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FIRST QUARTER 2004
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, 2004
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 13, 2004.
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, 2004 and 2003 2
Condensed Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 2004 and 2003 2
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003 3
Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 4
Notes to Condensed Consolidated Financial Statements 5 - 17
ITEM 2. Management's Narrative Analysis of Results of Operations 18 - 19
ITEM 4. Controls and Procedures 19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 5. Other 20
ITEM 6. Exhibits and Reports on Form 8-K 20
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
MARCH 31
2004 2003
------- -------
NET SALES $ 665.6 $ 553.9
------- -------
OPERATING COSTS AND EXPENSES
Cost of goods sold 553.2 478.4
Selling, general and
administrative expenses 6.7 6.7
Depreciation 25.1 24.4
------- -------
Total 585.0 509.5
------- -------
OPERATING PROFIT 80.6 44.4
Other expense (income), net (4.9) 1.8
Interest expense on debt 20.6 17.8
------- -------
INCOME BEFORE INCOME TAXES AND
CHANGE IN ACCOUNTING PRINCIPLE 64.9 24.8
PROVISION FOR INCOME TAXES 23.2 8.4
------- -------
NET INCOME BEFORE CHANGE IN
ACCOUNTING PRINCIPLE 41.7 16.4
Cumulative effect of change in
accounting principle, net of tax of $0.9 (Note 9) (1.6)
------- -------
NET INCOME $ 41.7 $ 14.8
======= =======
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31
2004 2003
------- -------
Net income $ 41.7 $ 14.8
Other comprehensive income, net of tax - -
------- -------
COMPREHENSIVE INCOME $ 41.7 $ 14.8
======= =======
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
2004 2003
-------- --------
OPERATING ACTIVITIES
Net income $ 41.7 $ 14.8
-------- --------
Adjustments to reconcile net income to net
cash from operating activities:
Gain on early extinguishment of debt - (0.8)
Gain on sale of property, plant and equipment (0.1) (0.1)
Change in accounting principle - 2.5
Depreciation 25.1 24.4
Amortization of debt premium (0.1) (0.3)
Undistributed earnings from joint ventures (9.4) (9.8)
Deferred income taxes 23.2 7.5
Change in:
Receivables (63.3) 49.9
Inventories (27.3) (41.3)
Other assets (1.2) 3.1
Accounts payable 12.3 15.0
Payables to/receivables from related companies 6.1 (0.1)
Other accrued liabilities (26.7) 6.9
Deferred employee benefit cost (8.6) 3.9
Pension contribution (17.7) (54.5)
Other items 2.3 2.6
-------- --------
Net adjustments (85.4) 8.9
-------- --------
Net cash from operating activities (43.7) 23.7
INVESTING ACTIVITIES
Capital expenditures (1.8) (9.7)
Proceeds from sale of property, plant and equipment 0.1 0.1
Investments in, advances to and distributions from joint ventures, net 7.7 11.0
-------- --------
Net cash from investing activities 6.0 1.4
FINANCING ACTIVITIES
Payments on long-term debt (661.5) (3.1)
Proceeds from issuance of long-term debt 794.9 -
Dividends paid - (1.9)
Proceeds from note receivable from related company (18.6) -
Bank overdrafts 9.7 (1.3)
Repayments of revolver borrowings, net (72.0) (12.0)
-------- --------
Net cash from financing activities 52.5 (18.3)
-------- --------
Net change in cash and cash equivalents 14.8 6.8
Cash and cash equivalents - beginning of period 13.4 10.0
-------- --------
Cash and cash equivalents - end of period $ 28.2 $ 16.8
======== ========
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, 2004 DECEMBER 31, 2003
-------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 28.2 $ 13.4
Receivables, less provision for allowances, claims and 278.7 215.4
doubtful accounts of $13.7 and $22.6
Receivables from related companies 2.9 4.9
Inventories 399.1 371.8
Deferred income taxes 26.5 26.5
-------------- -----------------
Total current assets 735.4 632.0
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES 216.0 214.3
PROPERTY, PLANT AND EQUIPMENT, NET 1,728.0 1,751.3
NOTE RECEIVABLE FROM RELATED COMPANIES 24.2 5.6
DEFERRED INCOME TAXES 381.5 404.7
PENSION INTANGIBLE ASSET 65.6 65.6
OTHER ASSETS 63.7 62.5
-------------- -----------------
Total Assets $ 3,214.4 $ 3,136.0
============== =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 195.1 $ 182.8
Note payable 15.0 15.0
Bank overdrafts 15.9 6.2
Payables to related companies 9.5 5.4
Pension contribution 93.8 111.5
Accrued expenses and other liabilities 125.8 152.5
Long-term debt due within one year
Related companies (Note 6) - 7.0
Other 1.5 -
-------------- -----------------
Total current liabilities 456.6 480.4
LONG-TERM DEBT
Related companies (Note 6) 1,010.7 870.3
Other 371.5 445.0
DEFERRED EMPLOYEE BENEFITS 1,638.8 1,647.4
OTHER LONG-TERM OBLIGATIONS 82.4 80.2
-------------- -----------------
Total liabilities 3,560.0 3,523.3
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' DEFICIT
Preferred stock 90.0 90.0
Common stock 320.0 320.0
Accumulated deficit (191.3) (233.0)
Accumulated other comprehensive loss (564.3) (564.3)
-------------- -----------------
Total stockholders' deficit (345.6) (387.3)
-------------- -----------------
Total Liabilities and Stockholders' Deficit $ 3,214.4 $ 3,136.0
============== =================
See notes to unaudited condensed consolidated financial statements
4
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, 2003.
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.
STOCK OPTION PLAN
In 1999, Ispat International N.V. ("Ispat") established the Ispat International
N.V. Global Stock Option Plan (the "Ispat Plan"). Under the terms of the Ispat
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.
Prior to 2003, the Company, which participates in the Ispat Plan, accounted for
stock options under the recognition and measurement provisions of APB No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation ("SFAS 123"), prospectively to all
employee awards granted, modified, or settled after January 1, 2003. This
prospective adoption of the fair value provisions of SFAS 123 is in accordance
with the transitional provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation" ("SFAS 148") issued in December 2002 for recognizing compensation
cost of stock options. There were no stock options granted, modified or settled
during 2003 or during the three months ended March 31, 2004 and accordingly, no
compensation expense has been recognized in 2003 and the three months ended
March 31, 2004.
SFAS 148 also requires that if awards of stock-based employee compensation were
outstanding and accounted for under the intrinsic value method of Opinion 25 for
any period in which an income statement is presented, a tabular presentation is
required as follows:
THREE MONTHS ENDED MARCH 31
(DOLLARS IN MILLIONS)
2004 2003
----------- -----------
Net Income - as reported $ 41.7 $ 14.8
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net of
related tax effects - (0.2)
----------- -----------
Net Income - pro forma $ 41.7 $ 14.6
----------- -----------
5
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued SFAS No. 132 (revised December 2003) (SFAS No.
132R), "Employers' Disclosures about Pensions and Other Postretirement Benefits"
to revise employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by FASB Statements No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". This Statement retains the
disclosure requirements contained in SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits", which it replaces. Additional
disclosures include information describing the types of plan assets, investment
strategy, measurement date, plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods. SFAS No. 132R was
effective for financial statements with fiscal years ending after December 15,
2003. The interim-period disclosures required by this Statement are effective
for interim periods beginning after December 15, 2003. The Company adopted the
disclosure requirements of SFAS No. 132R in December 2003.
In April 2004, FASB issued FASB Staff Position ("FSP") No. 106-b, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003". This FSP supersedes FSP No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" which was issued by the FASB in
January 2004. This FSP provides companies with initial guidance on recognizing
the effects of the prescription drug provisions of the Medicare Act. As allowed
by the FSP, the Company elected to defer recognition until further guidance is
issued by the FASB. FSP 106-b is effective for the first interim or annual
periods beginning after June 15, 2004. See Note 5, Retirement Benefits for more
information on this FSP.
NOTE 2 - INVENTORIES
Inventories consist of the following:
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
(DOLLARS IN MILLIONS)
------------------------------------
In process and finished steel $ 271.1 $ 246.7
Raw materials and supplies:
Iron ore 47.6 65.7
Scrap and other raw materials 54.2 32.6
Supplies 26.2 26.8
-------------- -----------------
128.0 125.1
-------------- -----------------
Total $ 399.1 $ 371.8
============== =================
NOTE 3 - LONG-TERM DEBT
PRIOR 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 was the agent (the
"Agent"). The Credit Agreement consisted of a $350 million Tranche B Term Loan
due July 16, 2005 (the "Tranche B Loan"), a $350 million 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 million letter of credit that expired on July 9, 2003
(the "LC" and
6
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3 - LONG-TERM DEBT (CONT.)
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 million over the next two years and
pay 50% of excess cash flows as defined in the agreement with the PBGC to its
pension plan. The Company contributed $50 million in July 2003, and is required
to contribute $82.5 million in 2004 and $27.5 million in 2005. Outside of this
PBGC Agreement, the Company also contributed $21 million in September 2003.
Additionally, the Company pledged $160 million of non-interest bearing First
Mortgage Bonds to the PBGC as security until the remaining $110 million has been
contributed to the pension plan and certain tests have been met. Each of the
Tranche B Loan and Tranche C Loan had scheduled principal repayments of $0.875
million per quarter until maturity.
On July 16, 1998, the Company issued $875 million of First Mortgage Bonds as
security both for the Facilities and for an interest rate hedge (not as defined
under SFAS No. 133) which expired on October 16, 2003 owned by the Borrower as
required under the Credit Agreement (the "Hedge"). Series U, in a principal
amount of $700 million, 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 million, 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 million, 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 were
fully and unconditionally guaranteed for as long as the obligations were
outstanding by the Company, certain subsidiaries of the Company and Ispat. The
Company could have been required to perform under the guarantee if an event of
default as defined in the Credit Agreement occurred under the Facilities.
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 Ispat Inland Administrative Service Company
("IIASC"). At December 31, 2003, the Company recorded $661.5 million for the
Term Loans in its Consolidated Balance Sheet.
Borrowings under the Term Loans bore interest at a rate per annum equal to, at
the Borrower's option: (1) the higher of (a) the Agent's prime rate or (b) the
rate which is 1/2 of 1% in excess of the Federal Funds effective rate (together
the "Base Rate"), plus 2.75% or (2) the LIBO Rate (as defined in the Credit
Agreement) plus 3.75%. The fee for the LC was 4.00% of the LC amount per annum
(the "LC Fee"). The spread over the LIBO Rate and Base Rate would have been
reduced if the Company's Consolidated Leverage Ratio (as defined in the Credit
Agreement) fell to specified levels.
In October 1998, the Borrower entered into the Hedge required under the Credit
Agreement. The Hedge consisted of a five-year interest rate collar which expired
on October 16, 2003. The Hedge was based on LIBOR with a floor of 4.50% and a
ceiling of 6.26% on a notional amount of $450 million.
The Company was obligated to pay interest on the Series U First Mortgage Bonds
at the rate paid by the Borrower to the Term Loan lenders without regard to the
interest rate collar, plus 1/2 of 1% per annum and on the Series V First
Mortgage Bonds at a rate equal to the LC Fee.
The Credit Agreement restricted the payment of dividends and other Restricted
Payments (as defined in the Credit Agreement) to 50% of Consolidated Net Income
(as defined in the Credit Agreement) plus certain specifically allowed types of
Restricted Payments. At December 31, 2003 no dividends or other Restricted
Payments, in addition to those specifically allowed, which included dividends on
the preferred stock held by a subsidiary of the Borrower, could have been paid.
7
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3 - LONG-TERM DEBT (CONT.)
The Company also had to maintain a minimum Consolidated EBITDA (as defined in
the Credit Agreement). The Company was in compliance with this covenant at
December 31, 2003. The Credit Agreement also contained other covenants that,
among other things, prohibited or limited the ability of the Company or the
Borrower to incur indebtedness, create liens, engage in transactions with
affiliates, sell assets and engage in mergers and consolidations. Any loans from
Ispat or its other subsidiaries (see "Ispat International Advances" Note 6)
could not have been repaid until the Company's leverage fell to specified
levels.
PRESENT DEBT
On March 25, 2004, a newly created subsidiary of the Borrower issued $800
million principal amount of senior secured notes: $150 million of floating rate
notes bearing interest at LIBOR plus 6.75% due April 1, 2010 and $650 million of
fixed rate notes bearing interest at 9.75% (issued at 99.212% to yield 9.875%)
due April 1, 2014 (the "Senior Secured Notes"). Also on March 25, 2004, the
Company issued $800 million principal amount of First Mortgage Bonds (Series Y,
in a principal amount of $150 million, and Series Z, in a principal amount of
$650 million) to Ispat Inland Finance, LLC, an indirect subsidiary of the
Borrower which, in turn, pledged them to the trustee for the Senior Secured
Notes as security. The $775.5 million net proceeds from the offering were used
to retire the entire balance outstanding of $661.5 million of Tranche B and
Tranche C Loans under the Credit Agreement, and repay the entire balance
outstanding of $105 million under the inventory revolving credit facility, with
the remainder of the proceeds used to reduce the amount outstanding under the
receivables revolving credit facility. Series U and W First Mortgage Bonds were
retired at the close of the refinancing. The early retirement of the Term Loans
was done at par, without prepayment penalty.
The Senior Secured Notes are also secured by a second position lien on the
inventory of the Company. As further credit enhancement, the Senior Notes are
fully and unconditionally guaranteed by the Company, certain subsidiaries of the
Company, Ispat and certain other affiliates of the Borrower. At March 31, 2004,
the Company recorded $794.9 million for the Senior Secured Notes in its
Consolidated Balance Sheet.
The Company is obligated to pay interest on the Series Y First Mortgage Bonds at
the rate paid on the floating rate Senior Secured Notes, plus 1/2 of 1% per
annum and on the Series Z First Mortgage Bonds at a rate of 10.25%.
The First Mortgage Bonds are the obligations 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 had a book value of approximately $1,600 million on
December 31, 2003. This property is also subject to a subordinate lien in favor
of the United Steelworkers of America to secure a post retirement health
benefit.
The terms of the Senior Secured Notes place certain limitations on the ability
of the Company and the Company's subsidiaries to, among other things, (i) incur
additional indebtedness, (ii) pay dividends or make other distributions or
repurchase or redeem stock, (iii) make investments, (iv) sell assets, (v) incur
liens, (vi) enter into agreements restricting their subsidiaries' ability to pay
dividends, (vii) enter into transactions with affiliates, (viii) engage in
certain businesses and (x) consolidate, merge or sell all or substantially all
of its or their assets. The indenture under which the Senior Secured Notes were
issued also contains limitations on the ability of the Borrower and the
guarantors that are not subsidiaries of the Company to, among other things,
engage in business activities, other than performing their obligations under the
indenture, and incur other liabilities. Such indenture also contains limited
covenants that are applicable to Ispat. These limitations are subject to a
number of exceptions and qualifications. The Company and Borrower were in
compliance with all covenants on March 31, 2004.
IIASC, a wholly owned subsidiary of the Company established to provide a
supplemental source of funds to the Company, has a $185 million 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
8
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3 - LONG-TERM DEBT (CONT.)
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, 2004, based on the amount of eligible
collateral, there was $2.8 million of additional availability under the line.
Drawings under the line included $168.0 million of loans and $14.2 million 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 million inventory-backed credit
facility with a four-year approximately $175 million committed revolving credit
facility secured by its inventory, spare parts, mobile equipment and the
Company's ownership interest in IIASC. Provisions of this agreement prohibit or
limit the Company's ability to incur debt, repay debt, make investments, sell
assets, create liens, engage in transactions with or repay loans from
affiliates, engage in mergers and consolidations and pay dividends and other
restricted payments. At March 31, 2004, there were no drawings under the line
and, based on the amount of eligible collateral, there was $117.6 million of
availability under the line. Additionally, an extra $10 million of borrowing is
available for any two consecutive days to meet temporary cash needs.
At March 31, 2004 and 2003, the amount outstanding under both of the revolving
credit facilities were shown as a long term obligation. The Company has both the
ability and intent to refinance these obligations as they mature under the
respective credit agreements.
In the first quarter of 2003, the Company purchased $0.1 million of its
Pollution Control Series 1977, $0.9 million of its Pollution Control Series
1993, and $1.0 million 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 million.
Series R First Mortgage Bonds have one last remaining sinking fund payment of
$3.6 million due in January of 2006. Pollution Control Series 1977 Bonds require
annual payments of $1.5 million to a sinking fund which is used to repurchase
bonds in the market or at par.
Maturities of long-term debt obligations (excluding Ispat International
advances) are: $0.0 million in 2004, $169.5 million in 2005 (including $168.0
million under a revolving credit facility), $5.0 million in 2006, $59.8 million
in 2007, $0.0 million in 2008 and $933.5 million thereafter.
Interest cost incurred by the Company totaled $20.5 million and $18.5 million
for the quarter ended March 31, 2004 and 2003, respectively. Included in the
March 2003 total is capitalized interest of $0.7 million for the quarter.
NOTE 4 - EQUITY
Common Stock
On March 31, 2004 and December 31, 2003, 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, 2004 and December 31, 2003, 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.
9
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5 - RETIREMENT BENEFITS
PENSIONS
The Ispat Inland Inc. Pension Plan and Pension Trust is a non-contributory
defined benefit pension plan covering substantially all of its employees.
Benefits for most non-represented employees are determined under a "Cash
Balance" formula as an account balance which grows as a result of interest
credits and of allocations based on a percent of pay. Benefits for other
non-represented salaried employees are determined as a monthly benefit at
retirement depending on final pay and service. Benefits for wage and salaried
employees represented by the United Steelworkers of America are determined as a
monthly benefit at retirement based on a fixed rate and service.
The net periodic benefit was as follows:
QUARTER ENDED QUARTER ENDED
MARCH 31, 2004 MARCH 31, 2003
(DOLLARS IN MILLIONS)
-------------- --------------
Net Periodic cost
Service cost $ 9.6 $ 8.6
Interest cost 38.4 39.7
Expected return on plan assets (46.2) (45.9)
Amortization 11.5 4.4
-------------- -------------
Net periodic benefit cost $ 13.3 $ 6.8
============== =============
BENEFITS OTHER THAN PENSION PLAN
Substantially all of the Company's employees are covered under postretirement
life insurance and medical benefit plans that require deductible and
co-insurance payments from retirees. The postretirement life insurance benefit
formula used in the determination of postretirement benefit cost is primarily
based on applicable annual earnings at retirement for salaried employees and
specific amounts for hourly employees. The Company does not prefund any of these
postretirement benefits. Effective January 1, 1994, a Voluntary Employee Benefit
Association Trust (the "Trust") was established for payment of health care
benefits made to United Steelworkers of America retirees. Funding of the Trust
is made as claims are submitted for payment.
On December 8, 2003, the Medicare Act was signed into law. The Medicare Act
introduced a prescription drug benefit under Medicare (Medicare Part D), as well
as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D. In
April 2004, FASB issued FASB Staff Position ("FSP") No. 106-b, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003". This FSP supersedes FSP No. 106-1, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" which was issued by the FASB in
January 2004. This FSP provides companies with initial guidance on recognizing
the effects of the prescription drug provisions of the Medicare Act. As allowed
by the FSP, the Company elected to defer recognition until further guidance is
issued by the FASB. As such, any measurement of the accumulated postretirement
benefit obligations or net periodic postretirement benefit cost in the 2004 and
2003 financial statements and accompanying footnotes do not reflect the effects
of the Medicare Act. Upon issuance of further guidance, the Company may be
required to change previously reported information.
10
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5 - RETIREMENT BENEFITS (CONT.)
The net periodic benefit was as follows:
QUARTER ENDED QUARTER ENDED
MARCH 31, 2004 MARCH 31, 2003
(DOLLARS IN MILLIONS)
-------------- --------------
Net periodic benefit cost
Service cost $ 2.2 $ 2.2
Interest cost 13.7 14.4
Amortization (6.9) (4.9)
-------------- --------------
Net periodic benefit cost $ 9.0 $ 11.7
============= ==============
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company was charged $2.5 million and $3.3 million by Ispat for the three
months ended March 31, 2004 and 2003, respectively, for management, financial
and legal services provided to the Company. The Company was also charged $0
million and $0.2 million by Ispat North America Holding Inc. for corporate
expense allocations for the three months ended March 31, 2004 and 2003. The
company charged Ispat $0.6 million and $0.2 million for operating and technical
services for the three months ended March 31, 2004 and 2003, respectively.
The Company purchased $16.7 million and $18.0 million of inventory from
subsidiaries of Ispat during the three months ended March 31, 2004 and 2003,
respectively. The Company sold $1.6 million and $2.0 million of inventory to
subsidiaries of Ispat for the three months ended March 31, 2004 and 2003,
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 $36.8
million and $34.6 million for such tolling services for the three months ended
March 31, 2004 and 2003, 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
$84.9 million and $93.6 million for the three months ended March 31, 2004 and
2003, respectively.
The Company's long-term debt due to a related company of $1,010.7 million and
$877.3 million as of March 31, 2004 and December 31, 2003, respectively,
comprises $794.9 million and $661.5 million, respectively, payable to Ispat
Inland Finance, LLC and of $215.8 million advances from Ispat and other
subsidiaries of Ispat. Under certain debt agreements, these advances cannot be
repaid until the Company's leverage falls to specified levels and sufficient
cumulative earnings have been achieved. Interest expense related to debt from
Ispat Inland Finance, LLC was $9.7 million and $9.4 million for the three months
ended March 31, 2004 and 2003, respectively. This debt arose in connection with
the financing of the acquisition of the Company and March 2004 refinancing. The
advances from Ispat and its other subsidiaries mature on June 30, 2014. Interest
on each advance is charged at a fixed rate. Rates in effect at March 31, 2004
range from 2.9% to 5.6%. At March 31, 2004 the Company has both the ability and
intent to refinance the unpaid interest as the obligations mature, therefore it
has been shown as long-term. Interest expense related to the advances from Ispat
and its other subsidiaries was $2.7 million and $2.1 million for the three
months ended March 31, 2004 and 2003, respectively.
11
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6 - RELATED PARTY TRANSACTIONS (CONT.)
The Company's note receivable from a related company of $24.2 million and $5.6
million at March 31, 2004 and December 31, 2003, respectively is due from Ispat
Inland, L.P. Interest income on this receivable was $0.1 million and $0.1
million for the three months ended March 31, 2004 and 2003, respectively.
Amounts relate to costs associated with the financing of the acquisition of the
Company by Ispat, costs incurred in relation to settlement of the interest
collar and costs associated with the March 2004 refinancing. Payment is due on
April 2, 2014 unless Ispat Inland, L.P. chooses to prepay.
The Company's payable to related companies of $9.5 million and $5.4 million at
March 31, 2004 and December 31, 2003, respectively, consists of trade and other
intercompany expenses. The Company's receivable from related companies of $2.9
million and $4.9 million at March 31, 2004 and December 31, 2003, respectively,
consists of trade and other intercompany receivables.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
At March 31, 2004 and December 31, 2003, the Company guarantees $47.7 million
and $54.5 million, 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 its 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 terms of the guarantee require the Company to maintain a minimum
tangible net worth (as defined). The Company was in compliance with this test as
of March 31, 2004.
On July 16, 1998, the Company entered into an agreement (the "Agreement") with
the Pension Benefit Guaranty Corporation (the "PBGC") to provide certain
financial assurances with respect to the Company's Pension Plan. In accordance
with the Agreement, the Company provided the PBGC a $160 million letter of
credit which expired on July 9, 2003, and had made $242 million of contributions
to the Pension Trust through June 30, 2003, including $54.5 million 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 million letter of credit. The
letter of credit was allowed to expire, and in its place, the Company agreed to
contribute $160 million over the next two years and pay 50% of excess cash flows
as defined in the agreement with the PBGC to the Company's Pension Plan. The
Company contributed $50 million in July 2003, and is required to contribute
$82.5 million in 2004 and $27.5 million in 2005. Outside of this Agreement, the
Company also contributed $21 million in September 2003. Additionally, the
Company pledged $160 million of non-interest bearing First Mortgage Bonds to the
PBGC as security until the remaining $110 million 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 million 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 million 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 million 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 million
over the twelve-month period beginning January 2004, thereby eliminating any
remaining
12
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONT.)
guaranty/letter of credit obligations of Ryerson Tull with respect to the
Company's Pension Plan. Included in the $31.5 million contribution made during
the first quarter of 2004 was $4.0 million which reduced the amount of the
Ryerson Tull guaranty/letter of credit. 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.
During the first quarter of 2004, the Company contributed $31.5 million to the
Pension Plan from both agreements.
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 million 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, 2004 and December 31, 2003, the estimated
minimum tolling charges remaining over the life of this agreement were
approximately $191 million and $199 million, respectively.
The Company sold all of its limestone and dolomite properties in 1990. The
Company entered into a long-term contract with the buyer of the properties to
purchase, subject to certain exceptions and at prices which approximate market,
the full amount of the annual limestone needs of the Company through 2002. The
Company has extended this arrangement at a fixed price through 2007.
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 million cash fine, required $7 million in
environmentally beneficial projects at the Indiana Harbor Works, and required
that $19 million, 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 million to $4 million per year over
the next several years to perform the required Assessments. The Company paid the
$3.5 million 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 million, more than the required $7 million, 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 $28.2 million and $28.1 million as
of March 31, 2004 and December 31, 2003, respectively, reflecting the $19
million plus interest for the Sediment Remediation liabilities, and amounts for
the Corrective Action assessments. Until the first two steps are completed, the
remedial action to be implemented cannot be determined. Therefore, the Company
cannot reasonably estimate the cost of or the time required to satisfy its
Corrective Action obligations under the Consent Decree. It is expected that
13
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONT.)
assessment and remediation of the site will require significant expenditures
over several years that may be material to the Company's business, 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 million
to $5 million annually in each of the next five years for the construction, and
have ongoing annual expenditures (non-capital) of $30 million to $35 million to
operate 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, 2004 and December 31, 2003, the Company's reserves for environmental
liabilities totaled $36.9 million and $36.8 million, respectively, $22.2 million
and $22.1 million 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 in connection with construction projects primarily
related to additions to property, plant and equipment, was $7.4 million and $1.6
million at March 31, 2004 and December 31, 2003, respectively.
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. In 2003, NIPSCO sold its
portion of PCI Associates to Primary Energy Steel LLC. 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 Steel LLC 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 Primary Energy
Steel LLC 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 million, 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,
2004, the Company's cumulative cost reduction due to such tax credits totaled
$163.6 million. The current carrying amount of this indemnification is $0
million.
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) intended to perform a
natural resource damage assessment on the Grand Calumet River and
14
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONT.)
Indiana Harbor Ship Canal Waterways. The notice stated that the Company has been
identified as a potentially responsible party due to alleged releases of
hazardous materials from its Indiana Harbor Works facility. Such assessment has
been substantially completed. The company has been in negotiations with the
trustees, and, as a consequence of such negotiations, has established a reserve
of $8.7 million to cover anticipated liabilities in connection with this matter.
Until such time as the matter is finally resolved, it is not possible to
accurately predict, beyond the currently established reserve, the amount of the
Company's potential liability or whether this potential liability could
materially affect the Company's business, financial position and results of
operations.
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 current or former site owners or operators
or parties who sent hazardous materials 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
based on new information, 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 hazardous materials
or those of its predecessor were disposed of at a site that later becomes 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. In a letter
dated June 2, 2003, IDEM advised the PRP's for the First Operable Unit that all
terms of the Agreed Order for the First Operable Unit had been completed and
that the Order was terminated, subject to the Reservation of Rights. Under the
terms of the PRP agreement, the Company had an approximate 7.2% share, which
amount has been paid.
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 million, with an
additional contingent remedy estimated to cost approximately $2.1 million, to be
implemented only if the selected remedy is deemed to be inadequate. IDEM has a
trust account holding approximately $0.8 million for use in the implementation
of the First and the Second Operable Unit remedies. In 2003, the PRP Group
entered into another Agreed Order pursuant to which the PRP Group agreed to pay
$0.3 million in exchange for a release from the cost of the Second Operable
Unit. The Company's share of that payment was minimal. The Agreed Order is final
and the payment has been made.
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 minimal 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 which is owned and operated by IHCC. An amended NOV
stating similar allegations was issued on August 8, 2002. Although the Company
currently believes that its liability with respect to this matter will be
minimal, the Company could be found liable for violations and this potential
liability could materially affect the business, financial position and results
of operations of the Company.
15
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONT.)
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 of the
Company.
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, 2004 and December 31, 2003, the
Company had entered into contracts for these commodities for notional amounts of
$60.4 million and $6.0 million, respectively which had fair values of $(2.3)
million and $0.2 million, respectively. For the three months ended March 31,
2004 and 2003, the Company recorded a $2.6 million and $0.6 million 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 $0 million and $0.3 million on
deposit with counterparties at March 31, 2004 and December 31, 2003,
respectively, that was classified as an other asset on the balance sheet.
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 believes it 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 December 31,
2003, the estimated total future reclamation costs are $18.2 million.
The impact of adopting SFAS No. 143 on January 1, 2003 was an increase in assets
and liabilities of $3.8 million and $6.3 million, respectively. A charge of $1.6
million (net of tax of $0.9 million) was reflected on the Consolidated Statement
of Operations as of January 1, 2003 as a Cumulative Effect of Change in
Accounting Principle.
Changes in the liability for asset retirement obligations during the first
quarter of 2004 consisted of the following (Dollars in Millions):
Balance as of December 31, 2003 $ 7.0
Liabilities incurred 0.1
------
Balance as of March 31, 2004 $ 7.1
======
16
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Total research and
development costs for the three months ended March 31, 2004 and 2003 were $3.1
million and $2.8 million, respectively.
NOTE 11 - PROPERTY TAX LIABILITY
For the quarter ended March 31, 2004, the Company recorded a favorable
adjustment to cost of goods sold of $35.0 million due to a change in estimate
for property taxes for the years 2002 and 2003. This adjustment was the result
of a reassessment of real property and the release of the published tax rate for
2002 for Lake County, Indiana.
NOTE 12 - WORKFORCE REDUCTION
For the quarter ended March 31, 2004, the Company recorded charges of $4.0
million for severance and termination benefit costs related to involuntary
workforce reductions of approximately 130 salaried non-represented employees.
The Company's remaining accrual for the workforce reductions totaled $0.8
million as of March 31, 2004 and is included in "Accrued expenses and other
liabilities" in the consolidated balance sheets.
NOTE 13 - SALES OF POLLUTION ALLOWANCES
During the first quarter 2004, the Company sold 2,168 tons of Nitrous Oxide
("NOx") allowances for $6.7 million which was recorded in "Other Expense
(Income), net". NOx allowances sold were part of an overall bank of emission
allowances and credits (collectively, "rights") owned by the Company. Generally,
these rights arose from actions taken by the Company or the state to reduce the
emission of air pollutants. As the Company evaluates its future development
plans and contemporaneous environmental regulation, it may from time to time,
determine that additional rights are surplus to its operations. If determined to
be surplus, the Company will seek to liquidate these surplus assets.
17
ITEM 2.
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of First Quarter 2004 to First Quarter 2003
Steel shipments in the first quarter of 2004 of 1,432,708 tons increased by
164,658 tons, or 13.0%, from the first quarter 2003 shipments of 1,268,050 tons
due to stronger demand across most markets and the realization of increased
production resulting from the successful reline of the No. 7 Blast Furnace.
Increases occurred primarily in cold rolled, coated, and bar products.
Sales revenue increased by 20.2% to $665.6 million in the first quarter of 2004
from $553.9 million in the first quarter of 2003. The average selling price per
ton increased by 6.4% to $465 per ton in the first quarter of 2004 from $437 per
ton in the comparable 2003 period. The increase in the average selling price per
ton is the result of the implementation of pricing surcharges designed to offset
escalation in the prices and associated freight for certain input commodities
such as coke, scrap and natural gas, base price increases, and a higher
percentage of cold rolled and coated products sold in the first quarter 2004.
In the first quarter of 2004, the cost of goods sold increased to $553.2 million
from $478.4 million in the first quarter of 2003. Included in the first quarter
2004 cost is a credit of $35.0 million due to a change in the accounting
estimate for property taxes for the years 2002 and 2003, due to the reassessment
of property taxes for the year 2002. Indiana's Legislature passed a law in 2001
which changed real property assessment from replacement cost less depreciation
to market value. Additionally, the law required an independent reassessment of
real property for Lake County, where our 1,900 acre Indiana Harbor Works
facility is located. This reassessment was not completed until the end of
February, 2004. The current quarter also included a charge of approximately $4.0
million for severance costs resulting from an 8% salaried workforce reduction.
The full benefit of the force reduction will occur in the second quarter of 2004
and is expected to have an annual benefit of approximately $10.0 million. The
operating cost per ton increased by $6 per ton to $408 per ton in the first
quarter of 2004 from $402 in the first quarter of 2003. Excluding the property
tax and severance cost items noted above, the operating cost per ton increased
by $28. Compared to the first quarter of 2003, input costs dramatically
increased for scrap, coke, coal, alloys, fluxes, and natural gas. On a quarter
to quarter basis, scrap prices increased approximately 89% while coke prices
increased approximately 41%. Labor costs were higher in the first quarter of
2004 as compared to the first quarter of 2003 due to increases in pension
expense resulting from the amortization of losses associated with lower interest
rates and expected market returns and employee profit sharing. The Company set a
new slab production record for the first quarter of 2004, following the
successful reline of its No. 7 Blast Furnace which was completed in the fourth
quarter of 2003. Consequently, less purchased semi-finished steel was required
in the first quarter of 2004 which resulted in lower operating costs. The higher
sales and operating volume in the first quarter of 2004 also mitigated some of
the previously mentioned cost increases on a per ton basis due to the absorption
of fixed costs.
Selling and general administrative expenses of $6.7 million in the first quarter
of 2004 were unchanged from the first quarter of last year.
Depreciation expense increased by $.7 million to $25.1 million in the first
quarter of 2004 from $24.4 million due to the 2003 capital expenditures for the
No. 7 Blast Furnace reline.
Operating income in the first quarter of 2004 increased by $36.2 million to
$80.6 million from $44.4 million in 2003. Higher sales volume, increases in
selling prices, lower costs due to record slab production and the resulting
reduction in purchased semi-finished requirements, and the property tax
reassessment were partially offset by an unprecedented increase in input costs,
increased pension expense and employee profit sharing, and the severance charge
resulting from the salaried workforce reduction.
Other (income) expense, net of $4.9 million of income in the first quarter of
2004 increased by $6.7 million from an expense of $1.8 million in the first
quarter of 2003 due to the sale of pollution credits. The Company sold 2,168
tons of Nitrous Oxide allowances, which were part of an overall bank of emission
allowances and credits owned by the
18
Company. Generally, these rights arose from actions taken by the Company or the
state to reduce the emission of air pollutants.
Interest expense of $20.6 million in the current quarter increased 15.7% from
$17.8 million in the year ago quarter due primarily to a higher level of debt
during the quarter.
LIQUIDITY
The cash balance at March 31, 2004 was $28.2 million and there was an additional
$120.4 million of availability under the two credit facilities, for total
liquidity of approximately $149 million. During the first quarter, the Company
generated net cash of $52.5 million from financing activities. On March 25,
2004, the Company received $794.9 million of gross proceeds ($775.5 million of
net proceeds) from the issuance and sale of $800 million of Senior Secured
Notes. These net proceeds were used to retire the entire balance outstanding of
$661.5 million of Tranche B and Tranche C Loans under its credit agreement, and
repay the entire balance outstanding of $105 million under its inventory
revolving credit facility, with the remainder of the proceeds used to reduce the
amount outstanding under its receivables revolving credit facility.
Cash generated by operations is our primary source of cash and, as such, future
operations will have a significant impact on our cash balances and liquidity.
The principal factors affecting our cash generated by operations are average net
realized prices, levels of steel shipments and our operating costs per ton.
For the quarter ended March 31, 2004, net cash outflows from operations totaled
$43.7 million, which included pension contributions of $31.5 million. Cash
inflows from operations in the first quarter, 2003, were $23.7 million, which
included $54.5 million of pension contributions.
Changes in working capital, defined as the change in receivables, inventories
and accounts payable, utilized cash of $78.3 million in the first quarter, 2004,
including $63.3 million for increased receivables and $27.3 million for
increased inventories. In the first quarter, 2003, changes in working capital
generated $23.6 million of cash, including $49.9 million for decreased
receivables, partially offset by increased inventories of $41.3 million.
Cash inflows for investing activities, which consist primarily of capital
expenditures offset by distributions from joint ventures, were $6.0 million in
the first quarter, 2004, and $1.4 million in the first quarter, 2003. Capital
expenditures were $1.8 million and $9.7 million (primarily for the reline of the
No. 7 Blast Furnace), for the first quarter 2004 and 2003, respectively. Net
distributions from joint ventures were $7.7 million and $11.0 million for the
first quarter, 2004 and 2003, respectively.
OUTLOOK
With a continuation of the strong demand for steel, the Company expects the
second quarter 2004 shipments to be in line with the first quarter. Due to
previously announced price increases, selling prices are expected to be higher
in the second quarter. The price for coke purchases not under long-term contract
will be significantly higher in the second quarter compared to the first
quarter.
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.
19
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 March 9, 2004, Ispat Inland Inc. (the "Company") announced that
an affiliate, Ispat Inland ULC, intends to raise $800 million of gross
proceeds through a private placement of senior secured notes, subject to
market and other conditions. The notes are secured by a pledge of $800
million of First Mortgage Bonds issued by the Company. The notes are
guaranteed by the Company, certain of the Company's existing and future
domestic subsidiaries, by Ispat International N.V. and by certain limited
purpose finance companies. The Company used the proceeds from the
offering to repay existing indebtedness of the Company.
On March 17, 2004, Ispat International N.V., the parent of Ispat
Inland Inc. (the "Company"), filed Amendment Number 1 to its Form 20-F for
the year ended December 31, 2003 with the Securities and Exchange
Commission, originally filed on March 10, 2004. The amended filing was
made in relation to the offering by our affiliate, Ispat Inland ULC, of
$800 million of senior secured notes through a private placement.
20
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 - Commercial
and Chief Financial Officer
Principal Financial Officer
Principal Accounting Officer
and Director
Date: May 13, 2004
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page No.
- ------ -------------------------------------------------------------------------- ----------
31.1 Certificate of Louis L. Schorsch, President & Chief Executive Officer of
Ispat Inland Inc. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Michael G. Rippey, Executive Vice President - Commercial
and Chief Financial Officer of Ispat Inland Inc. Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
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 - Commercial
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.