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 June 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)
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 223-9228
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(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
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NEW CF&I, INC.
CF&I STEEL, L.P.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS - NEW CF&I, INC.
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Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001 .........2
Consolidated Statements of Income (unaudited)
Three months and six months ended
June 30, 2002 and 2001 ..................................3
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2002 and 2001 .................4
Notes to Consolidated Financial Statements (unaudited)...5-11
FINANCIAL STATEMENTS - CF&I STEEL, L.P.
----------------
Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001 ........12
Statements of Income (unaudited)
Three months and six months ended
June 30, 2002 and 2001 .................................13
Statements of Cash Flows (unaudited)
Six months ended June 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 ................21-23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................24
Item 6. Exhibits and Reports on Form 8-K.....................24
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 4 $ 3
Trade accounts receivable, net 32,773 40,383
Inventories 30,681 36,058
Deferred taxes and other current assets 3,965 3,965
Other 517 306
--------- ---------
Total current assets 67,940 80,715
--------- ---------
Property, plant and equipment:
Land and improvements 3,414 3,503
Buildings 19,855 19,959
Machinery and equipment 257,624 254,316
Construction in progress 3,669 3,178
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284,562 280,956
Accumulated depreciation (102,430) (93,019)
--------- ---------
182,132 187,937
--------- ---------
Goodwill -- 31,863
Intangibles, net 1,166 1,227
Other assets 47,083 38,091
--------- ---------
$ 298,321 $ 339,833
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 9,914 $ 9,464
Accounts payable 36,041 35,606
Accrued expenses 24,928 26,590
--------- ---------
Total current liabilities 70,883 71,660
Long-term debt -- 5,072
Long-term debt - Oregon Steel Mills, Inc. 210,506 230,258
Environmental liability 28,486 28,465
Deferred employee benefits 8,494 8,024
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318,369 343,479
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Redeemable common stock 21,840 21,840
--------- ---------
Contingencies (Note 3)
STOCKHOLDERS' DEFICIT
Common stock 1 1
Additional paid-in capital 16,603 16,603
Accumulated deficit (56,972) (40,570)
Accumulated other comprehensive income:
Minimum pension liability (1,520) (1,520)
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(41,888) (25,486)
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$ 298,321 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Sales:
Product sales $ 82,947 $ 77,377 $ 160,827 $ 147,955
Freight 3,591 4,305 7,178 8,838
Electricity sales - 598 - 2,150
--------- --------- --------- ---------
86,538 82,280 168,005 158,943
Costs and expenses:
Cost of sales 72,067 73,668 139,757 145,825
(Gain) loss on sale of assets (111) 2 (1,022) 2
Selling, general and administrative
expenses 5,850 6,172 11,397 11,383
--------- --------- --------- ---------
77,806 79,842 150,132 157,210
--------- --------- --------- ---------
Operating income 8,732 2,438 17,873 1,733
Other income (expense):
Interest expense, net (6,514) (7,141) (13,339) (14,263)
Minority interests (129) 252 (236) 714
Other, net 660 53 754 130
--------- --------- --------- ---------
Income (loss) before income taxes 2,749 (4,398) 5,052 (11,686)
Provision for income tax benefit (expense) (1,934) 1,520 (2,385) 4,238
--------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle, net of
tax, net of minority interest 815 (2,878) 2,667 (7,448)
Cumulative effect of change in accounting
principle, net of tax, net of minority interest -- - (19,069) -
--------- --------- --------- ---------
Net income (loss) $ 815 $ (2,878) $ (16,402) $ (7,448)
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
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NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------------
2002 2001
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Cash flows from operating activities:
Net loss $(16,402) $ (7,448)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Cumulative effect of change in accounting principle, net of
tax, net of minority interest 19,070 --
Depreciation and amortization 9,513 8,548
Deferred income taxes 2,148 (4,248)
Minority interests 236 (714)
Loss (gain) on sale of assets and investments (1,023) 2
Changes in operating assets and liabilities, net:
Trade accounts receivable 7,610 (6,169)
Inventories 5,377 8,995
Operating liabilities 1,528 (1,625)
Other, net (1,170) (33)
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Net cash provided by (used in) operating activities 26,887 (2,692)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment
(3,813) (3,931)
Proceeds from sales of property, plant and equipment 1,023 --
Other, net 278 79
-------- --------
Net cash used in investing activities (2,512) (3,852)
-------- --------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 58,034 75,931
Payments to Oregon Steel Mills, Inc. (77,786) (65,175)
Payment of long-term debt (4,622) (4,212)
-------- --------
Net cash provided by (used in) financing activities (24,374) 6,544
-------- --------
Net increase in cash and cash equivalents 1 --
Cash and cash equivalents at beginning of period 3 5
-------- --------
Cash and cash equivalents at end of period $ 4 $ 5
======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 13,806 $ 12,095
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
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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 ("Company"). The Company owns a 95.2% interest in CF&I
Steel, L.P. ("CF&I"), which is one of the Company's principal subsidiaries.
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 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 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. The
Company 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 assets
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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 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
-----------
Inventories consist of:
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
(In thousands)
Raw materials $ 5,163 $ 9,711
Semi-finished product 5,884 9,610
Finished product 8,334 9,752
Stores and operating supplies 11,300 6,985
-------- --------
Total inventory $ 30,681 $ 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 steel mill in Pueblo,
Colorado ("Pueblo Mill"), CF&I accrued a liability of $36.7 million for
environmental remediation related to the prior owner's operations. The Company
believed this amount was the best estimate of costs from a range of $23.1
million to $43.6 million. The Company'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, the Company 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 June 30, 2002, the accrued
liability was $30.5 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
has been approved by the presiding judge. The settlement provides for the
Company to pay $300,000 in penalties, fund $1.5 million of community projects,
and to pay approximately $400,000 for consulting services. The Company will also
be 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
settlement provides that the two existing furnaces will be permanently shut down
approximately 18 months after the issuance of a
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Prevention of Significant Deterioration ("PSD") air permit. It is expected the
PSD air permit will be issued on or before September 30, 2002.
In May 2000, the Environmental Protection Agency ("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. The Company has negotiated a settlement in principal of this matter
with the 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 Consent Decrees, and 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, the Company has accrued $2.6 million as of June 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 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. This
modification gives the Company 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, 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 Union filed suit in U.S.
District Court in Denver, Colorado, asserting that the Company had violated the
CAA at the Pueblo Mill for a period extending over five years. On July 6, 2001,
the presiding judge dismissed the suit. The Union has appealed the decision. The
Company intends to defend this matter vigorously. 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 June 30, 2002, approximately 708 Unreinstated Employees have
either returned to work or have declined CF&I's offer of equivalent work. At
June 30, 2002, approximately 222 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
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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 222 unreinstated strikers as of June 30, 2002. On August 2,
2000, CF&I filed an appeal with the NLRB in Washington, D.C. A separate hearing
concluded on 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 workers 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 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 has issued an order upholding the PLB award and
is now considering possible back pay and benefits. On May 23, 2002 C&W filed an
appeal of the District Court's order in the United States Court of Appeals.
Given the inability to determine the number of former employees who intend to
return to work at C&W 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 the PLB, with one member dissenting,
-8-
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 March
31, 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 would have a
material adverse effect on the Company's results of operations.
GUARANTEES
As of June 30, 2002, Oregon Steel had payable to outside parties $228.3
million principal amount of 11% First Mortgage Notes ("Notes") due 2003. The
Company and CF&I (collectively "Guarantors") guaranteed the obligations of
Oregon Steel under the Notes, and those guarantees were 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, as of June 30, 2002, Oregon Steel maintained a $75 million
revolving credit facility that was collateralized, in part, by the Guarantors'
accounts receivable and inventory, and was guaranteed by the Guarantors.
On July 15, 2002 Oregon Steel issued $305 million of 10% First Mortgage
Notes due 2009 ("New Notes") in a private offering at a discount of 98.772% and
with 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 Company
and CF&I remain Guarantors on the New Notes. The existing credit agreement was
replaced with a new $75 million credit facility that will expire on June 30,
2005. Oregon Steel, the Company, CF&I, and Colorado and Wyoming Railway Company,
are each borrowers under the new $75 million credit facility. As of July 31,
2002, $6.7 million was restricted under outstanding letters of credit.
LIQUIDITY
The Company experienced a net loss for the six months ended June 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 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 during
the first quarter of 2002 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. 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
-9-
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 pro-forma report of what adjusted earnings
would have been if amortization had not taken place for the three and six months
ended June 30, 2002 and for the years ended December 31, 2001, 2000, and 1999.
GOODWILL - ADOPTION OF SFAS NO. 142
-----------------------------------
The changes in the carrying amount of goodwill for the quarter ended
June 30, 2002 are as follows:
(IN THOUSANDS)
Balance as of January 1, 2002 $ 31,863
Goodwill written off related to adoption of SFAS No. 142 (31,863)
---------
Balance as of June 30, 2002 $ --
=========
ACQUIRED INTANGIBLE ASSETS
--------------------------
AS OF JUNE 30, 2002
-----------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
(IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS: (FN1)
----------------------------
Proprietary Technology $ 1,892 $ (726)
------- ------
AGGREGATE AMORTIZATION EXPENSE:
-------------------------------
For the year ended 12/31/99 $122
For the year ended 12/31/00 $122
For the year ended 12/31/01 $122
For the three months ended 6/30/02 $31
For the six months ended 6/30/02 $61
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-
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2002 2001 2002 2001
--------- -------- -------- -------
Goodwill amortization $ -- $ (255) $ -- $ (510)
-------- -------- -------- --------
Net income (loss) 815 (2,878) (16,402) (7,448)
Add back: Goodwill amortization,
net of tax, net of minority interest - 158 - 316
-------- -------- -------- --------
Adjusted net income (loss) $ 815 $ (2,720) $(16,402) $ (7,132)
======== ======== ======== ========
FOR THE YEARS ENDED
------------------------------------------------
1999 2000 2001
----------- -------- ---------
Goodwill amortization $(1,020) $(1,020) $ (1,020)
------- ------- --------
Net income (loss) (13,252) (3,131) (14,963)
Add back: Goodwill amortization,
net of tax, net of minority interest 597 603 603
-------- ------- --------
Adjusted net income (loss) $(12,655) $(2,528) $(14,360)
======== ======= ========
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CF&I STEEL, L.P.
BALANCE SHEETS
(In thousands)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1 $ -
Trade accounts receivable, net 31,400 38,178
Inventories 30,424 35,824
Other 198 71
---------- ---------
Total current assets 62,023 74,073
---------- ---------
Property, plant and equipment:
Land and improvements 3,408 3,498
Buildings 18,466 18,570
Machinery and equipment 254,855 251,573
Construction in progress 3,669 3,178
---------- ---------
280,398 276,819
Accumulated depreciation (100,512) (91,204)
---------- ---------
179,886 185,615
---------- ---------
Goodwill - 31,863
Intangibles, net 1,166 1,227
Other assets 13,377 13,501
---------- ---------
$ 256,452 $ 306,279
========== =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 9,914 $ 9,464
Accounts payable 36,785 39,091
Accrued expenses 35,825 32,525
---------- ---------
Total current liabilities 82,524 81,080
Long-term debt - 5,072
Long-term debt - Oregon Steel Mills, Inc. 210,506 230,258
Long-term debt - New CF&I, Inc. 21,756 21,756
Environmental liability 28,486 28,465
Deferred employee benefits 8,494 8,024
---------- ---------
351,766 374,655
---------- ---------
Contingencies (Note 3)
PARTNERS' DEFICIT
General partner (90,468) (65,094)
Limited partners (4,846) (3,282)
---------- ---------
(95,314) (68,376)
---------- ---------
$ 256,452 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Sales:
Product sales $ 81,115 $ 75,915 $ 157,121 $ 144,845
Freight 3,591 4,305 7,178 8,838
Electricity sales - 598 - 2,150
--------- --------- --------- ---------
84,706 80,818 164,299 155,833
Costs and expenses:
Cost of sales 70,834 72,525 137,082 143,224
Gain on sale of assets (111) -- (1,023) --
Selling, general and administrative
expenses 5,122 5,441 10,094 10,280
--------- --------- --------- ---------
75,845 77,966 146,153 153,504
--------- --------- --------- ---------
Operating income 8,861 2,852 18,146 2,329
Other income (expense):
Interest expense, net (6,835) (7,574) (13,975) (15,197)
Other, net 660 53 754 130
--------- --------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle 2,686 (4,669) 4,925 (12,738)
Cumulative effect of change in accounting
principle -- -- (31,863) --
--------- --------- --------- ---------
Net income (loss) $ 2,686 $ (4,669) $ (26,938) $ (12,738)
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
-13-
CF&I STEEL, L.P.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $(26,938) $(12,738)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Cumulative effect of change in accounting principle 31,863 --
Depreciation and amortization 9,410 8,460
Gain on sale of assets and investments (1,023) --
Changes in operating assets and liabilities, net:
Trade accounts receivable 6,778 (6,217)
Inventories 5,400 8,993
Operating liabilities 1,465 (1,242)
Other, net (94) (87)
-------- --------
Net cash provided by (used in) operating activities 26,861 (2,831)
Cash flows from investing activities:
Additions to property, plant and equipment (3,787) (3,792)
Proceeds from sale of property, plant and equipment 1,023 --
Other, net 278 79
-------- --------
Net cash used in investing activities (2,486) (3,713)
-------- --------
Cash flows from financing activities:
Borrowings from related parties 58,034 75,931
Payments to related parties (77,786) (65,175)
Payment of long-term debt (4,622) (4,212)
-------- --------
Net cash provided by (used in) financing activities (24,374) 6,544
-------- --------
Net increase in cash and cash equivalents 1 --
Cash and cash equivalents at beginning of period -- 2
-------- --------
Cash and cash equivalents at end of period $ 1 $ 2
======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 13,806 $ 12,095
======== ========
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% 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 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, 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.
-15-
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. 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:
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
(IN THOUSANDS)
Raw materials $ 5,163 $ 9,711
Semi-finished product 5,884 9,610
Finished product 8,334 9,752
Stores and operating supplies 11,043 6,751
-------- --------
Total inventory $ 30,424 $ 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 steel mill in 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 June 30, 2002, the accrued liability was $30.5
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
has been approved by the presiding judge. The settlement provides for CF&I to
pay $300,000
-16-
in penalties, fund $1.5 million of community projects, and to pay approximately
$400,000 for consulting services. CF&I will also be 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 settlement provides that the two
existing furnaces will be permanently shut down approximately 18 months after
the issuance of a Prevention of Significant Deterioration ("PSD") air permit. It
is expected the PSD air permit will be issued on or before September 30, 2002.
In May 2000, the Environmental Protection Agency ("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 Consent Decrees, and 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 $2.6 million as of June 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 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. 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, 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 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. On
July 6, 2001, the presiding judge dismissed the suit. The Union has appealed the
decision. The Company intends to defend this matter vigorously. 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 June 30, 2002, approximately 708 Unreinstated Employees have
either
-17-
returned to work or have declined CF&I's offer of equivalent work. At June 30,
2002, approximately 222 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
approximately 222 unreinstated strikers as of June 30, 2002. On August 2, 2000,
CF&I filed an appeal with the NLRB in Washington, D.C. A separate hearing
concluded on 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 workers 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
As of June 30, 2002, Oregon Steel had payable to outside parties $228.3
million principal amount of 11% First Mortgage Notes ("Notes") due 2003. The
Company and CF&I (collectively "Guarantors") guaranteed the obligations of
Oregon Steel under the Notes, and those guarantees were 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, as of June 30, 2002, Oregon Steel maintained a $75 million
revolving credit facility that was collateralized, in part, by the Guarantors'
accounts receivable and inventory, and was guaranteed by the Guarantors.
On July 15, 2002 Oregon Steel issued $305 million of 10% First Mortgage
Notes due 2009 ("New 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 Company and CF&I
remain Guarantors on the New Notes. The existing credit agreement was replaced
with a new $75 million credit facility that will expire in June 30, 2005. Oregon
Steel,
-18-
the Company, CF&I, and Colorado and Wyoming Railway Company, are each borrowers
under the new $75 million credit facility. As of July 31, 2002, $6.7 million was
restricted under outstanding letters of credit.
LIQUIDITY
CF&I experienced a net loss for the six months ended June 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 schedules describing the goodwill and intangibles
of CF&I. Also included is a pro-forma report of what adjusted earnings
would have been if amortization had not taken place for the three and six months
ended June 30, 2002 and for the years ended December 31, 2001, 2000, and 1999.
GOODWILL - ADOPTION OF SFAS NO. 142
- -----------------------------------
The changes in the carrying amount of goodwill for the quarter ended
June 30, 2002 are as follows:
(IN THOUSANDS)
Balance as of January 1, 2002 $ 31,863
Goodwill written off related to adoption
of SFAS No. 142 (31,863)
--------
BALANCE AS OF JUNE 30, 2002 $ -
========
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ACQUIRED INTANGIBLE ASSETS (FN1)
- --------------------------------
AS OF JUNE 30, 2002
------------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
(IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
----------------------------
Proprietary Technology $1,892 $(726)
====== =====
AGGREGATE AMORTIZATION EXPENSE:
-------------------------------
For the year ended 12/31/99 $122
For the year ended 12/31/00 $122
For the year ended 12/31/01 $122
For the three months ended 6/30/02 $31
For the six months ended 6/30/02 $61
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.
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2002 2001 2002 2001
--------- --------- ---------- ---------
Goodwill amortization $ -- $ (255) $ -- $ (510)
-------- -------- -------- --------
Net income (loss) 2,686 (4,669) (26,938) (12,738)
Add back: Goodwill amortization -- 255 -- 510
-------- -------- -------- --------
Adjusted net income (loss) $ 2,686 $ (4,414) $(26,938) $(12,228)
======== ======== ======== ========
FOR THE YEARS ENDED,
-----------------------------------------
1999 2000 2001
--------- --------- ---------
Goodwill amortization $ (1,020) $ (1,020) $ (1,020)
-------- -------- --------
Net income (loss) (24,965) (9,259) (22,620)
Add back: Goodwill amortization 1,020 1,020 1,020
-------- -------- --------
Adjusted net income (loss) $(23,945) $ (8,239) $(21,600)
======== ======== ========
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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 six months ended June 30, 2002, sales of CF&I were 97.9% and 97.8%,
respectively, compared to 98.2% and 98.0% for corresponding periods in 2001, of
the consolidated sales of the Company. For the three and six months ended June
30, 2002, cost of sales of CF&I were 98.3% and 98.1%, respectively, compared to
98.4% and 98.2% 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- --------- --------- ---------
Tonnage sold:
Rail 101,200 55,500 199,900 110,600
Rod and Bar 109,300 100,000 220,200 206,100
Seamless Pipe (FN) 7,000 37,900 9,300 67,100
Semi-finished 2,500 1,500 2,600 4,200
-------- -------- -------- --------
Total 220,000 194,900 432,000 388,000
======== ======== ======== ========
Product sales (in thousands): (FN2) $ 82,947 $ 77,377 $160,827 $147,955
Average selling price per ton: (FN2) $ 377 $ 397 $ 372 $ 381
(FN1)The Company suspended operation of the seamless pipe mill in November of
2001; operations of the mill resumed in April 2002.
(FN2)Product sales and average selling price per ton exclude freight revenues in
the three and six months ended June 30, 2002 and 2001, and the sale of
electricity in the three and six months ended June 30, 2001.
_______________
-21-
SALES. The Company's consolidated sales increased $4.3 million, or
5.2%, to $86.5 million, and $9.1 million, or 5.7%, to $168.0 million for the
three and six months ended June 30, 2002, respectively, over the same periods in
2001. For the three and six months ended June 30, 2002, the Company shipped
220,000 tons and 432,000 tons of rail, rod and bar, seamless pipe and
semi-finished products at an average selling price of $377 and $372 per ton,
compared to 194,900 tons and 388,000 tons of product at an average selling price
of $397 and $381 per ton for the same periods in 2001. The increase in shipments
is a result of an increase in rail and rod and bar product shipments, partially
offset by a decrease in seamless pipe and semi-finished shipments. The decrease
in average 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, as compared to the corresponding
periods in 2001; however, a decrease in average selling price still occurred due
to significantly reduced seamless pipe sales, the highest average selling price
of the Company's products. Freight revenue decreased in response to product mix
and customer preference on shipping. There were no sales of electricity in the
first six months ended June 30, 2002, compared to $2.2 million for the same
period in 2001.
GROSS PROFITS. The Company's gross profit was $14.5 million and $28.2
million for the three and six months ended June 30, 2002, or 16.7% and 16.8%,
compared to $8.6 million and $13.1 million, or 10.5% and 8.3%, for the same
periods in 2001. The increase of $5.9 million and $15.1 million, respectively,
was primarily attributed to increased profitability in rail and rod and bar
products, which was the result of lower semi-finished steel ("billets") costs
and an increase in average product selling price, offset in part by a decrease
in electricity sales.
SELLING, GENERAL & ADMINISTRATIVE. The Company's selling, general and
administrative expenses ("SG&A") of $5.9 million for the three months ended June
30, 2002 decreased by 5.2%, from $6.2 million for the same period in 2001. For
the six months ended June 30, 2002, SG&A expenses were $11.4 million, the same
as compared to the corresponding period of 2001. SG&A expenses decreased in the
second quarter primarily due to reduced shipping costs.
INTEREST EXPENSE. Total interest expense of $6.5 million and $13.3
million for the three and six months ended June 30, 2002 decreased by 8.8% and
6.5%, from $7.1 million and $14.3 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 47.2%
for the six months ended June 30, 2002, as compared to a tax benefit of 36.3%
for the corresponding period in 2001. The effective income tax rate for the
second 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 six months ended June 30, 2002
was $26.9 million compared to $2.7 million cash flow used by operations for the
corresponding period of 2001. The items primarily affecting the $29.6 million
increase in cash flow include a non-cash provision for deferred income taxes of
$6.4 million, a decrease in net receivables of $7.6 million in 2002 versus an
increase of $6.2 million in 2001, and a positive income before the cumulative
effect of change in accounting principle of $2.7 million for the first six
months of 2002 versus a net loss of $7.4 million for the first six 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 and
$1.5 million of minority interest).
During the six months of 2002, the Company 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 June 30, 2002, $210.5 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 11.6%. 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.
-22-
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 June 30,
2002, the outstanding balance on the debt was $9.9 million, of which the entire
amount was classified as short-term.
As of June 30, 2002, Oregon Steel had $228.3 million principal amount
of 11% First Mortgage Notes ("Notes") due 2003, payable to outside parties. The
Company and CF&I (collectively, "Guarantors") have guaranteed the obligations of
Oregon Steel under the Notes, and those guarantees were 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 maintains a $75 million revolving credit
facility that is collateralized, in part, by the Guarantors' accounts receivable
and inventory, and also guaranteed by the Guarantors.
On July 15, 2002 Oregon Steel issued $305 million of 10% First Mortgage
Notes due 2009 ("New 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 Company and CF&I
remain Guarantors on the New Notes. The existing credit agreement was replaced
with a new $75 million credit facility that will expire on June 30, 2005. Oregon
Steel, the Company, CF&I, and Colorado and Wyoming Railway Company are each
borrowers under the new $75 million credit facility. As of July 31, 2002, $6.7
million was restricted under outstanding letters of credit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes.
-23-
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 negotiations with CDPHE and EPA regarding
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
None
(b) Reports on Form 8-K
On June 26, 2002, a Form 8-K was filed by New CF&I, Inc.
and CF&I Steel, L.P. in relation to a transitional note disclosure for the
adoption of SFAS No. 142.
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: August 13, 2002 /s/ Jeff S. Stewart
-----------------------
Jeff S. Stewart
Corporate Controller
CF&I STEEL, L.P.
By: New CF&I, Inc.
General Partner
Date: August 13, 2002 /s/ Jeff S. Stewart
------------------------
Jeff S. Stewart
Corporate Controller
New CF&I, Inc.
-24-