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THIRD 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 SEPTEMBER 30, 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 November 10,
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 and
Nine Months Ended September 30, 2003 and 2002 2
Condensed Consolidated Statements of Comprehensive Income for the
Three and Nine Months Ended September 30, 2003 and 2002 2
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002 3
Condensed Consolidated Balance Sheets as of September 30, 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 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 5. Other 18
ITEM 6. Exhibits and Reports on Form 8-K 18
1
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ---------------------------
2003 2002 2003 2002
-------- -------- ---------- ----------
NET SALES $ 541.5 $ 597.3 $ 1,655.9 $ 1,718.3
-------- -------- ---------- ----------
OPERATING COSTS AND EXPENSES
Cost of goods sold 544.2 525.2 1,566.0 1,574.4
Selling, general and
administrative expenses 7.1 7.0 20.8 20.3
Depreciation 24.2 25.4 72.9 74.5
-------- -------- ---------- ----------
Total 575.5 557.6 1,659.7 1,669.2
-------- -------- ---------- ----------
OPERATING (LOSS) PROFIT (34.0) 39.7 (3.8) 49.1
Other expense (income), net (10.5) (0.3) (8.4) (31.6)
Interest expense on debt 18.3 20.4 53.5 58.3
-------- -------- ---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES AND
CHANGE IN ACCOUNTING PRINCIPLE (41.8) 19.6 (48.9) 22.4
(BENEFIT) PROVISION FOR INCOME TAXES (15.5) 6.6 (19.3) 6.5
-------- -------- ---------- ----------
NET (LOSS) INCOME BEFORE CHANGE IN
ACCOUNTING PRINCIPLE (26.3) 13.0 (29.6) 15.9
Cumulative effect of change in
accounting principle (Note 9) - - (1.6)
-------- -------- ---------- ----------
NET (LOSS) INCOME $ (26.3) $ 13.0 $ (31.2) $ 15.9
======== ======== ========== ==========
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
---------------- ---------------- --------------- ---------------
Net (loss) income $ (26.3) $ 13.0 $ (31.2) $ 15.9
Other comprehensive income, net of tax: - - - -
---------------- ---------------- --------------- ---------------
COMPREHENSIVE INCOME (LOSS) $ (26.3) $ 13.0 $ (31.2) $ 15.9
================ ================ =============== ===============
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)
NINE MONTHS ENDED
SEPTEMBER 30
2003 2002
------ ------
OPERATING ACTIVITIES
Net (loss) income $ (31.2) $ 15.9
------- ------
Adjustments to reconcile net (loss) income to net
cash from operating activities:
Gain on early extinguishment of debt (0.9) (29.2)
Loss on sale of property, plant and equipment 0.5 (0.3)
Change in accounting principle 2.5 -
Depreciation 72.9 74.5
Deferred employee benefit cost (149.5) (1.1)
Amortization of debt premium (0.8) (0.9)
Undistributed earnings from joint ventures (22.2) (5.0)
Deferred income taxes (20.2) 6.5
Change in:
Receivables 41.2 (40.1)
Inventories 35.5 (12.3)
Prepaid expenses and other assets (3.5) (2.5)
Accounts payable 22.4 2.3
Payables to/receivables from related companies 28.5 (0.4)
Other accrued liabilities (1.1) 7.9
Pension contribution 34.9 -
Other items 13.6 3.4
------- ------
Net cash from operating activities 22.6 18.7
INVESTING ACTIVITIES
Capital expenditures (93.9) (31.2)
Proceeds from sale of property, plant and equipment 0.2 0.3
Distributions from joint ventures, net of advances 20.6 0.7
------- ------
Net cash from investing activities (73.1) (30.2)
FINANCING ACTIVITIES
Payments on long-term debt (6.7) (16.3)
Dividends (15.9) -
Proceeds from note receivable from related company, net - (3.2)
Proceeds from note payable to related company 15.0 1.6
Bank overdrafts 1.9 (2.6)
Proceeds from revolver borrowings, net 59.0 35.0
------- ------
Net cash from financing activities 53.3 14.5
------- ------
Net increase in cash and cash equivalents 2.8 3.0
Cash and cash equivalents - beginning of period 10.0 24.2
------- ------
Cash and cash equivalents - end of period $ 12.8 $ 27.2
======= ======
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)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12.8 $ 10.0
Receivables, less provision for allowances, claims and
doubtful accounts of $17.1 and $17.0 216.3 257.5
Receivables from related companies 3.0 8.0
Inventories 407.6 443.1
Prepaid expenses and other - 2.8
Deferred income taxes 35.9 35.9
-------- --------
Total current assets 675.6 757.3
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES 216.4 214.8
PROPERTY, PLANT AND EQUIPMENT, NET 1,758.0 1,733.9
NOTE RECEIVABLE FROM RELATED COMPANIES 6.1 6.1
DEFERRED INCOME TAXES 342.0 321.8
PENSION INTANGIBLE ASSET 73.4 73.4
OTHER ASSETS 62.8 56.5
-------- --------
Total Assets $3,134.3 $3,163.8
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 201.1 $ 178.7
Bank overdrafts 10.4 8.5
Payables to related companies 31.3 7.8
Pension contribution 89.4 54.5
Accrued expenses and other liabilities 138.7 139.8
Long-term debt due within one year
Related companies (Note 6) 7.0 7.0
Other 0.8 -
-------- --------
Total current liabilities 478.7 396.3
LONG-TERM DEBT
Related companies (Note 6) 827.0 817.3
Other 479.7 424.6
DEFERRED EMPLOYEE BENEFITS 1,555.9 1,705.4
OTHER LONG-TERM OBLIGATIONS 78.3 58.4
-------- --------
Total liabilities 3,419.6 3,402.0
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' DEFICIT
Preferred stock 90.0 90.0
Common stock 320.0 320.0
Accumulated deficit (211.6) (164.5)
Accumulated other comprehensive loss (483.7) (483.7)
-------- --------
Total stockholders' deficit (285.3) (238.2)
-------- --------
Total Liabilities and Stockholders' Deficit $3,134.3 $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 Condensed 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 $0 and $29.2
of extraordinary gains to the "Other expense (income), net" line item for the
three and nine months ended September 30, 2002, respectively, in accordance with
SFAS No. 145.
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 provisions of SFAS No.
148.
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 April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No 133 on
Derivative Instruments and Hedging Activities". This Statement amends Statement
No. 133 for decisions made (1) as part of the Derivatives Implementation Group
process that effectively required amendments to Statement No. 133, (2) in
connection with other Board projects dealing with financial instruments, and (3)
in connection with implementation issues raised in relation to the application
of the definition of a derivative, in particular, the meaning of an initial net
investment that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors,
the meaning of underlying, and the characteristics of a derivative that contains
financing components. The changes in this Statement improve financial reporting
by requiring that contracts with comparable characteristics be accounted for
similarly. This Statement is effective for contracts entered into or modified
after June 30, 2003, with certain exceptions, and for hedging relationships
designated after June 30, 2003. The Company has determined that SFAS No. 149 did
not have an impact on its financial condition, results of operations or cash
flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". The Statement
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The new Statement requires that
those instruments be classified as liabilities in statements of financial
position. Most of the guidance in SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company has determined that SFAS No. 150 did not have an impact on its
financial condition, results of operations or cash flows.
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 variable interest entities
created before February 1, 2003 in the first fiscal year or interim period
beginning after December 15, 2003. The Company has determined that FIN 46 did
not have an impact on its financial condition, results of operations or cash
flows.
In May 2003, the EITF reached a consensus on EITF 01-8 "Determining Whether an
Arrangement Contains a Lease," relating to new requirements on identifying
leases contained in contracts or other arrangements that sell or purchase
products or services. The evaluation of whether an arrangement contains a lease
within the scope of SFAS No. 13 "Accounting for Leases," should be based on the
evaluation of whether an arrangement conveys the right to use property, plant
and equipment. This may result in a difference in the timing of revenue
recognition. The consensus requires sellers to report the revenue from the
leasing component of the arrangement as leasing or rental income rather that
revenue from product sales or services. Purchaser's arrangements which
previously would have been considered service or supply contracts, but are now
considered leases, could affect the timing of their expense recognition and the
classification of assets and liabilities on their balance sheet as well as
require footnote disclosure of lease terms and future minimum lease commitments.
This consensus is effective prospectively for contracts entered into or
significantly modified after July 1, 2003. Based on arrangements in place today,
adoption of EITF 01-8 did not have a material effect on the company's 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:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
In process and finished steel $264.2 $294.3
Raw materials and supplies:
Iron ore 66.9 72.0
Scrap and other raw materials 47.9 48.3
Supplies 28.6 28.5
------ ------
143.4 148.8
------ ------
Total $407.6 $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 expired on July 9, 2003 (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. In July 2003,
the Company reached an agreement with the PBGC regarding alternative security
for the maturing letter of credit. The LC was allowed to expire, and in its
place, the Company agreed to contribute $160 to its pension plan over the next
two years. The Company paid $50 in July and is required to contribute $82.5 in
2004 and $27.5 in 2005. Additionally, the Company pledged $160 of non-interest
bearing First Mortgage Bonds to the PBGC as security until the remaining $110
has been contributed to the pension plan and certain tests have been met. Each
of the Tranche B Loan and Tranche C Loan has scheduled principal repayments of
$0.875 per quarter until maturity.
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. This series was
retired during the quarter ended September 30, 2003 once the LC expired. 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 Term Loans 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. Additionally, in
April 2003, the security package was further enhanced by the addition of a
second position in the Company's inventory, spare parts, mobile equipment and
ownership interest in IIASC. At September 30, 2003 and December 31, 2002, the
Company recorded $663.2 and $668.5 for the Term Loans and $0 and $0 for 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 and W, the outstanding 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 September 30, 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 $185 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 September 30, 2003, based on the
amount of eligible collateral, there was $0 of availability under the line. At
September 30, 2003 and December 31, 2002, drawings under the line included $168
and $149 of loans and $7 and $12, respectively, of letters of credit issued for
the purchase of commodities on the international market and as security under
various insurance and workers compensation coverages.
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, mobile equipment and the Company's
ownership interest in IIASC. At September 30, 2003, based on the amount of
eligible collateral, there was $2 of availability under the line with $116 of
loans outstanding (compared to $76 of loans outstanding at December 31, 2002
under the old facility). Additionally, an extra $10 of borrowing is available
for any two consecutive business days to meet temporary cash needs.
At September 30, 2003 and December 31, 2002, the amounts outstanding under both
the IIASC and inventory-backed 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.
In the first quarter of 2002, the Company purchased $14.3 of its Pollution
Control Series 1993, $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 discounts from
face value. As a result of these early redemptions, the Company recognized a
pretax gain of $14.5. In the second quarter of 2002, the Company purchased $0.2
of its Series R Bonds, $0.6 of its Pollution Control Series 1977, $1.4 of its
Pollution Control Series 1993, $0.8 of its Pollution Control Series 1995, $8.6
of its Pollution Control Series 13, and $6.2 of its Pollution Control Series 15
at discounts from face value. As a result of these early redemptions, the
Company recognized a pretax gain of $15.4.
8
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.)
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 discounts from face value. As a result of
this early redemption, the Company recognized a pretax gain of $0.8. In the
second quarter of 2003, the Company purchased $0.1 of its Pollution Control
Series 1993 Bonds at a discount from face value. As a result of this early
redemption, the Company recognized a pretax gain of $0.1.
Interest cost incurred by the Company totaled $18.8 and $55.4 for the three and
nine months ended September 30, 2003 and $20.6 and $59.0 for the three and nine
months ended September 30, 2002, respectively. Included in these totals is
capitalized interest of $0.5 and $1.9 for the three and nine months ended
September 30, 2003 and $0.2 and $0.7 for the three and nine months ended
September 30, 2002, respectively.
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 and nine months ended September 30, 2003 and
2002 would have been decreased (increased) to the pro forma amounts indicated
below:
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Net (Loss) Income - as reported $ (26.3) $ 13.0 $ (31.2) $ 15.9
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) (0.5) (0.9)
------- ------- ------- -------
Net (Loss) Income - pro forma $ (26.5) $ 12.7 $ (31.7) $ 15.0
- ----------------------------------------------------------------------------------------------------------------------
9
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 5 - EQUITY
Common Stock
On September 30, 2003 and December 31, 2002, the Company had 1,000 shares
authorized of common stock, $0.01 par value ("Common Stock"), of which 100
shares were issued, outstanding and owned by a wholly owned subsidiary of Ispat.
Cumulative Preferred Stock
On September 30, 2003 and December 31, 2002, the Company had 100 shares
authorized, issued and outstanding of Series A 8% Cumulative Preferred Stock,
$0.01 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 $0.6 and $4.7 by Ispat for the three and nine months
ended September 30, 2003 and $0.5 and $1.4 by Ispat for the three and nine
months ended September 30, 2002, respectively for management, financial and
legal services provided to the Company. The Company was also charged $0.3 and
$0.7 by Ispat North America Holding Inc. for the three and nine months ended
September 30, 2003 and $0.4 and $1.2 for the three and nine months ended
September 30, 2002, respectively for corporate expense allocations. The Company
charged Ispat $0.2 and $0.7 for the three and nine months ended September 30,
2003, respectively, for research services.
The Company purchased $12.6 and $46.3 of inventory from subsidiaries of Ispat
during the three and nine months ended September 30, 2003 and $79.2 and $120.4
during the three and nine months ended September 30, 2002, respectively. The
Company sold $1.4 and $4.8 of inventory to subsidiaries of Ispat for the three
and nine months ended September 30, 2003 and $1.8 and $5.0 for the three and
nine months ended September 30, 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 $35.7 and
$105.3 for such tolling services for the three and nine months ended September
30, 2003 and $34.3 and $108.8 for the three and nine months ended September 30,
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
$71.7 and $249.8 for the three and nine months ended September 30, 2003 and
$87.5 and $253.6 for the three and nine months ended September 30, 2002,
respectively.
The Company's debt due to related companies of $834.0 and $824.3 as of September
30, 2003 and December 31, 2002, respectively, consists of $663.2 and $668.5,
respectively, payable to Ispat Inland Finance LLC, a wholly owned subsidiary of
the Borrower and Ispat and of $170.8 and $155.8, respectively, advances from
other subsidiaries of Ispat. Under the Credit Agreement and the inventory-backed
revolver, these advances cannot be repaid, nor can interest on these advances be
paid, until the Company's leverage falls to specified levels and certain
liquidity measures are met. At September 30, 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 September
30, 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.
10
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's receivable from related companies of $3.0 and $8.0 at September
30, 2003 and December 31, 2002, respectively, consists of trade and other
intercompany receivables. The Company's payable to related companies of $31.3
and $7.8 at September 30, 2003 and December 31, 2002, respectively, consists of
trade and other intercompany expenses.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
At September 30, 2003 and December 31, 2002, the Company guaranteed $54.5 and
$67.1, respectively, 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.
On July 16, 1998, the Company entered into an agreement (the "Agreement") with
the Pension Benefit Guaranty Corporation (the "PBGC") to provide certain
assurances with respect to the Company's Pension Plan. In accordance with the
Agreement, the Company provided the PBGC a $160 letter of credit which expired
on July 9, 2003, and had made $242 of contributions to the Pension Trust through
June 30, 2003, including $54.5 in the first quarter of 2003. In addition, the
Company granted to the PBGC a first priority lien on selected assets. In July
2003, the Company reached an agreement with the PBGC regarding alternative
security for the $160 letter of credit. The letter of credit was allowed to
expire, and in its place, the Company agreed to contribute $160 to its Pension
Plan over the next two years. The Company contributed $50 in July 2003 and is
required to contribute $82.5 in 2004 and $27.5 in 2005. Additionally, the
Company pledged $160 of non-interest bearing First Mortgage Bonds to the PBGC as
security until the remaining $110 has been contributed to the Pension Plan and
certain tests have been met.
Also, under the Agreement, Ryerson Tull Inc., the former parent of the Company,
provided to the PBGC a $50 guarantee of the Company's pension plan obligations,
later issuing a letter of credit to secure this guarantee. The Company committed
to take all necessary action to replace the guaranty/letter of credit by July
16, 2003, but was unable to do so, and therefore the guaranty and letter of
credit continued in place. Separately, on September 15, 2003, the Company
entered into a settlement agreement with Ryerson Tull under which, among other
things, Ryerson Tull paid the Company $21 to release Ryerson Tull from various
environmental and other indemnification obligations arising out of the sale by
Ryerson Tull of the Company to Ispat. The $21 received from Ryerson Tull was
paid into the Company Pension Plan and went to reduce the amount of the Ryerson
Tull guaranty/letter of credit. The Company has agreed to make specified monthly
contributions to its Pension Plan totaling $29 over the twelve-month period
beginning January 2004, thereby eliminating any remaining guaranty/letter of
credit obligations of Ryerson Tull with respect to the Company's Pension Plan.
In addition, the Company committed to reimburse Ryerson Tull for the cost of the
letter of credit to the PBGC, and to share with Ryerson Tull one-third of any
proceeds which the Company might receive in the future in connection with a
certain environmental insurance policy.
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
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.)
September 30, 2003 and December 31, 2002, the estimated minimum tolling charges
remaining over the life of this agreement were approximately $206 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 (a wholly owned
subsidiary of the Company) 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 $28.0 and $27.7 as of September 30,
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
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 September 30, 2003 and
December 31, 2002, the Company's reserves for environmental liabilities totaled
$28.0 and $27.7, respectively, $22.0 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 $17.6 and $6.9 at September 30, 2003 and December 31,
2002, respectively.
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 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. In the fall of 2003,
Nipsco sold its interest to Primary Energy Steel LLC, a private investment
company. 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 Primary Energy 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
Primary Energy. 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 September
30, 2003 and December 31, 2002, the Company's cumulative cost reduction due to
such tax credits totaled $149.2 and $129.2, respectively. The current carrying
amount of this indemnification is $0.
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. At this time, the Company believes its potential
liability will not exceed $8.7.
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.
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.)
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 that PRP agreement, the Company was
designated as having 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 has negotiated with
IDEM to resolve all 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. IDEM has a trust account
holding approximately $0.8 for use in the implementation of the First and Second
Operable Unit remedies. Pursuant to the IDEM Agreed Order, which became
effective on June 5, 2003, the Company has now paid a de minimus amount in
resolving all outstanding liability at the Four County Landfill.
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 which is operated by IHCC. An amended NOV stating similar
allegations was issued on August 8, 2002. 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 September 30, 2003 and December 31, 2002, the
Company had entered into contracts for these commodities for notional amounts of
$12.6 and $14.9, respectively, which had fair values of $0.9 and $1.6,
respectively. For the three and nine months ended September 30, 2003, the
Company recorded (losses)/gains of $(0.4) and $0.7, respectively, and for the
three and nine months ended September 30, 2002, the Company recorded gains of
$1.5 and $3.0, 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 $0.3 and $0.9
on deposit with counterparties at September 30, 2003 and December 31, 2002,
respectively, that was classified as an other asset on the balance sheet.
From time to time, the Company uses forward contracts to manage fluctuations in
the valuation of Euros. Timing of these transactions corresponds to the expected
need for Euros and is intended as a hedge (not as defined by SFAS No. 133). The
counterparties to these contracts are internationally recognized companies which
are not considered a
14
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 8 - DERIVATIVES (CONT.)
credit risk by the Company. At September 30, 2003, the Company had entered into
contracts for these commodities for notional amounts of $0.2. For the three and
nine months ended September 30, 2003, the Company recorded (losses)/gains of
$0.1 and $0.0, respectively. There were no contracts outstanding at December 31,
2002.
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 years 2002
and 2003, the fair value of the collar represented a derivative liability to the
Borrower of approximately $3.9 at September 30, 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 significant 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 Condensed Consolidated Statement of Operations as of January 1, 2003 as a
Cumulative Effect of Change in Accounting Principle.
NOTE 10 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Total research and
development costs for the three and nine months ended September 30, 2003 were
$2.9 and $8.6 respectively, and for the three and nine months ended September
30, 2002 were $2.9 and $8.7, respectively.
NOTE 11 - SUBSEQUENT EVENTS
On October 6, 2003, the Company received a $25 unsecured loan from a related
company. As with other related party debt, under terms of the Credit Agreement
and the inventory-backed revolver, these advances cannot be repaid until the
Company's leverage falls to specified levels and certain liquidity measures are
met.
On October 21, 2003, the Company received a $15 unsecured loan from a major
supplier. The loan bears interest at a 10% rate and matures on July 21, 2004.
15
ITEM 2.
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
Comparison of Third Quarter 2003 to Third Quarter 2002
Net sales of $541.5 for the third quarter of 2003 decreased by 9.3 percent from
$597.3 in the year-ago quarter as shipments decreased by 7.9 percent and average
selling price per ton decreased 2.0 percent. Steel shipments were 1,310,897 net
tons for the third quarter of 2003 compared to 1,422,999 net tons for the third
quarter of 2002.
Cost of goods sold per ton of $415 increased 12.5 percent from $369 per ton in
the year ago period due to higher natural gas costs, an increase in the volume
of purchased steel resulting from the relining of the #7 Blast Furnace and lower
sales volume.
Selling, general and administrative expenses of $7.1 increased 1.4 percent from
$7.0 in the year-ago quarter due to decreased spending during the current
quarter.
Depreciation expense of $24.2 for the current quarter decreased 4.7 percent from
$25.4 in the year-ago quarter.
An operating loss of $34.0 was reported for the current quarter compared to an
operating profit of $39.7 in the year-ago quarter due to the decrease in
shipments and higher costs cited above as well as the decrease in average
selling price per ton.
Other expense (income), net of $10.5 of income increased by $10.2 from $0.3 of
income. The third quarter of 2003 included $10.7 associated with the $21.0
settlement agreement with Ryerson Tull.
Interest and other expense on debt of $18.3 in the current quarter decreased
10.3 percent from $20.4 in the year ago quarter due to a reduction in interest
rates.
On September 15, 2003, the Company entered into a settlement agreement with
Ryerson Tull under which, among other things, Ryerson Tull paid the Company
$21.0 to release Ryerson Tull from various environmental and other
indemnification obligations arising out of the sale by Ryerson Tull of the
Company to Ispat. The $21.0 received from Ryerson Tull was paid into the Company
Pension Plan and went to reduce the amount of the Ryerson Tull guaranty/letter
of credit. The Company also agreed with Ryerson Tull to, among other things,
make specified monthly contributions to the Company's Pension Plan totaling
$29.0 over the twelve-month period beginning January 2004, thereby eliminating,
by the end of such year, the obligation of Ryerson Tull to provide a continuing
guaranty and letter of credit to the Pension Benefit Guaranty Corporation in
connection with the Company's Pension Plan, which guaranty/letter of credit the
Company had previously committed to take all necessary action to eliminate. In
addition, the Company committed to reimburse Ryerson Tull for the cost of the
letter of credit to the PBGC, and to share with Ryerson Tull one-third of any
proceeds which the Company might receive in the future in connection with a
certain environmental insurance policy.
Comparison of First Nine Months of 2003 to First Nine Months of 2002
Net sales of $1,655.9 for the first nine months of 2003 decreased by 3.6 percent
from $1,718.3 in the year-ago period as shipments decreased by 8.5 percent while
average selling price per ton increased 5.3 percent. Steel shipments were
3,948,726 net tons for the first nine months of 2003 compared to 4,313,362 net
tons for the first nine months of 2002.
Cost of goods sold per ton of $397 increased 8.7 percent from $365 per ton in
the year-ago period. Higher costs were incurred for natural gas, scrap, an
increase in the volume of purchased slabs due to the relining of the #7 Blast
Furnace and, additionally, the lower sales volume increased the cost of goods
sold per ton due to the assumption of
16
fixed costs, pensions and retiree health care costs.
Depreciation expense of $72.9 for the current period decreased 2.2 percent from
$74.5 in the year-ago period.
Selling, general and administrative expenses of $20.8 increased 2.5 percent from
$20.3 in the year-ago period due to increased spending during the current
period.
Operating profit decreased to a loss of $3.8 for the current period compared to
a profit of $49.1 in the year-ago period due to the higher costs noted above and
the decrease in sales volume, partially offset by the higher average selling
prices per ton.
Other expense (income), net of $8.4 of income decreased by $23.2 from $31.6 of
income in the year-ago period. The first nine months of 2002 also included a
gain on the early extinguishment of debt of $29.2 while the first nine months of
2003 included a gain on the early extinguishment of debt of $0.9. The first nine
months of 2003 included $10.7 associated with the $21.0 settlement agreement
with Ryerson Tull.
Interest and other expense on debt of $53.5 in the current period decreased 8.2
percent from $58.3 in the year ago period due to a reduction in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
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-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. 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 changes have been made in our
internal control over financial reporting during the period covered by this
report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
17
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.
On September 29, 2003, the Company issued a Form 8-K announcing
senior management changes. The 8-K attached a press release which
stated that Dr. Peter Southwick, then President and CEO of the
Company, would be moving to a corporate role with Ispat
International N.V., the parent of the Company. The filing noted
that Dr. Southwick will be serving as Director, Quality Assurance
and Application Development for the parent organization. The
filing went on to note that the position of President and CEO of
the Company would be filled by Mr. Louis Schorsch as of October 1,
2003. Mr. Schorsch had worked with the LNM Group, the parent of
Ispat International N.V., on various commercial and organizational
matters, and had previously served as President and CEO of GSX, an
e-commerce platform focused on international steel trade, and as a
partner at McKinsey & Company.
18
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 Chief
Financial Officer and Director
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 13, 2003
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- ----------
31.1 Certification of Louis L. Schorsch, President &
Chief Executive Officer of Ispat Inland Inc.
Pursuant to Rule 13a-14(a) or Rule 14d-14(a) of
the Securities Exchange Act of 1934.
31.2 Certification of Michael G. Rippey, President &
Chief Executive Officer of Ispat Inland Inc.
Pursuant to Rule 13a-14(a) or Rule 14d-14(a) of
the Securities Exchange Act of 1934.
32.1 Certification of Louis L. Schorsch, 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.
32.2 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.