UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
AMENDMENT NO. 1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
------------------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
NEW CF&I, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-20781 93-1086900
- -------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification
Number)
1000 Broadway Building, Suite 2200, Portland, Oregon 97205
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 223-9228
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification
Number)
1000 Broadway Building, Suite 2200, Portland, Oregon 97205
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 223-9228
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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
---- ----
NEW CF&I, INC.
CF&I STEEL, L.P.
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS - NEW CF&I, Inc.
--------------
Consolidated Balance Sheets
March 31, 2003 (unaudited) and
December 31, 2002...................................... 2
Consolidated Statements of Income (unaudited)
Three months ended March 31, 2003 and 2002............. 3
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 2003 and 2002............. 4
Notes to Consolidated Financial Statements
(unaudited)...........................................5-10
FINANCIAL STATEMENTS - CF&I Steel, L.P.
----------------
Balance Sheets
March 31, 2003 (unaudited) and December 31, 2002....... 11
Statements of Operations (unaudited)
Three months ended March 31, 2003 and 2002............. 12
Statements of Cash Flows (unaudited)
Three months ended March 31, 2003 and 2002............. 13
Notes to Financial Statements (unaudited)..............14-18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...........................19-20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...................................... 20
ITEM 4. CONTROLS AND PROCEDURES.................................. 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................ 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................... 22
SIGNATURES.........................................................22
CERTIFICATIONS..................................................23-24
-2-
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2003 2002
--------------- ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 7 $ 289
Trade accounts receivable, net of allowance for
doubtful accounts of $1,672 and $1,811 28,922 32,458
Inventories 41,022 46,104
Deferred tax asset 4,600 4,841
Other 639 745
--------- ---------
Total current assets 75,190 84,437
--------- ---------
Property, plant and equipment:
Land and improvements 3,452 3,454
Buildings 19,890 19,886
Machinery and equipment 263,212 260,791
Construction in progress 6,609 5,151
--------- ---------
293,163 289,282
Accumulated depreciation (116,137) (111,469)
--------- ---------
Net property, plant and equipment 177,026 177,813
--------- ---------
Intangibles, net 1,075 1,106
Other assets 45,532 46,241
--------- ---------
$ 298,823 $ 309,597
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 38,880 $ 39,701
Accrued expenses 25,236 26,156
--------- ---------
Total current liabilities 64,116 65,857
Long-term debt -- Oregon Steel Mills, Inc. 221,576 228,208
Environmental liability 25,914 27,488
Deferred employee benefits 8,599 8,299
--------- ---------
Total liabilities 320,205 329,852
--------- ---------
Redeemable common stock, 26 shares 21,840 21,840
--------- ---------
Contingencies (Note 3)
STOCKHOLDERS' DEFICIT
Common stock, par value $1 per share, 1,000
shares authorized; 200 issued and outstanding 1 1
Additional paid-in capital 16,603 16,603
Accumulated deficit (56,335) (55,208)
Accumulated other comprehensive income:
Minimum pension liability (3,491) (3,491)
--------- ---------
(43,222) (42,095)
--------- ---------
$ 298,823 $ 309,597
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
------------ ---------
SALES
Product Sales $ 88,588 $ 77,880
Freight 3,968 3,586
-------- --------
92,556 81,466
COSTS AND EXPENSES:
Cost of sales 83,873 67,689
Gain on sale of assets (28) (911)
Selling, general and administrative expenses 4,632 5,547
-------- --------
88,477 72,325
-------- --------
OPERATING INCOME 4,079 9,141
OTHER INCOME (EXPENSE):
Interest expense (5,937) (6,792)
Minority interests 117 (107)
Other income, net 67 62
-------- --------
Net income(loss) before income taxes (1,674) 2,304
Provision for income tax benefit (expense) 547 (451)
-------- --------
Net income(loss) before accounting change (1,127) 1,853
Cumulative effect of change in accounting principle -- (19,070)
-------- --------
NET LOSS $ (1,127) $(17,217)
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
---------- -----------
Cash flows provided by operating activities:
Net loss $ (1,127) $(17,217)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of change in accounting principle -- 19,070
Depreciation and amortization 4,701 4,887
Deferred income taxes, net (552) 590
Minority interests' share of income (117) 107
Gain on sale of assets and investments (28) (911)
Other, net (1,713) (753)
Changes in current assets and liabilities:
Trade accounts receivable 3,675 5,466
Inventories 5,082 (99)
Accounts payable (821) (2,131)
Accrued expenses and deferred employee benefits (620) 2,795
Other 1,706 (61)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,186 11,743
-------- --------
Cash flows used in investing activities:
Additions to property, plant and equipment (3,882) (1,681)
Proceeds from disposal of property and equipment 46 1,236
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,836) (445)
-------- --------
Cash flows used in financing activities:
Borrowings from Oregon Steel Mills, Inc. 32,430 26,161
Payments to Oregon Steel Mills, Inc. (38,994) (37,458)
Payment of long-term debt (68) --
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (6,632) (11,297)
-------- --------
Net increase (decrease) in cash and cash equivalents (282) 1
Cash and cash equivalents at the beginning of the quarter 289 3
-------- --------
Cash and cash equivalents at the end of the quarter $ 7 $ 4
======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
- --------------
Interest $ -- $ 6,628
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
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"). New CF&I owns a 95.2% interest in CF&I
Steel, L.P. ("CF&I"), which is one of New CF&I's principal subsidiaries. Oregon
Steel Mills, Inc. ("Oregon Steel") holds an 87% ownership interest in New CF&I.
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 presentation of the interim periods. Results for an interim period
are not necessarily indicative of results for a full year. Reference should be
made to New CF&I's 2002 Annual Report on Form 10-K for additional disclosures
including a summary of significant accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 143, "ACCOUNTING
FOR ASSET RETIREMENT OBLIGATIONS." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated retirement costs. This statement requires
that New CF&I record a liability for the fair value of an asset retirement
obligation when New CF&I has a legal obligation to remove the asset. SFAS No.
143 is effective for New CF&I beginning January 1, 2003. New CF&I does not
believe that the adoption of SFAS No. 143 will have a material impact on its
consolidated 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 ("APB") Opinion No. 30,
"REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS" are met. SFAS No. 145 provisions regarding early
extinguishment of debt are generally effective for fiscal years beginning after
May 15, 2002. New CF&I does not believe that the adoption of this statement will
have a material impact on its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." SFAS No. 146 addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and supercedes Emerging Issues Task Force ("EITF") Issue No. 94-3,
"LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS
TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING)." SFAS
No. 146 requires recognition of the liability for costs associated with an exit
or disposal activity when the liability is incurred. Under EITF No. 94-3, a
liability for an exit cost is recognized at the date of a company's commitment
to an exit plan. SFAS No. 146 also establishes that the liability should
initially be measured and recorded at fair value. This statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. New CF&I adopted SFAS No. 146 effective January 1, 2003. New CF&I
primarily accounts for employee termination actions under SFAS No. 112, which
requires recording when such charges are probable and estimable. As such, the
adoption of SFAS No. 146 did not have an impact in the quarter, as there were no
significant one-time severance actions or other exit costs
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS." It clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee, including its
ongoing obligation to stand ready to perform over the term of the guarantee in
the event that the specified triggering events or conditions occur. The
disclosure provisions for FIN No. 45 were effective for the year ending December
31, 2002. New CF&I adopted the recognition provisions of FIN No. 45 effective
January 1, 2003 for guarantees issued or modified after December 31, 2002. The
adoption of FIN No. 45 did not have any material impact on New CF&I's
consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "CONSOLIDATION OF VARIABLE
INTEREST ENTITIES." FIN No. 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN No. 46 also requires
disclosures about variable interest entities that a company is not required to
consolidate but in which it has a
-6-
significant variable interest. FIN No. 46 applies immediately to variable
interest entities created after January 31, 2003 and to existing variable
interest entities in the periods beginning after June 15, 2003. New CF&I has not
created or obtained an interest in any variable interest entities after January
31, 2003. New CF&I is continuing to review the provisions of FIN No. 46 to
determine its impact, if any, on future reporting periods with respect to
interests in variable interest entities created prior to February 1, 2003, and
does not currently anticipate any material accounting or disclosure requirement
under the provisions of the interpretation.
RECLASSIFICATIONS
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 are stated at the lower of manufacturing cost or market
value with manufacturing cost determined under the average cost method. The
components of inventories are as follows:
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(IN THOUSANDS)
Inventories consist of:
Raw materials $ 8,423 $ 5,536
Semi-finished product 5,508 11,325
Finished product 15,606 17,420
Stores and operating supplies 11,485 11,823
-------- -------
Total inventory $ 41,022 $46,104
======== =======
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 March 31, 2003, the accrued
liability was $29.7 million, of which $24.3 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 $25 million, including converting to the new single New Source
Performance Standards Subpart AAa ("NSPS AAa") compliant furnace
-7-
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 of this matter with the EPA. Under that agreement and overlapping
with the commitments made to the CDPHE described below, CF&I committed to the
conversion to the new NSPS AAa compliant furnace (demonstrating full compliance
21 months after permit approval and expected to cost, with all related emission
control improvements, approximately $25 million), and to pay approximately
$450,000 in penalties and fund certain supplemental environmental projects and
undertake additional 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. On April 9, 2003,
the EPA filed a proposed federal Consent Decree, now subject to public comment,
which, if approved by the court, 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 approved, 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 a liability of $2.8 million as of March 31, 2003, for
possible fines and non-capital related expenditures.
As noted above, as part of the settlement with the CDPHE and the EPA,
CF&I is required to install one new electric arc furnace and the two existing
furnaces, with a combined melting and casting capacity of approximately 1.2
million tons through two continuous casters (the Demag and Rokop casters), will
be shut down. The new single furnace operation may not have the capacity to
support a two caster operation and in that event the Rokop caster and the
related assets with a book value of $9.2 million would be written off.
In December 2001, the State of Colorado issued a Title V air emission
permit to CF&I under the 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 the EPA. In September 2002, CF&I submitted a
request for a further extension of certain Title V compliance deadlines,
consistent with a joint petition by the State and CF&I for an extension of the
same deadlines in the State Consent Decree. This modification gives CF&I
adequate time 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, CF&I 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 Union filed suit in U.S.
District Court in Denver, Colorado, asserting that New CF&I 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 10th Circuit Court of
Appeals on March 3, 2003 reversed the District Court's dismissal of the case and
remanded the case for further hearing to the District Court. New CF&I and CF&I
will seek a stay of the District Court action until a Consent Decree filed in
another case settling the same issues with the EPA becomes final. While New CF&I
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 remand.
LABOR MATTERS
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.
-8-
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 March 31, 2003, approximately 779 Unreinstated Employees have
either returned to work or have declined CF&I's offer of equivalent work. At
March 31, 2003, approximately 151 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
strikers to jobs as positions became open. As noted above, there were 151
Unreinstated Employees as of March 31, 2003. 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. CF&I
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 CF&I, 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 New CF&I'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 CF&I. 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 and 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 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 and the District Court referred the
matter back to the PLB to determine the specific release which should be granted
as to each claimant in accordance with the terms of the award. The District
Court also filed a judgement to that effect and the C&W
-9-
filed an appeal of the District Court's order and judgement in the United States
Court of Appeals. The appeal was dismissed as being premature given that the
hearing on back pay had not yet occurred. New CF&I does not believe that the
resolution of this matter will have a material adverse effect on New CF&I's
results of operations.
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 April 2003,
this matter has been resolved with all the claimants with no material adverse
effect on New CF&I's results of operations.
PURCHASE COMMITMENTS
Effective February 2, 1993, CF&I entered into an agreement,
subsequently amended on August 4, 1994, to purchase a base amount of oxygen
produced at the Pueblo Mill. This agreement expires January 2013 and specifies
that CF&I will pay a base monthly charge that is adjusted annually based upon a
percentage change in the Producer Price Index. The monthly base charge at March
31, 2003 for this agreement was $116,000.
GUARANTEES AND FINANCING ARRANGEMENTS
On July 15, 2002, Oregon Steel issued $305 million of 10% First
Mortgage Notes due 2009 ("10% Notes") 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. New CF&I 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.
In addition, Oregon Steel, New CF&I, CF&I, and C&W are borrowers
("Borrowers") under a $75 million revolving credit facility ("Credit Agreement")
that will expire on June 30, 2005 and is collateralized, in part, by certain
equity and intercompany interests, accounts receivable and inventory of New CF&I
and CF&I. At March 31, 2003, $5.0 million was restricted under the Credit
Agreement, $ 9.2 million was restricted under the outstanding letters of credit,
and $60.8 million was available for use. 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 and environmental expenditures, limitations on stockholder
dividends and limitations on incurring new or additional debt obligations other
than as allowed by the Credit Agreement. As of March 31, 2003, there was no
outstanding balance due under the credit facility. The Borrowers were in
compliance with such covenants at March 31, 2003.
LIQUIDITY
New CF&I experienced a net loss for the three months ended March 31,
2003. Contributing to the adverse results was the interest paid by New CF&I to
Oregon Steel for its financing. New 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. New CF&I expects that operations will continue
for the remainder of 2003, with the realization of assets, and discharge of
liabilities in the ordinary course of business. New 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 New CF&I and, although the demand for repayment of the obligation
in full is not expected during 2003, 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 New 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
New CF&I.
-10-
OTHER CONTINGENCIES
New CF&I is party to various claims, disputes, legal actions and other
proceedings involving contracts, employment and various other matters. In the
opinion of management, the outcome of these matters would not have a material
adverse effect on the consolidated financial condition of New CF&I.
4. INTANGIBLE ASSETS
-----------------
The carrying amount of intangible assets and the associated
amortization expenses are as follows:
ACQUIRED INTANGIBLE ASSETS
--------------------------
AS OF MARCH 31, 2003
----------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
---------------- ------------
(IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS
---------------------------
Proprietary Technology $1,892 $(817)
====== =====
AGGREGATE AMORTIZATION EXPENSE
------------------------------
For the three months ended 3/31/03 $ 31
ESTIMATED AMORTIZATION EXPENSE
------------------------------
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
For the year ended 12/31/07 $ 122
-11-
CF&I STEEL, L.P.
BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
---------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ --
Trade accounts receivable, net of allowance for
doubtful accounts of $1,672 and $1,811 27,548 31,036
Inventories 40,731 45,829
Other 248 506
--------- ---------
Total current assets 68,527 77,371
--------- ---------
Property, plant and equipment:
Land and improvements 3,447 3,449
Buildings 18,496 18,496
Machinery and equipment 260,384 258,013
Construction in progress 6,609 5,150
--------- ---------
288,936 285,108
Accumulated depreciation (113,980) (109,396)
--------- ---------
Net property, plant and equipment 174,956 175,712
--------- ---------
Intangibles, net 1,075 1,106
Other assets 11,721 13,334
--------- ---------
TOTAL ASSETS $ 256,279 $ 267,523
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 47,884 $ 48,016
Accrued expenses 25,236 25,895
--------- ---------
Total current liabilities 73,120 73,911
Long-term debt -- Oregon Steel Mills, Inc. 221,576 228,208
Long-term debt -- New CF&I, Inc. 21,756 21,756
Environmental liability 25,914 27,488
Deferred employee benefits 8,599 8,417
--------- ---------
Total liabilities 350,965 359,780
--------- ---------
Contingencies (Note 3)
PARTNERS' DEFICIT
General partner (90,141) (87,829)
Limited partners (4,545) (4,428)
--------- ---------
(94,686) (92,257)
--------- ---------
$ 256,279 $ 267,523
========= =========
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 MARCH 31,
--------------------------------
2003 2002
--------- --------
SALES
Product Sales $ 86,821 $ 76,007
Freight 3,968 3,586
-------- --------
90,789 79,593
COSTS AND EXPENSES:
Cost of sales 82,563 66,247
Gain on sale of assets (39) (912)
Selling, general and administrative 4,525 4,972
-------- --------
87,049 70,307
-------- --------
OPERATING INCOME 3,740 9,286
OTHER INCOME (EXPENSE):
Interest expense (6,236) (7,108)
Other income, net 67 61
-------- --------
Net income(loss) before change
in accounting principle (2,429) 2,239
Cumulative effect of change in
accounting principle -- (31,863)
-------- --------
NET LOSS $ (2,429) $(29,624)
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-13-
CF&I STEEL, L.P.
STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2003 2002
------------ ------------
Cash flows provided by operating activities:
Net loss $ (2,429) $(29,624)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of change in accounting principle -- 31,863
Depreciation and amortization 4,654 4,826
Gain on sale of assets and investments (39) (912)
Other, net (1,713) (753)
Changes in current assets and liabilities:
Trade accounts receivable 3,627 4,843
Inventories 5,098 (130)
Accounts payable (132) (719)
Accrued expenses and deferred employee benefits (477) 2,290
Other 1,865 52
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,454 11,736
-------- --------
Cash flows used in investing activities:
Additions to property, plant and equipment (3,868) (1,674)
Proceeds from disposal of property and equipment 27 1,236
Other, net 19 --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,822) (438)
-------- --------
Cash flows used in financing activities:
Borrowings from related parties 32,430 26,161
Payments to related parties (38,994) (37,458)
Payment of long-term debt (68) --
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (6,632) (11,297)
-------- --------
Net increase in cash and cash equivalents -- 1
Cash and cash equivalents at the beginning of the quarter -- --
-------- --------
Cash and cash equivalents at the end of the quarter $ -- $ 1
======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
- --------------
Interest $ -- $ 6,628
The accompanying notes are an integral part of the
consolidated 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% interest in New
CF&I, Inc. ("New CF&I") 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 presentation 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 2002 Annual Report on Form 10-K for additional disclosures
including a summary of significant accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 143, "ACCOUNTING
FOR ASSET RETIREMENT OBLIGATIONS." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated retirement costs. This statement requires
that CF&I record a liability for the fair value of an asset retirement
obligation when CF&I has a legal obligation to remove the asset. SFAS No. 143 is
effective for CF&I beginning January 1, 2003. CF&I does not believe that the
adoption of SFAS No. 143 will have a material impact on its 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 ("APB") Opinion No. 30,
"REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS" 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 financial statements.
In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES." SFAS No. 146 addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and supercedes Emerging Issues Task Force ("EITF") Issue No. 94-3,
"LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS
TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING)." SFAS
No. 146 requires recognition of the liability for costs associated with an exit
or disposal activity when the liability is incurred. Under EITF No. 94-3, a
liability for an exit cost is recognized at the date of a company's commitment
to an exit plan. SFAS No. 146 also establishes that the liability should
initially be measured and recorded at fair value. This statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. CF&I adopted SFAS No. 146 effective January 1, 2003. CF&I primarily
accounts for employee termination actions under SFAS No. 112, which requires
recording when such charges are probable and estimable. As such, the adoption of
SFAS No. 146 did not have an impact in the quarter, as there were no significant
one-time severance actions or other exit costs.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS." It clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee, including its
ongoing obligation to stand ready to perform over the term of the guarantee in
the event that the specified triggering events or conditions occur. The
disclosure provisions for FIN No. 45 were effective for the year ending December
31, 2002. CF&I adopted the recognition provisions of FIN No. 45 effective
January 1, 2003 for guarantees issued or modified after December 31, 2002. The
adoption of FIN No. 45 did not have any material impact on CF&I's financial
statements.
-15-
RECLASSIFICATIONS
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 are stated at the lower of manufacturing cost or market
value with manufacturing cost determined under the average cost method. The
components of inventories are as follows:
MARCH 31, DECEMBER 31,
2003 2002
--------- -----------
Inventories consist of: (In thousands)
Raw materials $ 8,423 $ 5,536
Semi-finished product 5,508 11,325
Finished product 15,606 17,420
Stores and operating supplies 11,194 11,548
------- -------
Total inventory $40,731 $45,829
======= =======
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 March 31, 2003, the accrued
liability was $29.7 million, of which $24.3 million was classified as
non-current on the 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 $25 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 of this matter with EPA. Under that agreement and overlapping with
the commitments
-16-
made to the CDPHE described below, CF&I committed to the conversion to the new
NSPS AAa compliant furnace (demonstrating full compliance 21 months after permit
approval and expected to cost, with all related emission control improvements,
approximately $25 million), and to pay approximately $450,000 in penalties and
fund certain supplemental environmental projects and undertake additional
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. On April 9, 2003, the EPA filed a
proposed Federal Consent Decree, now subject to public comment, which, if
approved by the court, 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 approved, 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 a liability of $2.8 million for possible fines and
non-capital related expenditures since the settlement. As of March 31, 2003, the
accrued liability was $1.2 million.
As noted above, as part of the settlement with the CDPHE and the EPA,
CF&I is required to install one new electric arc furnace and the two existing
furnaces with a combined melting and casting capacity of approximately 1.2
million tons through two continuous casters (the Demag and Rokop casters), will
be shut down. The new single furnace operation may not have the capacity to
support a two caster operation and in that event the Rokop caster and the
related assets with a book value of $9.2 million would be written off.
In December 2001, the State of Colorado issued a Title V air emission
permit to CF&I under the 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 the EPA. In September 2002, CF&I submitted a
request for a further extension of certain Title V compliance deadlines,
consistent with a joint petition by the State and CF&I for an extension of the
same deadlines in the State Consent Decree. This modification gives CF&I
adequate time 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, CF&I 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 Union filed suit in U.S.
District Court in Denver, Colorado, asserting that New CF&I 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 10th Circuit Court of
Appeals on March 3, 2003 reversed the District Court's dismissal of the case and
remanded the case for further hearing to the District Court. New CF&I and CF&I
will seek a stay of the District Court action until a Consent Decree filed in
another case settling the same issues with the EPA becomes final. While CF&I
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 remand.
LABOR MATTERS
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 March 31, 2003, approximately 779 Unreinstated Employees have
either returned to work or have declined CF&I's offer of equivalent work. At
March 31, 2003, approximately 151 Unreinstated Employees remain unreinstated.
-17-
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
strikers to jobs as positions became open. As noted above, there were
approximately 151 Unreinstated Employees as of March 31, 2003. 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. CF&I 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 CF&I, 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 CF&I's 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 CF&I. 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.
PURCHASE COMMITMENTS
Effective February 2, 1993, CF&I entered into an agreement,
subsequently amended on August 4, 1994, to purchase a base amount of oxygen
produced at the Pueblo Mill. This agreement expires January 2013 and specifies
that CF&I will pay a base monthly charge that is adjusted annually based upon a
percentage change in the Producer Price Index. The monthly base charge at March
31, 2003 for this agreement was $116,000.
GUARANTEES AND FINANCING ARRANGEMENTS
On July 15, 2002, Oregon Steel issued $305 million of 10% First
Mortgage Notes due 2009 ("10% Notes") 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. New CF&I 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.
In addition, Oregon Steel, New CF&I, CF&I, and C&W are borrowers
("Borrowers") under a $75 million revolving credit facility ("Credit Agreement")
that will expire on June 30, 2005 and is collateralized, in part, by certain
equity and intercompany interests, accounts receivable and inventory of New CF&I
and CF&I. At March 31, 2003, $5.0 million was restricted under the Credit
Agreement, $9.2 million was restricted under the outstanding letters of credit,
and $60.8 million
-18-
was available for use. 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 and environmental expenditures, limitations on stockholder dividends and
limitations on incurring new or additional debt obligations other than as
allowed by the Credit Agreement. The Borrowers were in compliance with such
covenants at March 31, 2003.
LIQUIDITY
CF&I experienced a net loss for the three months ended March 31, 2003.
Contributing to the adverse results was the interest paid by CF&I to Oregon
Steel for its financing. 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
2003, 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 2003, 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.
OTHER CONTINGENCIES
CF&I 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 would not have a
material adverse effect on the consolidated financial condition of CF&I.
4. INTANGIBLE ASSETS
-----------------
The carrying amount of intangible assets and the associated
amortization expenses are as follows:
ACQUIRED INTANGIBLE ASSETS
--------------------------
AS OF MARCH 31, 2003
-------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
(IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS
---------------------------
Proprietary Technology $1,892 $(817)
====== =====
AGGREGATE AMORTIZATION EXPENSE
------------------------------
For the quarter ended 3/31/03 $ 31
..
ESTIMATED AMORTIZATION EXPENSE
------------------------------
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
For the year ended 12/31/07 $ 122
-19-
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 New CF&I; costs of environmental compliance and
the impact of governmental regulations; risks related to the outcome of the
pending union lawsuit, and failure of New CF&I to predict the impact of lost
revenues associated with interruption of New CF&I's, its customers' or
suppliers' operations.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth for the tonnage sold and sales and average
selling price per ton:
Three Months Ended March 31,
----------------------------
2003 2002
----------- ---------
Tonnage sold:
Rail 113,000 98,700
Rod and Bar 115,500 110,900
Seamless pipe (1) 10,900 2,300
Semi-finished -- 100
-------- --------
Total 239,400 212,000
======== ========
Product sales (in thousands): (2) $ 88,588 $ 77,880
Average selling price per ton: (2) $ 370 $ 367
- ---------------
(1) New CF&I suspended operation of the seamless pipe mill in November of 2001
to April 2002.
(2) Product sales and average selling price per ton exclude freight revenues
for the three months ended March 31, 2003 and 2002.
SALES. New CF&I's consolidated sales for the first quarter of 2003 of
$92.5 million increased $11.1 million, or 13.6% from sales of $81.4 million in
the first quarter of 2002. New CF&I's product sales for the first quarter of
2003 of $88.6 million increased 13.7% from sales of $77.9 million in the first
quarter of 2002. New CF&I shipped 239,400 tons of rail, rod and bar, and
seamless pipe at an average selling price of $370 per ton for the first quarter
of 2003, compared to 212,000 tons of product at an average selling price of $367
per ton for the same quarter of 2002. Increased sales of specialty rod and an
announced rod price increase contributed to the higher average sales price per
ton. Freight revenue increased in response to product mix and customer
preference on shipping.
GROSS PROFITS. New CF&I's gross profit for the first quarter of 2003
was $8.7 million or 9.4% of sales compared to $13.8 million or 16.9% for the
corresponding 2002 period. The $5.1 million decrease was a result of a decrease
in sales prices for rail and seamless pipe, and increased cost per ton of rail
and rod and bar products due to higher scrap and energy costs, partially offset
by an increase in the sales price for rod and bar products, and a decrease in
the cost per ton of seamless pipe.
SELLING, GENERAL & ADMINISTRATIVE. New CF&I's selling, general and
administrative expenses for the first quarter of 2003 decreased by $0.9 million
to $4.6 million from $5.5 million for the corresponding 2002 period and
decreased as a percentage of sales to 5.0% in the first quarter of 2003 from
6.8% for the corresponding 2002 period. The $0.9 million decrease is primarily
due to a decrease in bad debt and legal fees.
-20-
INTEREST EXPENSE. New CF&I's total interest cost decreased to $5.9
million for the first quarter of 2003 compared $6.8 million for the
corresponding period of 2002, due to a decrease in the average borrowing
outstanding and a decrease in the borrowing rate for the respective periods.
INCOME TAX EXPENSE. New CF&I's effective income tax benefit (expense)
rates were 32.7% and (19.5)% for the three month period ended March 31, 2003 and
2002, respectively. The effective tax rate for the first quarters of 2003 and
2002 varied from the combined state and federal statutory rates due to
adjustments to state net operating loss carryforwards, an increase in the
valuation allowance for state tax credit carryforwards, and non-deductible fines
and penalties.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flow provided by operations for the first quarter of 2003 was
$10.2 million compared to $11.7 million in the first quarter of 2002. Exclusive
of the cumulative effect of change in accounting principle, the items primarily
affecting the $1.5 million decrease in cash flows include a decrease in net
receivables of $3.7 million in the first quarter of 2003 versus a $5.5 million
decrease for the first quarter of 2002, a decrease in inventories in the first
quarter of 2003 of $5.1 million versus no change in the first quarter of 2002,
and a loss of $1.1 million in the first quarter of 2003 versus income before the
cumulative effect of a change in accounting principle of $1.9 million in the
first quarter of 2002. The cumulative effect of change in accounting principle
in the first quarter of 2002 of $19.1 million consists of a $11.3 million tax
effect and a $1.5 million minority interest impact relating to the $31.9 million
write-off of goodwill.
During the first quarter of 2003, New CF&I expended approximately $3.8
million, excluding capitalized interest, on capital projects.
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 March 31, 2003, $221.6 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 10.5%. 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.
New 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. New CF&I expects that operations will continue for the remainder of 2003,
with the realization of assets, and discharge of liabilities in the ordinary
course of business. New 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 New CF&I and,
although the demand for repayment of the obligation in full is not expected
during 2003, 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 New
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 as favorable to New CF&I as that provided by
Oregon Steel. The failure of either New CF&I or Oregon Steel to maintain their
current financing arrangements would likely have a material adverse impact on
New CF&I and CF&I.
Oregon Steel has $305 million principal amount of 10% First Mortgage
Notes ("Notes"), due 2009, payable to outside parties. New CF&I, Inc. and CF&I
Steel, L.P. (the "Guarantors") have guaranteed the obligations of Oregon Steel
under the Notes, and those guarantees are secured by a lien on substantially all
of the Guarantors' property, plant and equipment and certain other assets,
excluding accounts receivable and inventory.
In addition, Oregon Steel, New CF&I, CF&I, and C&W are borrowers
("Borrowers") under a $75 million revolving credit facility ("Credit Agreement")
that will expire on June 30, 2005 and 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 and
environmental expenditures, limitations on stockholder dividends and limitations
on incurring new or additional debt obligations other than as allowed by the
Credit Agreement. As of March 31, 2003, there was no outstanding balance due
under the credit facility. The Borrowers were in compliance with such covenants
at March 31, 2003.
-21-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
- ------------------------------------------------
New CF&I's chief executive officer and chief financial officer, after
evaluating the effectiveness of New CF&I'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,
New CF&I's disclosure controls and procedures were effective and designed to
ensure that material information relating to New CF&I and New CF&I's
consolidated subsidiaries would be made known to them by others within those
entities.
CHANGES IN INTERNAL CONTROLS
- ----------------------------
There were no significant changes in New CF&I's internal controls or in
other factors that could significantly affect those controls subsequent to the
Evaluation Date.
-22-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, 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 matters at CF&I.
New CF&I 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 New CF&I.
New CF&I maintains insurance against various risks, including certain
types of tort liability arising from the sale of its products. New CF&I does not
maintain insurance against liability arising out of waste disposal, or on-site
remediation of environmental contamination because of the high cost of such
insurance coverage. There is no assurance that the insurance coverage currently
carried by New CF&I will be available in the future at reasonable rates, if at
all.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
No reports on Form 8-K were filed by the Registrant during the quarter ended
March 31, 2003.
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: May 14, 2003 /s/ Jeff S. Stewart
------------------------
Jeff S. Stewart
Corporate Controller
CF&I STEEL, L.P.
By: New CF&I, Inc.
General Partner
Date: May 14 , 2003 /s/ Jeff S. Stewart
-------------------------
Jeff S. Stewart
Corporate Controller
New CF&I, Inc.
-23-
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 officer 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 officer 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 officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14 , 2003 /s/ Joe E. Corvin
-------------------------------------
Joe E. Corvin
President and Chief Executive Officer
-23-
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 officer 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 officer 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 officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003 /s/ L . Ray Adams
--------------------------------------
L . Ray Adams
Vice President - Finance,
Chief Financial Officer, and Treasurer
-24-