UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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NEW CF&I, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-20781 93-1086900
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification
Number)
1000 Broadway Building, Suite 2200, Portland, Oregon 97205
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(Address of principal executive offices) (Zip Code)
(503) 223-9228
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
CF&I STEEL, L.P.
(Exact name of registrant as specified in its charter)
Delaware 02-20779 93-1103440
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification
Number)
1000 Broadway Building, Suite 2200, Portland, Oregon 97205
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(Address of principal executive offices) (Zip Code)
(503) 223-9228
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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
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NEW CF&I, INC.
CF&I STEEL, L.P.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS - NEW CF&I, INC.
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Consolidated Balance Sheets (unaudited)
September 30, 2002 and December 31, 2001 ...............2
Consolidated Statements of Income (unaudited)
Three months and nine months ended
September 30, 2002 and 2001 ............................3
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2002 and 2001 ..........4
Notes to Consolidated Financial Statements
(unaudited)..........................................5-11
FINANCIAL STATEMENTS - CF&I STEEL, L.P.
----------------
Balance Sheets (unaudited)
September 30, 2002 and December 31, 2001 .............12
Statements of Income (unaudited)
Three months and nine months ended
September 30, 2002 and 2001 ...........................13
Statements of Cash Flows (unaudited)
Nine months ended September 30, 2002 and 2001..........14
Notes to Financial Statements (unaudited)..............15-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...............21-24
Item 3. Quantitative and Qualitative Disclosures
about Market Risk......................................24
Item 4. Controls and Procedures...................................24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................25
Item 6. Exhibits and Reports on Form 8-K.......................25-26
SIGNATURES..................................................... 26
CERTIFICATIONS...................................................27-28
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3 $ 3
Trade accounts receivable, net 31,629 40,383
Inventories 33,486 36,058
Deferred taxes and other current assets 5,578 3,965
Other 711 306
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Total current assets 71,407 80,715
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Property, plant and equipment:
Land and improvements 3,454 3,503
Buildings 19,855 19,959
Machinery and equipment 259,099 254,316
Construction in progress 4,747 3,178
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287,155 280,956
Accumulated depreciation (106,882) (93,019)
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Net property, plant and equipment 180,273 187,937
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Goodwill -- 31,863
Intangibles, net 1,136 1,227
Other assets 45,568 38,091
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Total assets $ 298,384 $ 339,833
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 6,121 $ 9,464
Accounts payable 31,574 35,606
Accrued expenses 22,138 26,590
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Total current liabilities 59,833 71,660
Long-term debt -- 5,072
Long-term debt - Oregon Steel Mills, Inc. 219,472 230,258
Environmental liability 28,486 28,465
Deferred employee benefits 8,734 8,024
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Total liabilities 316,525 343,479
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Redeemable common stock 21,840 21,840
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Contingencies (Note 3)
STOCKHOLDERS' DEFICIT
Common stock 1 1
Additional paid-in capital 16,603 16,603
Accumulated deficit (55,065) (40,570)
Accumulated other comprehensive income:
Minimum pension liability (1,520) (1,520)
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(39,981) (25,486)
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$ 298,384 $ 339,833
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
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NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------------
2002 2001 2002 2001
-------- --------- ---------- ---------
SALES:
Product sales $ 79,434 $ 70,232 $ 240,261 $ 218,187
Freight 3,438 3,995 10,616 12,833
Electricity sales -- -- -- 2,150
-------- --------- --------- ---------
82,872 74,227 250,877 233,170
COSTS AND EXPENSES:
Cost of sales 68,377 61,680 208,135 207,507
Gain on sale of assets (86) (20) (1,108) (18)
Selling, general and administrative
expenses 5,711 7,905 17,107 19,287
-------- --------- --------- ---------
74,002 69,565 224,134 226,776
-------- --------- --------- ---------
Operating income 8,870 4,662 26,743 6,394
OTHER INCOME (EXPENSE):
Interest expense, net (6,019) (7,088) (19,325) (21,428)
Minority interests (134) 127 (371) 841
Other, net 77 212 799 420
-------- --------- --------- ---------
Income (loss) before income taxes 2,794 (2,087) 7,846 (13,773)
Provision for income tax (expense) benefit (887) 918 (3,272) 5,156
-------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle, net of
tax, net of minority interest 1,907 (1,169) 4,574 (8,617)
Cumulative effect of change in accounting
principle, net of tax, net of minority
interest -- -- (19,069) --
-------- --------- --------- ---------
NET INCOME (LOSS) $ 1,907 $ (1,169) $ (14,495) $ (8,617)
======== ========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
--------------------------------
2002 2001
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Cash flows from operating activities:
Net loss $ (14,495) $ (8,617)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting principle, net of tax,
net of minority interest 19,070 --
Depreciation and amortization 14,015 12,951
Deferred income taxes 2,197 (5,171)
Minority interests 371 (841)
Gain on sale of operating and non-operating assets (1,108) (18)
Other, net (413) --
Changes in operating assets and liabilities, net:
Trade accounts receivable 9,023 8,157
Inventories 2,572 9,076
Operating liabilities (6,616) (5,022)
Other, net (381) (532)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 24,234 9,983
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Cash flows from investing activities:
Additions to property, plant and equipment (6,436) (7,530)
Proceeds from sales of operating and non-operating assets 1,403 386
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NET CASH USED IN INVESTING ACTIVITIES (5,033) (7,144)
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Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 93,780 102,280
Payments to Oregon Steel Mills, Inc. (104,566) (100,907)
Payment of long-term debt (8,415) (4,212)
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NET CASH USED IN FINANCING ACTIVITIES (19,201) (2,839)
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Net increase in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period 3 5
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Cash and cash equivalents at end of period $ 3 $ 5
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 20,264 $ 21,478
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
NEW CF&I, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The consolidated financial statements include the accounts of New
CF&I, Inc. and its subsidiaries ("New CF&I" or the "Company"). The Company
owns a 95.2% interest in CF&I Steel, L.P. ("CF&I"), which is the Company's
principal subsidiary. Oregon Steel Mills, Inc. ("Oregon Steel") holds an
87% ownership interest in the Company. All significant intercompany
balances and transactions have been eliminated.
The unaudited financial statements include all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair statement of the interim periods.
Results for an interim period are not necessarily indicative of results
for a full year. Reference should be made to the Company's 2001 Annual
Report on Form 10-K for additional disclosures including a summary of
significant accounting policies.
In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "BUSINESS COMBINATIONS," and SFAS No. 142, "GOODWILL
AND OTHER INTANGIBLE ASSETS," collectively referred to as the "Standards."
SFAS No. 141 supersedes Accounting Principles Board Opinion (APB) No. 16,
"BUSINESS COMBINATIONS." The provisions of SFAS No. 141 (1) require that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and (2) provide specific criteria for the
initial recognition and measurement of intangible assets apart from
goodwill. SFAS No. 141 also requires that, upon adoption of SFAS No. 142,
the Company reclassify the carrying amounts of certain intangible assets
into or out of goodwill, based on certain criteria. SFAS No. 142
supersedes APB 17, "INTANGIBLE ASSETS," and is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS No. 142 (1) prohibit the amortization
of goodwill and indefinite-lived intangible assets, (2) require that
goodwill and indefinite-lived intangible assets be tested annually for
impairment (and in interim periods if certain events occur indicating that
the carrying value of goodwill and/or indefinite-lived intangible assets
may be impaired), (3) require that reporting units be identified for the
purpose of assessing potential future impairments of goodwill, and (4)
remove the forty-year limitation on the amortization period of intangible
assets that have finite lives. The Company adopted the provisions of SFAS
No. 141 and 142 during its first quarter ended March 31, 2002. See Note 4
for further information.
On October 3, 2001, the FASB issued SFAS No. 144 "ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS." SFAS No. 144 supercedes
SFAS No. 121 "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF." SFAS No. 144 applies to all
long-lived assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30 (APB 30), Reporting
Results of Operations and Reporting the Effects of Disposal of a Segment of
a Business. SFAS No. 144 develops one accounting model for long-lived
assets that are to be disposed of by sale. SFAS No. 144 requires that
long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. Additionally, SFAS No.
144 expands the scope of discontinued operations to include all components
of an entity with operations that (1) can be distinguished from the rest of
the entity and (2) will be eliminated from the ongoing operations of the
entity in a disposal transaction. SFAS No. 144 was effective for the
Company for the year beginning January 1, 2002. The adoption of this
standard did not have a material effect on the Company's financial
statements.
In May 2002, the FASB issued SFAS No. 145, "RECISSION OF FAS NOS.
4, 44, AND 64, AMENDMENT OF FAS 13, AND TECHNICAL CORRECTIONS." Among other
things, SFAS No. 145 rescinds various pronouncements regarding early
extinguishment of debt and allows extraordinary accounting treatment for
early extinguishment only when the provisions of Accounting Principles
Board 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" are met. SFAS No. 145
provisions regarding early extinguishment of debt are generally effective
for fiscal years beginning after May 15, 2002. In mid-July 2002, Oregon
Steel refinanced its credit facility and redeemed its 11% First Mortgage
Notes due 2003, resulting in a $1.1 million extraordinary loss, net of
taxes, on the early extinguishment of debt. The amount recognized consisted
primarily of the write-off of unamortized fees and expenses. The adoption
of SFAS 145 will cause a reclassfication
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of the extraordinary loss from extinguishment of debt to ordinary income
in Oregon Steel, but will have no impact to New CF&I or CF&I.
In July of 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS AND FOR OBLIGATIONS
ASSOCIATED WITH DISPOSAL ACTIVITIES." SFAS No. 146 addresses the
differences in accounting for long-lived assets and operations (segments)
to be disposed of under SFAS No. 121 and APB No. 30 and accounting for
costs associated with those and other disposal activities, including
restructuring activities, under Emerging Issues Task Force ("EITF") Issue
No. 94-3. SFAS No. 146 is effective for disposal activities after December
31, 2002, with early application encouraged. The Company does not believe
that the adoption of this statement will have a material impact on its
consolidated financial statements.
Certain reclassifications have been made in prior periods to
conform to the current year presentation. Such reclassifications do not
affect results of operations as previously reported.
2. INVENTORIES
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Inventories consist of:
September 30, December 31,
2002 2001
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(In thousands)
Raw materials $ 8,309 $ 9,711
Semi-finished product 6,100 9,610
Finished product 11,896 9,752
Stores and operating supplies 7,181 6,985
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Total inventory $ 33,486 $ 36,058
======== ========
3. CONTINGENCIES
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Environmental Matters
- ---------------------
All material environmental remediation liabilities for non-capital
expenditures, which are probable and estimable, are recorded in the financial
statements based on current technologies and current environmental standards at
the time of evaluation. Adjustments are made when additional information is
available that suggests different remediation methods or periods may be required
and affect the total cost. The best estimate of the probable cost within a range
is recorded; however, if there is no best estimate, the low end of the range is
recorded and the range is disclosed.
In connection with the acquisition of the steelmaking and finishing
facilities located at Pueblo, Colorado ("Pueblo Mill"), CF&I accrued a liability
of $36.7 million for environmental remediation related to the prior owner's
operations. CF&I believed this amount was the best estimate of costs from a
range of $23.1 million to $43.6 million. CF&I's estimate of this liability was
based on two remediation investigations conducted by environmental engineering
consultants, and included costs for the Resource Conservation and Recovery Act
facility investigation, a corrective measures study, remedial action, and
operation and maintenance associated with the proposed remedial actions. In
October 1995, CF&I and the Colorado Department of Public Health and Environment
("CDPHE") finalized a postclosure permit for hazardous waste units at the Pueblo
Mill. As part of the postclosure permit requirements, CF&I must conduct a
corrective action program for the 82 solid waste management units at the
facility and continue to address projects on a prioritized corrective action
schedule which substantially reflects a straight-line rate of expenditure over
30 years. The State of Colorado mandated that the schedule for corrective action
could be accelerated if new data indicated a greater threat existed to the
environment than was presently believed to exist. At September 30, 2002, the
accrued liability was $30.2 million, of which $26.6 million was classified as
non-current on the consolidated balance sheet.
The CDPHE inspected the Pueblo Mill in 1999 for possible environmental
violations, and in the fourth quarter of 1999 issued a Compliance Advisory
indicating that air quality regulations had been violated, which was followed by
the filing of a
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judicial enforcement action ("Action") in the second quarter of 2000. In March
2002, CF&I and CDPHE reached a settlement of the Action, which was approved by
the court (the "State Consent Decree"). The State Consent Decree provides for
CF&I to pay $300,000 in penalties, fund $1.5 million of community projects, and
to pay approximately $400,000 for consulting services. CF&I is also required to
make certain capital improvements expected to cost approximately $20 million,
including converting to the new single New Source Performance Standards Subpart
AAa ("NSPS AAa") compliant furnace discussed below. The State Consent Decree
provides that the two existing furnaces will be permanently shut down
approximately 16 months after the issuance of a Prevention of Significant
Deterioration ("PSD") air permit. CF&I applied for the PSD permit in April 2002.
Terms of that permit are still under discussion with the State and it has not
yet been issued.
In May 2000, the EPA issued a final determination that one of the two
electric arc furnaces at the Pueblo Mill was subject to federal NSPS AA. This
determination was contrary to an earlier "grandfather" determination first made
in 1996 by CDPHE. CF&I appealed the EPA determination in the federal Tenth
Circuit Court of Appeals, and that appeal is pending. CF&I has negotiated a
settlement in principal of this matter with EPA. Under that agreement and
overlapping with the commitments made to the CDPHE described below, CF&I will
commit to the conversion to the new NSPS AAa compliant furnace (to be completed
approximately two years after permit approval and expected to cost, with all
related emission control improvements, approximately $20 million), and to pay
approximately $450,000 in penalties and fund certain supplemental environmental
projects valued at approximately $1.1 million, including the installation of
certain pollution control equipment at the Pueblo Mill. The above mentioned
expenditures for supplemental environmental projects will be both capital and
non-capital expenditures. Once the settlement agreement is finalized, the EPA
will file two proposed federal Consent Decrees, which, if approved by the
courts, will fully resolve all NSPS and PSD issues. At that time CF&I will
dismiss its appeal against the EPA. If the proposed settlement with the EPA is
not finalized, which appears unlikely, it would not be possible to estimate the
liability if there were ultimately an adverse determination of this matter.
In response to the CDPHE settlement and the resolution of the EPA
action, CF&I has accrued $3.0 million as of September 30, 2002 for possible
fines and non-capital related expenditures.
In December 2001, the State of Colorado issued a Title V air emission
permit to CF&I under the Clean Air Act ("CAA") requiring that the furnace
subject to the EPA action operate in compliance with NSPS AA standards. This
permit was modified in April 2002, to incorporate the longer compliance schedule
that is part of the settlement with the CDPHE and is part of the negotiations
with the EPA. In September 2002, the Company submitted a request for a further
extension of certain Title V compliance deadlines, consistent with a joint
petition by the State and the Company for an extension of the same deadlines in
the State Consent Decree. This modification gives CF&I adequate time (at least
10 months after CDPHE issues the PSD permit) to convert to a single NSPS AAa
compliant furnace. Any decrease in steelmaking production during the furnace
conversion period when both furnaces are expected to be shut down will be offset
by increasing production prior to the conversion period by building up
semi-finished steel inventory and, if necessary, purchasing semi-finished steel
("billets") for conversion into rod products at spot market prices at costs
comparable to internally generated billets. Pricing and availability of billets
is subject to significant volatility. However, the Company believes that near
term supplies of billets will continue to be available in sufficient quantities
at favorable prices.
In a related matter, in April 2000 the United Steelworkers of America
(the "Union") filed suit in U.S. District Court in Denver, Colorado, asserting
that the Company and CF&I had violated the CAA at the Pueblo Mill for a period
extending over five years. The Union sought declaratory judgement regarding the
applicability of certain emission standards, injunctive relief, civil penalties
and attorney's fees. On July 6, 2001, the presiding judge dismissed the suit.
The Union has appealed the decision and the Company is defending the appeal.
While the Company does not believe the suit will have a material adverse effect
on its results of operations, the result of litigation such as this is difficult
to predict and an adverse outcome with significant penalties is possible. It is
not presently possible to estimate the liability if there is ultimately an
adverse determination on appeal.
LABOR DISPUTE
- -------------
The labor contract at CF&I expired on September 30, 1997. After a brief
contract extension intended to help facilitate a possible agreement, on October
3, 1997, the Union initiated a strike at CF&I for approximately 1,000 bargaining
unit employees. The parties, however, failed to reach final agreement on a new
labor contract due to differences on economic issues. As a result of contingency
planning, CF&I was able to avoid complete suspension of operations at the Pueblo
Mill by utilizing a combination of new hires, striking employees who returned to
work, contractors and salaried employees.
-7-
On December 30, 1997, the Union called off the strike and made an
unconditional offer on behalf of its members to return to work. At the time of
this offer, because CF&I had permanently replaced the striking employees, only a
few vacancies existed at the Pueblo Mill. Since that time, vacancies have
occurred and have been filled by formerly striking employees ("Unreinstated
Employees"). As of September 30, 2002, approximately 710 Unreinstated Employees
have either returned to work or have declined CF&I's offer of equivalent work.
At September 30, 2002, approximately 220 Unreinstated Employees remain
unreinstated.
On February 27, 1998, the Regional Director of the National Labor
Relations Board ("NLRB") Denver office issued a complaint against CF&I, alleging
violations of several provisions of the National Labor Relations Act ("NLRA").
On August 17, 1998, a hearing on these allegations commenced before an
Administrative Law Judge ("Judge"). Testimony and other evidence were presented
at various sessions in the latter part of 1998 and early 1999, concluding on
February 25, 1999. On May 17, 2000, the Judge rendered a decision which, among
other things, found CF&I liable for certain unfair labor practices and ordered
as remedy the reinstatement of all 1,000 Unreinstated Employees, effective as of
December 30, 1997, with back pay and benefits, plus interest, less interim
earnings. Since January 1998, the Company has been returning Unreinstated
Employees to jobs as positions became open. As noted above, there were
approximately 220 Unreinstated Employees as of September 30, 2002. On August 2,
2000, CF&I filed an appeal with the NLRB in Washington, D.C. A separate hearing
concluded in February 2000, with the judge for that hearing rendering a decision
on August 7, 2000, that certain of the Union's actions undertaken since the
beginning of the strike did constitute misconduct and violations of certain
provisions of the NLRA. The Union has appealed this determination to the NLRB.
In both cases, the non-prevailing party in the NLRB's decision will be entitled
to appeal to the appropriate U.S. Circuit Court of Appeals. CF&I believes both
the facts and the law fully support its position that the strike was economic in
nature and that it was not obligated to displace the properly hired replacement
employees. The Company does not believe that final judicial action on the strike
issues is likely for at least two to three years.
In the event there is an adverse determination of these issues,
Unreinstated Employees could be entitled to back pay, including benefits, plus
interest, from the date of the Union's unconditional offer to return to work
through the date of their reinstatement or a date deemed appropriate by the NLRB
or an appellate court. The number of Unreinstated Employees entitled to back pay
may be limited to the number of past and present replacement workers; however,
the Union might assert that all Unreinstated Employees should be entitled to
back pay. Back pay is generally determined by the quarterly earnings of those
working less interim wages earned elsewhere by the Unreinstated Employees. In
addition to other considerations, each Unreinstated Employee has a duty to take
reasonable steps to mitigate the liability for back pay by seeking employment
elsewhere that has comparable working conditions and compensation. Any estimate
of the potential liability for back pay will depend significantly on the ability
to assess the amount of interim wages earned by these employees since the
beginning of the strike, as noted above. Due to the lack of accurate information
on interim earnings for both reinstated and Unreinstated Employees and sentiment
of the Union towards the Company, it is not currently possible to obtain the
necessary data to calculate possible back pay. In addition, the NLRB's findings
of misconduct by the Union may mitigate any back pay award with respect to any
Unreinstated Employees proven to have taken part or participated in acts of
misconduct during and after the strike. Thus, it is not presently possible to
estimate the liability if there is ultimately an adverse determination against
CF&I. An ultimate adverse determination against CF&I on these issues may have a
material adverse effect on the Company's consolidated financial condition,
results of operations, or cash flows. CF&I does not intend to agree to any
settlement of this matter that will have a material adverse effect on the
Company. In connection with the ongoing labor dispute, the Union has undertaken
certain activities designed to exert public pressure on CF&I. Although such
activities have generated some publicity in news media, CF&I believes that they
have had little or no material impact on its operations.
During the strike by the Union at CF&I, certain bargaining unit
employees of the Colorado & Wyoming Railway Company ("C&W"), a wholly-owned
subsidiary of New CF&I, refused to report to work for an extended period of
time, claiming that concerns for their safety prevented them from crossing the
picket line. The bargaining unit employees of C&W were not on strike, and
because the other C&W employees reported to work without incident, C&W
considered those employees to have quit their employment and, accordingly, C&W
declined to allow those individuals to return to work. The various unions
representing those individuals filed claims with C&W asserting that C&W had
violated certain provisions of the applicable collective bargaining agreement,
the Federal Railroad Safety Act ("FRSA"), or the Railway Labor Act. In all of
the claims, the unions demand reinstatement of the former employees with their
seniority intact, back pay and benefits.
The United Transportation Union, representing thirty of those former
employees, asserted that their members were protected under the FRSA and pursued
their claim before the Public Law Board ("PLB"). A hearing was held in November
1999, and the PLB, with one member dissenting, rendered an award on January 8,
2001 against C&W, ordering the
-8-
reinstatement of those claimants who intend to return to work for C&W, at their
prior seniority, with back pay and benefits, net of interim wages and benefits
received elsewhere. On February 6, 2001, C&W filed a petition for review of that
award in the District Court for the District of Colorado. The District Court
issued an order upholding the PLB award and is now considering possible back pay
and benefits. A hearing on the back pay is now scheduled for January 22, 2003.
On May 23, 2002, C&W filed an appeal of the District Court's order in the United
States Court of Appeals. The appeal was dismissed as being premature given that
the hearing on back pay has not yet occurred. Given the uncertantity as to the
methodology which will be used by the District Court to determine the amount of
back pay and the extent to which the adverse and mitigating factors discussed
above will impact the liability for back pay and benefits, it is not presently
possible to estimate the liability if there is ultimately an adverse
determination against C&W.
The Transportation-Communications International Union, Brotherhood
Railway Carmen Division, representing six of those former C&W employees,
asserted that their members were protected under the terms of the collective
bargaining agreement and pursued their claim before a separate PLB. A hearing
was held in January 2001, and that PLB, with one member dissenting, rendered an
award on March 14, 2001 against C&W, ordering the reinstatement of those
claimants who intend to return to work for C&W, at their prior seniority, with
back pay and benefits, net of interim wages earned elsewhere. As of September
30, 2002, two of the six former employees have accepted a settlement from C&W.
The remaining four do not agree with the award amount from the court. The
Company does not believe an adverse determination against C&W on this matter
would have a material adverse effect on the Company's results of operations.
GUARANTEES AND FINANCING ARRANGEMENTS
On July 15, 2002, Oregon Steel issued $305 million of 10% First
Mortgage Notes due 2009 ("10% Notes") in a private offering at a discount of
98.772% and an interest rate of 10%. Interest is payable on January 15 and July
15 of each year. The proceeds of this issuance were used to redeem Oregon
Steel's 11% First Mortgage Notes due 2003 (including interest accrued from June
16, 2002 until the redemption date of August 14, 2002), refinance its existing
credit agreement, and for working capital and general corporate purposes. The
existing credit agreement was replaced with a new $75 million credit facility
that will expire on June 30, 2005.
The Company and CF&I (collectively "Guarantors") guarantee the
obligations of Oregon Steel under the 10% Notes, and those guarantees are
secured by a lien on substantially all of the property, plant and equipment and
certain other assets of the Guarantors, excluding accounts receivable and
inventory. On August 16, 2002, Oregon Steel along with New CF&I and CF&I, L.P.
filed a registration statement on Form S-4 to exchange the 10% Notes for notes
with substantially identical terms registered with the Securities and Exchange
Commission.
In addition, as of September 30, 2002, Oregon Steel, New CF&I, CF&I,
and C&W are borrowers under a $75 million revolving credit facility ("Credit
Agreement") that is collateralized, in part, by certain equity and intercompany
interests, accounts receivable and inventory of New CF&I and CF&I. The Credit
Agreement contains various restrictive covenants including a minimum
consolidated tangible net worth amount, a minimum earnings before interest,
taxes, depreciation and amortization ("EBITDA") amount, a minimum fixed charge
coverage ratio, limitations on maximum annual capital expenditures, limitations
on stockholder dividends and limitations on incurring new or additional debt
obligations other than as allowed by the Credit Agreement. The Company was in
compliance with such covenants at September 30, 2002.
LIQUIDITY
The Company experienced a net loss for the nine months ended September
30, 2002. Contributing to the adverse results was the interest paid by the
Company to Oregon Steel for its financing and the write-off of impaired goodwill
associated with the adoption of SFAS No. 142. The Company has been able to
fulfill its needs for working capital and capital expenditures, due in part to
the financing arrangement with Oregon Steel. The Company expects that operations
will continue for the remainder of 2002, with the realization of assets and
discharge of liabilities in the ordinary course of business. The Company
believes that its prospective needs for working capital and capital expenditures
will be met from cash flows generated by operations and borrowings pursuant to
the financing arrangement with Oregon Steel. If operations are not consistent
with management's plans, there is no assurance that the amounts from these
sources will be sufficient for such purposes. Oregon Steel is not required to
provide financing to the Company and, although the demand for repayment of the
obligation in full is not expected during 2002, Oregon Steel may demand
repayment of the loan at any time. If Oregon Steel were to demand repayment of
the loan, it is not
-9-
likely that the Company would be able to obtain the external financing necessary
to repay the loan or to fund its capital expenditures and other cash needs and,
if available, that such financing would be on terms satisfactory to the Company.
4. GOODWILL AND INTANGIBLE ASSETS
------------------------------
Effective January 1, 2002, the Company adopted SFAS No.142, "GOODWILL
AND OTHER INTANGIBLE ASSETS." As part of this adoption, the Company ceased
amortizing all goodwill and assessed goodwill for possible impairment. As an
initial step, the Company tested goodwill impairment within CF&I, the only
reporting unit with goodwill.
As required under the transitional accounting provisions of SFAS No.
142, the Company completed the steps required to identify and measure goodwill
impairment at CF&I. This reporting unit was measured for impairment by comparing
implied fair value of the reporting unit's goodwill with the carrying amount of
the goodwill. As a result, the entire goodwill at CF&I was written off in the
amount of $31.9 million and a charge of $19.1 million (after tax and minority
interest) was recognized as a cumulative effect of a change in accounting
principle during the first quarter of 2002. Historical earnings and applying an
earnings multiple resulted in the identification of an impairment that was
recognized at the reporting unit. The implementation of SFAS No. 142 required
the use of judgements, estimates and assumptions in the determination of fair
value and impairment amounts related to the required testing. Prior to adoption
of SFAS No. 142, the Company had historically evaluated goodwill for impairment
by comparing the entity level unamortized balance of goodwill to projected
undiscounted cash flows, which did not result in an indicated impairment.
Additionally, pursuant to SFAS No. 142, the Company completed its
reassessment of finite intangible asset lives, which consists of proprietary
technology at CF&I. Based on this reassessment, no adjustment was needed on the
proprietary technology. The Company does not have any other acquired intangible
assets, whether finite or indefinite-lived assets.
Listed below are schedules describing the goodwill and intangibles of
the Company. Also included is a report of what adjusted earnings would have been
if amortization had not taken place for the three and nine months ended
September 30, 2002.
GOODWILL - ADOPTION OF SFAS NO. 142
- -----------------------------------
The Company applied the FAS 142 rules in accounting of goodwill and
intangibles and $31.9 million of goodwill was written off in the first quarter
of 2002. During the first nine months of 2002, no additional goodwill was
acquired. There was no remaining goodwill at September 30, 2002.
INTANGIBLES
- -----------
The carrying amount of intangible assets and the associated amortization
expenses are as follows:
AS OF SEPTEMBER 30, 2002
-----------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
(IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS: (FN1)
Proprietary technology $1,892 $(756)
====== =====
AGGREGATE AMORTIZATION EXPENSE: 2002 2001
---- ----
For the three months ended $ 30 $ 30
For the nine months ended $ 91 $ 91
ESTIMATED AMORTIZATION EXPENSE:
For the year ended 12/31/02 $ 122
For the year ended 12/31/03 $ 122
For the year ended 12/31/04 $ 122
For the year ended 12/31/05 $ 122
For the year ended 12/31/06 $ 122
(FN1) Weighted average amortization period is 16 years.
-10-
The following adjusts reported net income (loss) to exclude goodwill
amortization:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, (IN THOUSANDS) SEPTEMBER 30, (IN THOUSANDS)
---------------------------- ------------------------------
2002 2001 2002 2001
------ -------- -------- --------
Goodwill amortization $ -- $ (255) $ -- $ (765)
------ ------- -------- -------
Net income (loss) 1,907 (1,169) (14,495) (8,617)
Add back: Goodwill amortization,
net of tax, net of minority interest -- 158 -- 473
------ ------- -------- -------
Adjusted net income (loss) $1,907 $(1,011) $(14,495) $(8,144)
====== ======= ======== =======
-11-
CF&I STEEL, L.P.
BALANCE SHEETS
(In thousands)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ --
Trade accounts receivable, net 30,469 38,178
Inventories 33,237 35,824
Other 432 71
--------- ---------
Total current assets 64,956 74,073
--------- ---------
Property, plant and equipment:
Land and improvements 3,449 3,498
Buildings 18,466 18,570
Machinery and equipment 256,324 251,573
Construction in progress 4,747 3,178
--------- ---------
282,986 276,819
Accumulated depreciation (104,903) (91,204)
--------- ---------
Net property, plant and equipment 178,083 185,615
--------- ---------
Goodwill -- 31,863
Intangibles, net 1,136 1,227
Other assets 13,350 13,501
--------- ---------
Total assets $ 256,707 $ 306,279
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 6,121 $ 9,464
Accounts payable 43,518 39,091
Accrued expenses 21,153 32,525
--------- ---------
Total current liabilities 70,792 81,080
Long-term debt -- 5,072
Long-term debt - Oregon Steel Mills, Inc. 219,472 230,258
Long-term debt - New CF&I, Inc. 21,756 21,756
Environmental liability 28,486 28,465
Deferred employee benefits 8,734 8,024
--------- ---------
Total liabilities 349,240 374,655
--------- ---------
Contingencies (Note 3)
PARTNERS' DEFICIT
General partner (87,821) (65,094)
Limited partners (4,712) (3,282)
--------- ---------
(92,533) (68,376)
--------- ---------
$ 256,707 $ 306,279
========= =========
The accompanying notes are an integral part of the
financial statements.
-12-
CF&I STEEL, L.P.
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2002 2001 2002 2001
-------- --------- --------- ---------
SALES:
Product sales $ 77,790 $ 68,493 $ 234,912 $ 213,397
Freight 3,438 3,896 10,615 12,552
Electricity sales -- -- -- 2,106
-------- --------- --------- ---------
81,228 72,389 245,527 228,055
COSTS AND EXPENSES:
Cost of sales 67,241 60,426 204,323 203,483
Gain on sale of assets (86) (18) (1,109) (18)
Selling, general and administrative
expenses 5,036 7,253 15,129 17,533
-------- --------- --------- ---------
72,191 67,661 218,343 220,998
-------- --------- --------- ---------
Operating income 9,037 4,728 27,184 7,057
OTHER INCOME (EXPENSE):
Interest expense, net (6,334) (7,437) (20,277) (22,634)
Other, net 77 165 799 296
-------- --------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle 2,780 (2,544) 7,706 (15,281)
Cumulative effect of change in accounting
principle -- -- (31,863) --
-------- --------- --------- ---------
NET INCOME (LOSS) $ 2,780 $ (2,544) $ (24,157) $ (15,281)
======== ========= ========= =========
The accompanying notes are an integral part of the
financial statements.
-13-
CF&I STEEL, L.P.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss $ (24,157) $ (15,281)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting principle 31,863 --
Depreciation and amortization 13,850 12,891
Gain on sale of operating and non-operating assets (1,108) (18)
Other, net (240) --
Changes in operating assets and liabilities, net:
Trade accounts receivable 7,201 7,453
Inventories 2,587 9,086
Operating liabilities (5,422) (3,992)
Other, net (613) (1,290)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,200 8,849
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (6,402) (6,270)
Proceeds from sale of operating and non-operating assets 1,403 260
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (4,999) (6,010)
--------- ---------
Cash flows from financing activities:
Borrowings from related parties 93,780 102,280
Payments to related parties (104,566) (100,907)
Payment of long-term debt (8,415) (4,212)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (19,201) (2,839)
--------- ---------
Net increase in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period -- 2
--------- ---------
Cash and cash equivalents at end of period $ -- $ 2
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 20,264 $ 21,478
========= =========
The accompanying notes are an integral part of the
financial statements.
-14-
CF&I STEEL, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The financial statements include the accounts of CF&I Steel, L.P.
("CF&I"). Oregon Steel Mills, Inc. ("Oregon Steel") owns an 87 percent interest
in New CF&I, Inc. ("Company") which owns a 95.2% interest in CF&I. Oregon Steel
also owns directly an additional 4.3% interest in CF&I. In January 1998, CF&I
assumed the trade name of Rocky Mountain Steel Mills.
The unaudited financial statements include all adjustments (consisting
of normal recurring accruals) which, in the opinion of management, are necessary
for a fair statement of the interim periods. Results for an interim period are
not necessarily indicative of results for a full year. Reference should be made
to CF&I's 2001 Annual Report on Form 10-K for additional disclosures including a
summary of significant accounting policies.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141,"BUSINESS COMBINATIONS," and SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS," collectively referred to as the "Standards." SFAS No. 141
supersedes Accounting Principles Board Opinion (APB) No. 16, "BUSINESS
COMBINATIONS." The provisions of SFAS No. 141 (1) require that the purchase
method of accounting be used for all business combinations initiated after
September 30, 2001, and (2) provide specific criteria for the initial
recognition and measurement of intangible assets apart from goodwill. SFAS No.
141 also requires that, upon adoption of SFAS No. 142, CF&I reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS No. 142 supersedes APB 17, "INTANGIBLE ASSETS," and is
effective for fiscal years beginning after December 15, 2001. SFAS No. 142
primarily addresses the accounting for goodwill and intangible assets subsequent
to their initial recognition. The provisions of SFAS No. 142 (1) prohibit the
amortization of goodwill and indefinite-lived intangible assets, (2) require
that goodwill and indefinite-lived intangible assets be tested annually for
impairment (and in interim periods if certain events occur indicating that the
carrying value of goodwill and/or indefinite-lived intangible assets may be
impaired), (3) require that reporting units be identified for the purpose of
assessing potential future impairments of goodwill, and (4) remove the
forty-year limitation on the amortization period of intangible assets that have
finite lives. CF&I adopted the provisions of SFAS No. 141 and 142 during its
first quarter ended March 31, 2002. See Note 4 for further information.
On October 3, 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS." SFAS No. 144 supersedes SFAS No.
121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF." SFAS No. 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30 (APB 30), "REPORTING RESULTS OF OPERATIONS AND
REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS." SFAS No. 144
develops one accounting model for long-lived assets that are to be disposed of
by sale. SFAS No. 144 requires that long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value, less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 was
effective for CF&I for the year beginning January 1, 2002. The adoption of this
standard did not have a material effect on CF&I's financial statements.
In May 2002, the FASB issued SFAS No. 145, "RECISSION OF FAS NOS. 4,
44, AND 64, AMENDMENT OF FAS 13, AND TECHNICAL CORRECTIONS." Among other things,
SFAS No. 145 rescinds various pronouncements regarding early extinguishment of
debt and allows extraordinary accounting treatment for early extinguishment only
when the provisions of Accounting Principles Board 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" are met. SFAS No. 145 provisions regarding early extinguishment of
debt are generally effective for fiscal years beginning after May 15, 2002. CF&I
does not believe that the adoption of this statement will have a material impact
on its consolidated financial statements.
In July of 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS AND FOR OBLIGATIONS ASSOCIATED WITH
DISPOSAL ACTIVITIES." SFAS No. 146 addresses the differences in accounting for
long-lived
-15-
assets and operations (segments) to be disposed of under SFAS No. 121 and APB
No. 30 and accounting for costs associated with those and other disposal
activities, including restructuring activities, under Emerging Issues Task Force
("EITF") Issue No. 94-3. SFAS No. 146 is effective for disposal activities after
December 31, 2002, with early application encouraged. CF&I does not believe that
the adoption of this statement will have a material impact on its consolidated
financial statements.
Certain reclassifications have been made in prior periods to conform to
the current year presentation. Such reclassifications do not affect results of
operations as previously reported.
2. INVENTORIES
-----------
Inventories consist of:
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- ------------
(IN THOUSANDS)
Raw materials $ 8,309 $ 9,711
Semi-finished product 6,100 9,610
Finished product 11,896 9,752
Stores and operating supplies 6,932 6,751
-------- --------
Total inventory $ 33,237 $ 35,824
======== ========
3. CONTINGENCIES
-------------
Environmental Matters
- ---------------------
All material environmental remediation liabilities for non-capital
expenditures, which are probable and estimable, are recorded in the financial
statements based on current technologies and current environmental standards at
the time of evaluation. Adjustments are made when additional information is
available that suggests different remediation methods or periods may be required
and affect the total cost. The best estimate of the probable cost within a range
is recorded; however, if there is no best estimate, the low end of the range is
recorded and the range is disclosed.
In connection with the acquisition of the steelmaking and finishing
facilities located at Pueblo, Colorado ("Pueblo Mill"), CF&I accrued a liability
of $36.7 million for environmental remediation related to the prior owner's
operations. CF&I believed this amount was the best estimate of costs from a
range of $23.1 million to $43.6 million. CF&I's estimate of this liability was
based on two remediation investigations conducted by environmental engineering
consultants, and included costs for the Resource Conservation and Recovery Act
facility investigation, a corrective measures study, remedial action, and
operation and maintenance associated with the proposed remedial actions. In
October 1995, CF&I and the Colorado Department of Public Health and Environment
("CDPHE") finalized a postclosure permit for hazardous waste units at the Pueblo
Mill. As part of the postclosure permit requirements, CF&I must conduct a
corrective action program for the 82 solid waste management units at the
facility and continue to address projects on a prioritized corrective action
schedule which substantially reflects a straight-line rate of expenditure over
30 years. The State of Colorado mandated that the schedule for corrective action
could be accelerated if new data indicated a greater threat existed to the
environment than was presently believed to exist. At September 30, 2002, the
accrued liability was $30.2 million, of which $26.6 million was classified as
non-current on the consolidated balance sheet.
The CDPHE inspected the Pueblo Mill in 1999 for possible environmental
violations, and in the fourth quarter of 1999 issued a Compliance Advisory
indicating that air quality regulations had been violated, which was followed by
the filing of a judicial enforcement action ("Action") in the second quarter of
2000. In March 2002, CF&I and CDPHE reached a settlement of the Action, which
was approved by the court (the "State Consent Decree"). The State Consent Decree
provides for CF&I to pay $300,000 in penalties, fund $1.5 million of community
projects, and to pay approximately $400,000 for consulting services. CF&I is
also required to make certain capital improvements expected to cost
approximately $20 million, including converting to the new single New Source
Performance Standards Subpart AAa ("NSPS AAa") compliant furnace discussed
below. The State Consent Decree provides that the two existing furnaces will be
permanently shut down approximately 16 months after the
-16-
issuance of a Prevention of Significant Deterioration ("PSD") air permit. CF&I
applied for the PSD permit in April 2002. Terms of that permit are still under
discussion with the State and it has not yet been issued.
In May 2000, the EPA issued a final determination that one of the two
electric arc furnaces at the Pueblo Mill was subject to federal NSPS AA. This
determination was contrary to an earlier "grandfather" determination first made
in 1996 by CDPHE. CF&I appealed the EPA determination in the federal Tenth
Circuit Court of Appeals, and that appeal is pending. CF&I has negotiated a
settlement in principal of this matter with EPA. Under that agreement and
overlapping with the commitments made to the CDPHE described below, CF&I will
commit to the conversion to the new NSPS AAa compliant furnace (to be completed
approximately two years after permit approval and expected to cost, with all
related emission control improvements, approximately $20 million), and to pay
approximately $450,000 in penalties and fund certain supplemental environmental
projects valued at approximately $1.1 million, including the installation of
certain pollution control equipment at the Pueblo Mill. The above mentioned
expenditures for supplemental environmental projects will be both capital and
non-capital expenditures. Once the settlement agreement is finalized, the EPA
will file two proposed federal Consent Decrees, which, if approved by the
courts, will fully resolve all NSPS and PSD issues. At that time CF&I will
dismiss its appeal against the EPA. If the proposed settlement with the EPA is
not finalized, which appears unlikely, it would not be possible to estimate the
liability if there were ultimately an adverse determination of this matter.
In response to the CDPHE settlement and the resolution of the EPA
action, CF&I has accrued $ 3.0 million as of September 30, 2002 for possible
fines and non-capital related expenditures.
In December 2001, the State of Colorado issued a Title V air emission
permit to CF&I under the Clean Air Act ("CAA") requiring that the furnace
subject to the EPA action to operate in compliance with NSPS AA standards. This
permit was modified in April 2002 to incorporate the longer compliance schedule
that is part of the settlement with the CDPHE and is part of the negotiations
with the EPA. In September 2002, the Company submitted a request for a further
extension of certain of the Title V compliance deadlines, consistent with a
joint petition by the State and the Company for an extension of the same
deadlines in the State Consent Decree. This modification gives CF&I adequate
time (at least 10 months after CDPHE issues the PSD permit) to convert to a
single NSPS AAa compliant furnace. Any decrease in steelmaking production during
the furnace conversion period when both furnaces are expected to be shut down
will be offset by increasing production prior to the conversion period by
building up semi-finished steel inventory and, if necessary, purchasing
semi-finished steel ("billets") for conversion into rod products at spot market
prices at costs comparable to internally generated billets. Pricing and
availability of billets is subject to significant volatility. However, the
Company believes that near term supplies of billets will continue to be
available in sufficient quantities at favorable prices.
In a related matter, in April 2000 the United Steelworkers of America
(the "Union") filed suit in U.S. District Court in Denver, Colorado, asserting
that the Company and CF&I had violated the CAA at the Pueblo Mill for a period
extending over five years. The Union sought declaratory judgement regarding the
applicability of certain emission standards, injunctive relief, civil penalties
and attorney's fees. On July 6, 2001, the presiding judge dismissed the suit.
The Union has appealed the decision and the Company is defending the appeal.
While the Company does not believe the suit will have a material adverse effect
on its results of operations, the result of litigation such as this is difficult
to predict and an adverse outcome with significant penalties is possible. It is
not presently possible to estimate the liability if there is ultimately an
adverse determination on appeal.
..
Labor Dispute
- -------------
The labor contract at CF&I expired on September 30, 1997. After a brief
contract extension intended to help facilitate a possible agreement, on October
3, 1997, the Union initiated a strike at CF&I for approximately 1,000 bargaining
unit employees. The parties, however, failed to reach final agreement on a new
labor contract due to differences on economic issues. As a result of contingency
planning, CF&I was able to avoid complete suspension of operations at the Pueblo
Mill by utilizing a combination of new hires, striking employees who returned to
work, contractors and salaried employees.
On December 30, 1997, the Union called off the strike and made an
unconditional offer on behalf of its members to return to work. At the time of
this offer, because CF&I had permanently replaced the striking employees, only a
few vacancies existed at the Pueblo Mill. Since that time, vacancies have
occurred and have been filled by formerly striking employees ("Unreinstated
Employees"). As of September 30, 2002, approximately 710 Unreinstated Employees
have either returned to
-17-
work or have declined CF&I's offer of equivalent work. At September 30, 2002,
approximately 220 Unreinstated Employees remain unreinstated.
On February 27, 1998, the Regional Director of the National Labor
Relations Board ("NLRB") Denver office issued a complaint against CF&I, alleging
violations of several provisions of the National Labor Relations Act ("NLRA").
On August 17, 1998, a hearing on these allegations commenced before an
Administrative Law Judge ("Judge"). Testimony and other evidence were presented
at various sessions in the latter part of 1998 and early 1999, concluding on
February 25, 1999. On May 17, 2000, the Judge rendered a decision which, among
other things, found CF&I liable for certain unfair labor practices and ordered
as remedy the reinstatement of all 1,000 Unreinstated Employees, effective as of
December 30, 1997, with back pay and benefits, plus interest, less interim
earnings. Since January 1998, the Company has been returning Unreinstated
Employees to jobs as positions became open. As noted above, there were
approximately 220 Unreinstated Employees as of September 30, 2002. On August 2,
2000, CF&I filed an appeal with the NLRB in Washington, D.C. A separate hearing
concluded in February 2000, with the judge for that hearing rendering a decision
on August 7, 2000, that certain of the Union's actions undertaken since the
beginning of the strike did constitute misconduct and violations of certain
provisions of the NLRA. The Union has appealed this determination to the NLRB.
In both cases, the non-prevailing party in the NLRB's decision will be entitled
to appeal to the appropriate U.S. Circuit Court of Appeals. CF&I believes both
the facts and the law fully support its position that the strike was economic in
nature and that it was not obligated to displace the properly hired replacement
employees. The Company does not believe that final judicial action on the strike
issues is likely for at least two to three years.
In the event there is an adverse determination of these issues,
Unreinstated Employees could be entitled to back pay, including benefits, plus
interest, from the date of the Union's unconditional offer to return to work
through the date of their reinstatement or a date deemed appropriate by the NLRB
or an appellate court. The number of Unreinstated Employees entitled to back pay
may be limited to the number of past and present replacement workers; however,
the Union might assert that all Unreinstated Employees should be entitled to
back pay. Back pay is generally determined by the quarterly earnings of those
working less interim wages earned elsewhere by the Unreinstated Employees. In
addition to other considerations, each Unreinstated Employee has a duty to take
reasonable steps to mitigate the liability for back pay by seeking employment
elsewhere that has comparable working conditions and compensation. Any estimate
of the potential liability for back pay will depend significantly on the ability
to assess the amount of interim wages earned by these employees since the
beginning of the strike, as noted above. Due to the lack of accurate information
on interim earnings for both reinstated and Unreinstated Employees and sentiment
of the Union towards the Company, it is not currently possible to obtain the
necessary data to calculate possible back pay. In addition, the NLRB's findings
of misconduct by the Union may mitigate any back pay award with respect to any
Unreinstated Employees proven to have taken part or participated in acts of
misconduct during and after the strike. Thus, it is not presently possible to
estimate the liability if there is ultimately an adverse determination against
CF&I. An ultimate adverse determination against CF&I on these issues may have a
material adverse effect on the Company's consolidated financial condition,
results of operations, or cash flows. CF&I does not intend to agree to any
settlement of this matter that will have a material adverse effect on the
Company. In connection with the ongoing labor dispute, the Union has undertaken
certain activities designed to exert public pressure on CF&I. Although such
activities have generated some publicity in news media, CF&I believes that they
have had little or no material impact on its operations.
GUARANTEES AND FINANCING ARRANGEMENTS
On July 15, 2002, Oregon Steel issued $305 million of 10% First
Mortgage Notes due 2009 ("10% Notes") in a private offering at a discount of
98.772% and an interest rate of 10%. Interest is payable on January 15 and July
15 of each year. The proceeds of this issuance were used to redeem Oregon
Steel's 11% First Mortgage Notes due 2003 (including interest accrued from June
16, 2002 until the redemption date of August 14, 2002), refinance its existing
credit agreement, and for working capital and general corporate purposes. The
existing credit agreement was replaced with a new $75 million credit facility
that will expire on June 30, 2005.
The Company and CF&I (collectively "Guarantors") guarantee the
obligations of Oregon Steel under the 10% Notes, and those guarantees are
secured by a lien on substantially all of the property, plant and equipment and
certain other assets of the Guarantors, excluding accounts receivable and
inventory. On August 16 2002, Oregon Steel along with New CF&I and CF&I, L.P.
filed a registration statement on Form S-4 to exchange the 10% Notes for notes
with substantially identical terms registered with the Securities and Exchange
Commission.
-18-
In addition, as of September 30, 2002, Oregon Steel, New CF&I, CF&I,
and C&W are borrowers under a $75 million revolving credit facility ("Credit
Agreement") that is collateralized, in part, by certain equity and intercompany
interests, accounts receivable and inventory of New CF&I and CF&I. The Credit
Agreement contains various restrictive covenants including a minimum
consolidated tangible net worth amount, a minimum earnings before interest,
taxes, depreciation and amortization ("EBITDA") amount, a minimum fixed charge
coverage ratio, limitations on maximum annual capital expenditures, limitations
on stockholder dividends and limitations on incurring new or additional debt
obligations other than as allowed by the Credit Agreement. The Company was in
compliance with such covenants at September 30, 2002.
LIQUIDITY
CF&I experienced a net loss for the nine months ended September 30,
2002. Contributing to the adverse results was the interest paid by CF&I to
Oregon Steel for its financing and the write-off of impaired goodwill associated
with the adoption of SFAS No. 142. CF&I has been able to fulfill its needs for
working capital and capital expenditures, due in part to the financing
arrangement with Oregon Steel. CF&I expects that operations will continue for
the remainder of 2002, with the realization of assets and discharge of
liabilities in the ordinary course of business. CF&I believes that its
prospective needs for working capital and capital expenditures will be met from
cash flows generated by operations and borrowings pursuant to the financing
arrangement with Oregon Steel. If operations are not consistent with
management's plans, there is no assurance that the amounts from these sources
will be sufficient for such purposes. Oregon Steel is not required to provide
financing to CF&I and, although the demand for repayment of the obligation in
full is not expected during 2002, Oregon Steel may demand repayment of the loan
at any time. If Oregon Steel were to demand repayment of the loan, it is not
likely that CF&I would be able to obtain the external financing necessary to
repay the loan or to fund its capital expenditures and other cash needs and, if
available, that such financing would be on terms satisfactory to CF&I.
4. GOODWILL AND INTANGIBLE ASSETS
------------------------------
Effective January 1, 2002, CF&I adopted SFAS No.142, "GOODWILL AND
OTHER INTANGIBLE ASSETS." As part of this adoption, the Company ceased
amortizing all goodwill and assessed goodwill for possible impairment. As an
initial step, the Company tested goodwill impairment within CF&I, the only
reporting unit.
As required under the transitional accounting provisions of SFAS No.
142, CF&I completed the steps required to identify and measure goodwill
impairment at CF&I. This reporting unit was measured for impairment by comparing
implied fair value of the reporting unit's goodwill with the carrying amount of
the goodwill. As a result, the entire goodwill at CF&I was written off during
the first quarter of 2002 in the amount of $31.9 million and was recognized as a
cumulative effect of a change in accounting principle. Historical earnings and
applying an earnings multiple resulted in the identification of an impairment
that was recognized at the reporting units. The implementation of SFAS No. 142
required the use of judgements, estimates and assumptions in the determination
of fair value and impairment amounts related to the required testing. Prior to
adoption of SFAS No. 142, CF&I had historically evaluated goodwill for
impairment by comparing the entity level unamortized balance of goodwill to
projected undiscounted cash flows, which did not result in an indicated
impairment.
Additionally, pursuant to SFAS No. 142, CF&I completed its reassessment
of finite intangible asset lives, which consists of proprietary technology at
CF&I. Based on this reassessment, no adjustment was needed on the proprietary
technology. CF&I does not have any other acquired intangible assets, whether
finite or indefinite-lived assets.
Listed below are goodwill and intangibles of CF&I. Also included is a
report of what adjusted earnings would have been if amortization had not taken
place for the three and nine months ended September 30, 2002.
GOODWILL - ADOPTION OF SFAS NO. 142
- -----------------------------------
The Company applied the FAS 142 rules in accounting of goodwill and
intangibles and $31.9 million of goodwill was written off in the first quarter
of 2002. During the first nine months of 2002, no additional goodwill was
acquired. There was no remaining goodwill at September 30, 2002.
-19-
INTANGIBLES
- -----------
The carrying amount of intangible assets and the associated
amortization expenses are as follows:
AS OF SEPTEMBER 30, 2002
------------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
(IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS (FN1):
- --------------------------------
Proprietary Technology $1,892 $(756)
====== =====
AGGREGATE AMORTIZATION EXPENSE: 2002 2001
- ------------------------------- ------ -----
For the three months ended $ 30 $ 30
For the nine months ended $ 91 $ 91
ESTIMATED AMORTIZATION EXPENSE:
- -------------------------------
For the year ended 12/31/02 $ 122
For the year ended 12/31/03 $ 122
For the year ended 12/31/04 $ 122
For the year ended 12/31/05 $ 122
For the year ended 12/31/06 $ 122
(FN1) Weighted average amortization period is 16 years.
The following adjusts reported net income (loss) to exclude goodwill
amortization:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, (IN THOUSANDS) SEPTEMBER 30, (IN THOUSANDS)
---------------------------- -----------------------------
2002 2001 2002 2001
------ -------- -------- ---------
Goodwill amortization $ -- $ (255) $ -- $ (765)
------ ------- -------- --------
Net income (loss) 2,780 (2,544) (24,157) (15,281)
Add back: Goodwill amortization -- 255 -- 765
------ ------- -------- --------
Adjusted net income (loss) $2,780 $(2,289) $(24,157) $(14,516)
====== ======= ======== ========
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
The following information contains forward-looking statements, which
are subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Statements made in this report that are not statements of
historical fact are forward-looking statements. Forward-looking statements made
in this report can be identified by forward-looking words such as, but not
limited to, "expect," "anticipate," "believe," "intend," "plan," "seek,"
"estimate," "continue," "may," "will," "would," "could," and similar
expressions. These forward-looking statements are subject to risks and
uncertainties and actual results could differ materially from those projected.
These risks and uncertainties include, but are not limited to, general business
and economic conditions; competitive products and pricing, as well as
fluctuations in demand; the supply of imported steel and subsidies provided by
foreign governments to support steel companies domiciled in their countries;
changes in U.S. or foreign trade policies affecting steel imports or exports;
potential equipment malfunction; work stoppages; plant construction and repair
delays; reduction in electricity supplies and the related increased costs and
possible interruptions of supply; changes in the availability and costs of raw
materials and supplies used by the Company; costs of environmental compliance
and the impact of governmental regulations; risks related to the outcome of the
pending union dispute; and failure of the Company to predict the impact of lost
revenues associated with interruption of the Company's, its customers' or
suppliers' operations.
The New CF&I, Inc. ("Company") consolidated financial statements
include the accounts of CF&I Steel, L.P. ("CF&I"), a 95.2% owned subsidiary, and
the Colorado and Wyoming Railway Company, a wholly-owned short-line railroad,
serving principally the steel mill in Pueblo, Colorado ("Pueblo Mill"). For the
three and nine months ended September 30, 2002, sales of CF&I were 98.0% and
97.9%, respectively, compared to 97.5% and 97.8% for corresponding periods in
2001, of the consolidated sales of the Company. For the three and nine months
ended September 30, 2002, cost of sales of CF&I were 98.3% and 98.2%,
respectively, compared to 98.0% and 98.1% for the same periods in 2001, of the
consolidated cost of sales of the Company.
Results of Operations
- ---------------------
The following table sets forth for the Company tonnage sold, sales and
average selling price per ton:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Tonnage sold:
Rail 88,843 56,027 288,728 166,673
Rod and Bar 108,116 115,828 328,358 321,940
Seamless Pipe (FN1) 11,433 17,482 20,725 84,532
Semi-finished
-- 318 2,584 4,485
------- ------- ------- -------
Total 208,392 189,655 640,395 577,630
------- ------- ------- -------
Product sales (in thousands): (FN2) $ 79,434 $ 70,232 $240,261 $218,187
Average selling price per ton: (FN2) $ 381 $ 370 $ 375 $ 378
(FN1)The Company suspended operation of the seamless pipe mill from November
2001 to April 2002 and from mid-August 2002 to mid-September 2002.
(FN2)Product sales and average selling price per ton exclude freight revenues in
the three and nine months ended September 30, 2002 and 2001 and the sale of
electricity in the three and nine months ended September 30, 2001.
-21-
SALES. The Company's product sales of $79.4 million and $240.3 million
increased 13.1% and 10.1% for the three and nine months ended September 30,
2002, compared to $70.2 million and $218.2 million for the same periods in 2001.
For the three and nine months ended September 30, 2002, the Company shipped
208,392 tons and 640,395 tons of rail, rod and bar, seamless pipe and
semi-finished products at an average selling price of $381 and $375 per ton,
respectively, compared to 189,655 tons and 577,630 tons of product at an average
selling price of $370 and $378 per ton for the same periods in 2001. The
increase in shipments is a result of an increase in rail and rod product
shipments, partially offset by a decrease in seamless pipe and semi-finished
shipments. The decrease in the average annual selling price is a result of the
shift in product mix from seamless pipe to the Company's rail and rod and bar
products. Average selling prices for rail and rod and bar products increased for
the three and nine months ended September 30, 2002, as compared to the same
periods in 2001; however, a decrease in average selling price still occurred for
the nine months ended September 30, 2002, due to significantly reduced sales of
seamless pipe, which has the highest average selling price of the Company's
products.
GROSS PROFITS. The Company's gross profit was $14.5 million and $42.7
million for the three and nine months ended September 30, 2002, or 17.5% and
17.0% of sales, compared to $12.5 million and $25.7 million, or 16.9% and 11.0%
of sales, for the same periods in 2001. The increase of $2.0 million and $17.0
million, respectively, was primarily attributed to $21.0 million and $12.0
million increased profitability in rail and rod and bar products, which was the
result of lower manufacturing costs and an increase in average product selling
price, offset in part by a $10.0 million decrease in gross margin due to
declined seamless pipe product sales and no electricity sales in 2002.
SELLING, GENERAL & ADMINISTRATIVE. The Company's selling, general and
administrative expenses ("SG&A") of $5.7 million for the three months ended
September 30, 2002 decreased by 27.8%, from $7.9 million for the same period in
2001. For the nine months ended September 30, 2002, SG&A expenses decreased
11.4% to $17.1 million, compared to $19.3 million for the corresponding period
of 2001. SG&A expenses decreased in the third quarter primarily due to reduced
shipping costs and commissions paid for seamless pipe sales.
INTEREST EXPENSE. Total interest expense of $6.0 million and $19.3
million for the three and nine months ended September 30, 2002 decreased by
15.1% and 9.8%, from $7.1 million and $21.4 million, respectively, for the same
periods of 2001. Lower interest expense is due to a decrease in the average
borrowing outstanding for the 2002 periods.
INCOME TAX EXPENSE. The Company's effective income tax rate was 41.7%
for the nine months ended September 30, 2002, as compared to a tax benefit of
37.4% for the corresponding period in 2001. The effective income tax rate for
the third quarter of 2002 varied principally from the combined state and federal
statutory rate due to an increase in the valuation allowance for state tax
credit carry-forwards and non-deductible fines and penalties.
Liquidity and Capital Resources
- -------------------------------
Cash flow provided by operations for the nine months ended September 30,
2002 was $24.2 million compared to $10.0 million cash flow provided by
operations for the corresponding period of 2001. The items primarily affecting
the $14.2 million increase in cash flow include a non-cash provision for
deferred income taxes of $7.2 million, a decrease in inventory of $2.6 million
for the nine months ended September 30, 2002, versus a decrease in inventory of
$9.1 million for the corresponding period in 2001, and a positive income before
the cumulative effect of change in accounting principle of $4.6 million for the
first nine months of 2002 versus a net loss of $8.6 million for the first nine
months of 2001. A non-cash transaction during the first quarter of 2002 relating
to the write-off of $31.9 million worth of goodwill resulted in a cumulative
effect of change in accounting principle of $19.1 million (net of $11.3 million
tax effect and $1.5 million of minority interest impact).
Net working capital at September 30, 2002 increased $2.5 million compared
to December 31, 2001, reflecting a $9.3 million decrease in current assets and
$11.8 million decrease in current liabilities. The increase in current assets
was primarily due to decreased inventories and accounts receivables ($8.8
million and $2.6 million, respectively). Net accounts receivables for the nine
months ended September 30, 2002, as measured in average daily sales outstanding,
decreased to 37 days, as compared to 59 days for the corresponding period in
2001. The decrease is attributed to an increased effort on collections of
receivables, faster turnover of rail product receivables from customers paying
earlier in order to utilize cash discounts, and a decrease in sale of seamless
pipe. Seamless pipe has standard payment terms of net 60 days versus terms of
net 30 days for other products. The decrease in current liabilities was
primarily due to a $8.5 million decrease in accounts payable and accrued
expenses and $3.3 million payment of CF&I debt.
-22-
During the first nine months of 2002, the Company expended approximately
$6.3 million, excluding capitalized interest, on capital projects. For the
fourth quarter of 2002, the Company expects capital expenditure to be
approximately $1.5 million.
Borrowing requirements for capital expenditures and other cash needs, both
short-term and long-term, are provided through a loan from Oregon Steel. As of
September 30, 2002, $219.5 million of aggregate principal amount of the loan
was outstanding, all of which was classified as long-term. The loan includes
interest on the daily amount outstanding at the rate of 10.6%. The principal is
due on demand or, if no demand is made, due December 31, 2004. Interest on the
principal amount of the loan is payable monthly. Because the loan from Oregon
Steel is due on demand, the applicable interest rate is effectively subject to
renegotiation at any time, and there is no assurance the interest rate will not
be materially increased in the future.
The Company has been able to fulfill its needs for working capital and
capital expenditures, due in part to the financing arrangement with Oregon
Steel. The Company expects that operations will continue for the remainder of
2002, with the realization of assets and discharge of liabilities in the
ordinary course of business. The Company believes that its prospective needs for
working capital and capital expenditures will be met from cash flows generated
by operations and borrowings pursuant to the financing arrangement with Oregon
Steel. If operations are not consistent with management's plans, there is no
assurance that the amounts from these sources will be sufficient for such
purposes. Oregon Steel is not required to provide financing to the Company and,
although the demand for repayment of the obligation in full is not expected
during 2002, Oregon Steel may demand repayment of the loan at any time. If
Oregon Steel were to demand repayment of the loan, it is not likely that the
Company would be able to obtain the external financing necessary to repay the
loan or to fund its capital expenditures and other cash needs, and if available,
that such financing would be on terms as favorable to the Company as that
provided by Oregon Steel. The failure of either the Company or Oregon Steel to
maintain their current financing arrangements would likely have a material
adverse impact on the Company and CF&I.
Term debt of $67.5 million was incurred by the Company as part of the
purchase price of the Pueblo Mill on March 3, 1993. This debt is without stated
collateral and is payable over 10 years with interest at 9.5%. As of September
30, 2002, the outstanding balance on the debt was $6.1 million, of which the
entire amount was classified as short-term.
On July 15, 2002 Oregon Steel issued $305 million of 10% Notes in a
private offering at a discount of 98.772% and an interest rate of 10%. Interest
is payable on January 15 and July 15 of each year. The proceeds of this issuance
were used to redeem Oregon Steel's 11% Notes (including interest accrued from
June 16, 2002 until the redemption date of August 14, 2002), refinance its
existing credit agreement, and for working capital and general corporate
purposes. The old credit agreement, which was to expire on September 30, 2002,
was replaced on July 15, 2002 with a new $75 million credit facility that will
expire on June 30, 2005. As of September 30, 2002, Oregon Steel had outstanding
$305 million principal amount of 10% Notes, which bear interest at 10%. New
CF&I, Inc. and CF&I Steel, L.P. (the "Guarantors") guarantee the 10% Notes. The
Notes and the guarantees are secured by a lien on substantially all the
property, plant and equipment and certain other assets of the Guarantors. The
collateral does not include, among other things, accounts receivable and
inventory. The Indenture under which the 10% Notes are issued contains
restrictions on new indebtedness and various types of disbursements, including
dividends, based on the Oregon Steel's net income in relation to its fixed
charges, as defined. Under these restrictions, there was no amount available for
cash dividends at September 30, 2002.
On August 16, 2002, the Company filed a registration statement on Form S-4
to exchange the 10% Notes for notes with substantially identical terms
registered with the Securities and Exchange Commission.
As of September 30, 2002, Oregon Steel, New CF&I, Inc., CF&I Steel, L.P.,
and Colorado and Wyoming Railway Company are borrowers under the Credit
Agreement, which will expire on June 30, 2005. At September 30, 2002, the amount
available was the lesser of $70 million or the sum of the product of eligible
domestic accounts receivable and inventory balances and specified advance rates.
The Credit Agreement is secured by these assets in addition to a security
interest in certain equity and intercompany interests. Amounts under the Credit
Agreement bear interest based on either (1) the prime rate plus a margin ranging
from 0.25% to 1.00%, or (2) the adjusted LIBO rate plus a margin ranging from
2.50% to 3.25%. Unused commitment fees range from 0.25% to 0.50%. As of
September 30, 2002, there was no outstanding balance due under the Credit
Agreement. Had there been new borrowings, the average interest rate for the
Credit Agreement would have been 5.5%. The unused line fees were 0.50%.
Beginning April 1, 2003, the margins and unused commitment fees will be subject
to adjustment within the ranges discussed above based on a leverage ratio. The
Credit Agreement contains various restrictive covenants including a minimum
consolidated tangible net worth amount, a minimum earnings before interest,
taxes, depreciation and amortization ("EBITDA") amount, a minimum fixed charge
coverage ratio, limitations on maximum annual capital expenditures, limitations
on
-23-
stockholder dividends and limitations on incurring new or additional debt
obligations other than as allowed by the Credit Agreement. At September 30,
2002, $5.0 million was restricted under the credit agreement and $6.7 million
was restricted under outstanding letters of credit and $63.3 million was
available under the Credit Agreement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
- ------------------------------------------------
The Company's chief executive officer and chief financial officer,
after evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15d-14(c)) as of a date (the "Evaluation Date") within 90 days before the
filing date of this quarterly report, have concluded that as of the Evaluation
Date, the Company's disclosure controls and procedures were effective and
designed to ensure that material information relating to the Company and the
Company's consolidated subsidiaries would be made known to them by others within
those entities.
Changes in internal controls
- ----------------------------
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the
Evaluation Date.
-24-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part 1, Item 1 "Notes to Consolidated Financial Statements - Note 3,
Contingencies" for discussion of (a) the lawsuit initiated by the Union alleging
violations of the CAA, (b) the environmental issues at CF&I, and (c) the status
of the labor dispute at CF&I.
The Company is party to various other claims, disputes, legal actions and
other proceedings involving contracts, employment and various other matters. In
the opinion of management, the outcome of these matters should not have a
material adverse effect on the consolidated financial condition of the Company.
The Company maintains insurance against various risks, including certain
types of tort liability arising from the sale of its products. The Company does
not maintain insurance against liability arising out of waste disposal, or
on-site remediation of environmental contamination because of the high cost of
that coverage. There is no assurance that the insurance coverage carried by the
Company will be available in the future at reasonable rates, if at all.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Indenture, dated as of July 15, 2002, by and among Oregon Steel
Mills, U.S. Bank National Association, as trustee, and New CF&I,
Inc., and CF&I Steel, L.P., as guarantors. (Filed as exhibit 4.1
to the Registration Statement on Form S-4 (SEC Reg. No. 333-98249)
and incorporated by reference herein).
4.2 First Amendment to Oregon Steel Mills, Inc. Indenture.
4.3 Exchange and Registration Rights Agreement, dated July 15, 2002,
between Oregon Steel Mills and Goldman, Sachs & Co.
(Filed as exhibit 4.2 to the Registration Statement on Form S-4
(SEC Reg. No. 333-98249) and incorporated by reference herein).
4.4 Security Agreement, dated as of July 15, 2002, between Oregon
Steel Mills and U.S. Bank National Association. (Filed as exhibit
4.3 to the Registration Statement on Form S-4 (SEC Reg.
No. 333-98249) and incorporated by reference herein).
4.5 Security Agreement, dated as of July 15, 2002, between CF&I Steel,
L.P. and U.S. Bank National Association. (Filed as exhibit 4.4 to
the Registration Statement on Form S-4 (SEC Reg. No. 333-98249)
and incorporated by reference herein).
4.6 Security Agreement, dated as of July 15, 2002, between New CF&I,
Inc. and U.S. Bank National Association. (Filed as exhibit 4.5 to
the Registration Statement on Form S-4 (SEC Reg. No. 333-98249)
and incorporated by reference herein).
4.7 Intercreditor Agreement, dated July 15, 2002 between U.S. Bank
National Association and Textron Financial Corporation. (Filed as
exhibit 4.6 to the Registration Statement on Form S-4 (SEC Reg.
No. 333-98249) and incorporated by reference herein).
4.8 Form of Deed of Trust, Assignment of Rents and Leases and Security
Agreement. (Filed as exhibit 4.7 to the Registration Statement on
Form S-4 (SEC Reg. No. 333-98249) and incorporated by reference
herein).
-25-
4.9 Form of Global Note. (Filed as exhibit 4.8 to the Registration
Statement on Form S-4 (SEC Reg. No. 333-98249) and incorporated by
reference herein).
4.10 Guarantee of CF&I Steel, L.P. (Filed as exhibit 4.9 to the
Registration Statement on Form S-4 (SEC Reg. No. 333-98249) and
incorporated by reference herein).
4.11 Guarantee of New CF&I, Inc. (Filed as exhibit 4.10 to the
Registration Statement on Form S-4 (SEC Reg. No. 333-98249) and
incorporated by reference herein).
10.1 Credit Agreement, dated as of July 12, 2002, among Oregon Steel
Mills, Inc., New CF&I, Inc., CF&I Steel, L.P. and Colorado &
Wyoming Railway Company as borrowers, the financial institutions
that are or may from time to time become parties thereto,
as Lenders, Textron Financial Corporation, as Agent for the
Lenders, and GMAC Business Credit LLC, as Co-Managing Agent.
(Filed as exhibit 10.1 to the Registration Statement on Form S-4
(SEC Reg. No. 333-98249) and incorporated by reference herein).
10.2 Security Agreement, dated as of July 12, 2002, among Oregon Steel
Mills, Inc., New CF&I, Inc., CF&I Steel, L.P. and the Agent for
the Lenders. (Filed as exhibit 10.2 to the Registration Statement
on Form S-4 (SEC Reg. No. 333-98249) and incorporated by reference
herein).
99.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
On August 14, 2002, a Form 8-K was filed by the Company with
attachment of the CEO and CFO certifications pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW CF&I, INC.
Date: November 12, 2002 /s/ Jeff S. Stewart
----------------------------
Jeff S. Stewart
Corporate Controller
CF&I STEEL, L.P.
---------------------------
By: New CF&I, Inc.
General Partner
Date: November 12, 2002 /s/ Jeff S. Stewart
----------------------------
Jeff S. Stewart
Corporate Controller
New CF&I, Inc.
-26-
CERTIFICATIONS
I, Joe E. Corvin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New CF&I Inc. and
CF&I Steel, L.P.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Joe E. Corvin
------------------------------------
Joe E. Corvin
President and Chief Executive Officer
-27-
I, L. Ray Adams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New CF&I Inc. and
CF&I Steel, L.P.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ L . Ray Adams
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L . Ray Adams
Vice President - Finance,
Chief Financial Officer, and Treasurer
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