UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------------------------------------
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
---- ----
<PAGE>
NEW CF&I, INC.
CF&I STEEL, L.P.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS - NEW CF&I, INC.
Consolidated Balance Sheets
September 30, 2000 (unaudited) and
December 31, 1999 ......................................2
Consolidated Statements of Income (unaudited)
Three months and nine months ended
September 30, 2000 and 1999 ............................3
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2000 and 1999 ..........4
Notes to Consolidated Financial Statements (unaudited)...5-7
FINANCIAL STATEMENTS - CF&I STEEL, L.P.
Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999 ...8
Statements of Operations (unaudited)
Three months and nine months ended
September 30, 2000 and 1999 ............................9
Statements of Cash Flows (unaudited)
Nine months ended September 30, 2000 and 1999..........10
Notes to Financial Statements (unaudited)..............11-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...............14-16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk......................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................17
Item 6. Exhibits and Reports on Form 8-K..........................17
1
<PAGE>
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5 $ 5
Trade accounts receivable, net 30,371 27,214
Inventories 39,371 35,398
Deferred tax asset 4,010 4,013
Other 325 938
--------- ---------
Total current assets 74,082 67,568
--------- ---------
Property, plant and equipment:
Land and improvements 3,470 3,574
Buildings 18,651 18,525
Machinery and equipment 248,422 248,948
Construction in progress 3,798 1,416
--------- ---------
274,341 272,463
Accumulated depreciation (75,776) (65,366)
--------- ---------
198,565 207,097
--------- ---------
Costs in excess of net assets acquired, net 33,138 33,903
Other assets 30,194 28,013
--------- ---------
$ 335,979 $ 336,581
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 8,625 $ 7,861
Accounts payable 44,754 32,680
Accrued expenses 16,912 17,871
--------- ---------
Total current liabilities 70,291 58,412
Long-term debt 14,536 23,162
Long-term debt - Oregon Steel Mills, Inc. 199,882 201,090
Environmental liability 30,850 30,850
Deferred employee benefits 7,254 7,099
--------- ---------
322,813 320,613
--------- ---------
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 (25,278) (22,476)
-------- ---------
(8,674) (5,872)
-------- --------
$335,979 $336,581
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
2
<PAGE>
<TABLE>
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 71,462 $ 60,774 $ 200,491 $ 196,732
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 59,763 56,013 175,840 182,578
Selling, general and administrative
expenses 4,555 4,380 13,034 14,907
Gain on sale of assets (4) -- (450) --
Settlement of litigation -- (855) -- (4,539)
--------- --------- --------- ---------
64,314 59,538 188,424 192,946
--------- --------- --------- ---------
Operating income 7,148 1,236 12,067 3,786
Other income (expense):
Interest and dividend income 52 28 114 82
Interest expense, net (6,552) (6,511) (19,976) (19,564)
Minority interests 6 268 514 804
Other, net 62 129 2,677 317
--------- --------- --------- ---------
Income (loss) before income taxes 716 (4,850) (4,604) (14,575)
Income tax benefit (expense) (104) 2,128 1,802 6,396
--------- --------- --------- ---------
Net income (loss) $ 612 $ (2,722) $ (2,802) $ (8,179)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
<TABLE>
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,802) $ (8,179)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 13,880 13,963
Deferred income taxes (2,242) (6,368)
Minority interests (514) (804)
Gain on sale of operating and non-operating assets (2,943) --
Changes in operating assets and liabilities, net 5,266 5,919
--------- ---------
Net cash provided by operating activities 10,645 4,531
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (4,463) (5,606)
Proceeds from sales of operating and non-operating assets 3,047 --
Other, net (160) (1,960)
--------- ---------
Net cash used in investing activities (1,576) (7,566)
--------- ---------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 208,407 124,600
Payments to Oregon Steel Mills, Inc. (209,615) (114,400)
Payment of long-term debt (7,861) (7,164)
--------- ---------
Net cash provided by (used in) financing activities (9,069) 3,036
--------- ---------
Net increase in cash and cash equivalents -- 1
Cash and cash equivalents at beginning of period 5 3
--------- ---------
Cash and cash equivalents at end of period $ 5 $ 4
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 18,813 $ 20,548
=========
Taxes $ -- $ 574
========= =========
</TABLE>
4
<PAGE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
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"). Oregon Steel Mills, Inc.
("Oregon Steel") holds an 87 percent 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 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 the Company's 1999 Annual Report on Form 10-K
for additional disclosures including a summary of significant accounting
policies.
Certain reclassifications have been made in prior periods to conform to
the current period presentation. Such reclassifications do not affect
results of operations as previously reported.
2. INVENTORIES
-----------
Inventories consist of:
September 30, December 31,
2000 1999
------------- ------------
(In thousands)
Raw materials $8,978 $10,504
Semifinished product 8,487 6,439
Finished product 16,348 13,348
Stores and operating supplies 5,558 5,107
------- -------
Total inventory $39,371 $35,398
======= =======
3. CONTINGENCIES
-------------
ENVIRONMENTAL
All material environmental remediation liabilities, 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.
The Company owns a 95.2 percent interest in CF&I Steel, L.P. ("CF&I")
which owns the Pueblo, Colorado steel mill ("Pueblo Mill"). In connection
with the 1993 acquisition of CF&I, the Company accrued a liability of
$36.7 million for environmental remediation at the Pueblo Mill. The
Company believed this amount was the best estimate from a range of $23.1
million to $43.6 million. The Company's estimate of this liability was
based on two separate remediation investigations conducted by independent
environmental engineering consultants. The liability includes 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 is substantially reflective of a
5
<PAGE>
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 to the environment than was presently
believed to exist. At September 30, 2000, the accrued liability was $32.6
million, of which $30.9 million was classified as non-current in the
consolidated balance sheet.
The CDPHE has inspected the Pueblo Mill for possible environmental
violations, and in the fourth quarter of 1999, issued a Compliance
Advisory indicating that air quality regulations had been violated. During
the first quarter of 2000, the CDPHE filed a judicial enforcement action,
which could result in the levying of significant fines and penalties,
requirements to alter its operating procedures, requirements to accelerate
or expand the capital expenditure program or a combination of any of the
above. Although the CDPHE has not quantified the action against the
Company, resolution of the action will likely include payment of penalties
and an agreement to implement additional pollution controls. The Company
has commenced an engineering study to determine to what extent operating
practices can be altered, and has allocated up to $2 million in capital
expenditures to reach resolution with the CDPHE. It is not presently
possible to determine if further expenditures will be necessary to satisfy
the liability, if any, associated with the action.
In a related matter, on April 27, 2000, the United Steel Workers of
America ("Union") filed suit in U.S. District Court in Denver, Colorado,
asserting that CF&I had violated the Clean Air Act Amendments of 1990 at
the Pueblo Mill for a period extending over five years. The suit seeks
damages and to compel CF&I to incur significant capital improvements or
alter its operating procedures so that the Pueblo Mill would be in
compliance with more stringent environmental standards than CF&I currently
is operating under. The Company does not believe as a matter of law that
CF&I has an obligation to meet these standards. It is not presently
possible to estimate the ultimate liability in the event of an adverse
finding.
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 failed to reach final
agreement on a new labor contract due to differences on economic issues.
As a result of contingency planning, the Company was able to avoid
complete suspension of operations at the Pueblo Mill by utilizing a
combination of permanent replacement workers, 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 to return to work. At the time of this offer, only a
few vacancies existed at the Pueblo Mill. As of September 30, 2000, 285
former striking employees had returned to work as a result of their
unconditional offer. Approximately 560 former striking workers remain
unreinstated ("Unreinstated Employees").
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"). The Company not only denies the allegations, but rather believes
that both the facts and the law fully support its contention that the
strike was economic in nature and that it was not obligated to displace
the properly hired permanent replacement employees. 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 upholding certain
allegations against CF&I. On August 2, 2000, the Company filed an appeal
with the NLRB in Washington D.C. The ultimate determination of the issues
may require a ruling from the appropriate United States appellate court.
In the event there is an adverse determination of these issues,
Unreinstated Employees could be entitled to back pay, including benefits,
from the date of the Union's unconditional offer to return to work through
the date of the adverse determination. The number of Unreinstated
Employees entitled to back pay would probably 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
steps to mitigate the liability for back pay by seeking employment
elsewhere that has comparable working conditions and compensation. A
separate hearing concluded in February 2000, with the judge for that
hearing rendering a decision on August 7, 2000 that
6
<PAGE>
certain of the Union's actions undertaken since the beginning of the
strike did constitute misconduct and violations of certain provisions of
the NLRA. Given the inability to either determine the extent the adverse
and offsetting mitigating factors discussed above will impact the
liability or to quantify the financial impact of any of these factors, it
is not presently possible to estimate the ultimate liability if there is
an adverse determination.
During the strike by the Union at CF&I, 39 bargaining unit employees of
the Colorado & Wyoming Railway Company ("C&W"), a wholly-owned subsidiary
of New CF&I that provides rail service to the Pueblo Mill, refused to
report to work for an extended period of time. The bargaining unit
employees of C&W were not on strike. C&W considered these employees to
have quit their employment and, accordingly, C&W declined to allow those
individuals to return to work. The unions representing these individuals
have filed lawsuits in the U.S. District Court of Colorado against C&W
claiming their members had refused to cross the picket line because they
were honoring the picket line of another organization or because of safety
concerns stemming from those picket lines. The unions demand reinstatement
of the former employees, back pay, benefits and other damages. The Company
believes it has substantial defenses against these claims. However, it is
possible that one or more of them will proceed to arbitration before the
National Railroad Adjustment Board or otherwise initiate further judicial
proceedings. The outcome of such proceedings is inherently uncertain and
it is not possible to estimate any potential settlement amount that would
result from an adverse legal or arbitration decision.
GUARANTEES
Oregon Steel has $228.3 million principal amount of 11% First Mortgage
Notes ("Notes"), due 2003, payable to outside parties. The Company and
CF&I (collectively, "Guarantors") guaranteed the obligations of Oregon
Steel under the 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 maintains a $125 million credit agreement with a
syndicate of lenders that is collateralized, in part, by the Guarantors'
accounts receivable and inventory, and is guaranteed by the Guarantors.
7
<PAGE>
CF&I STEEL, L.P.
BALANCE SHEETS
(In thousands)
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2 $ 2
Trade accounts receivable, net 28,581 26,167
Inventories 39,166 35,157
Other -- 747
--------- ---------
Total current assets 67,749 62,073
--------- ---------
Property, plant and equipment:
Land and improvements 3,465 3,569
Buildings 18,419 18,419
Machinery and equipment 245,933 246,445
Construction in progress 3,778 1,416
--------- ---------
271,595 269,849
Accumulated depreciation (74,174) (63,863)
--------- ---------
197,421 205,986
--------- ---------
Costs in excess of net assets acquired, net 33,138 33,903
Other assets 12,892 12,966
--------- --------
$ 311,200 $314,928
========= ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 8,625 $ 7,861
Accounts payable 54,659 40,834
Accrued expenses 17,747 18,649
--------- ---------
Total current liabilities 81,031 67,344
Long-term debt 14,536 23,162
Long-term debt - Oregon Steel Mills, Inc. 199,882 201,090
Long-term debt - New CF&I, Inc. 21,756 21,756
Environmental liability 30,850 30,850
Deferred employee benefits 7,254 7,099
--------- ---------
355,309 351,301
--------- ---------
Contingencies (Note 3)
PARTNERS' DEFICIT
General partner (44,109) (36,373)
--------- --------
$ 311,200 $314,928
========= ========
The accompanying notes are an integral part of
the financial statements.
8
<PAGE>
<TABLE>
CF&I STEEL, L.P.
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 69,803 $ 59,177 $ 195,607 $ 191,783
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 58,545 54,535 172,460 177,972
Selling, general and administrative
expenses 4,378 4,263 12,555 14,522
Gain on sale of assets (6) -- (452) --
Settlement of litigation -- (855) -- (4,539)
--------- --------- --------- ---------
62,917 57,943 184,563 187,955
--------- --------- --------- ---------
Operating income 6,886 1,234 11,044 3,828
Other income (expense):
Interest and dividend income 19 3 19 5
Interest expense, net (7,069) (6,951) (21,476) (20,847)
Other, net 62 129 2,677 317
--------- --------- --------- ---------
Net loss $ (102) $ (5,585) $ (7,736) $ (16,697)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
9
<PAGE>
<TABLE>
CF&I STEEL, L.P.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,736) $ (16,697)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 13,761 13,776
Loss (gain) on sale of operating and non-operating assets (2,943) 43
Changes in operating assets and liabilities, net 7,409 7,404
--------- --------- ------- -----
Net cash provided by operating activities 10,491 4,526
--------- --------- ------- -----
Cash flows from investing activities:
Additions to property, plant and equipment (4,309) (5,601)
Proceeds from sale of operating and non-operating assets 3,047 --
Other, net (160) (1,960)
--------- ---------
Net cash used in investing activities (1,422) (7,561)
--------- ---------
Cash flows from financing activities:
Borrowings from related parties 208,407 124,600
Payments to related parties (209,615) (114,400)
Payment of long-term debt (7,861) (7,164)
--------- ---------
Net cash provided by (used in) financing activities (9,069) 3,036
--------- ---------
Net increase in cash and cash equivalents -- 1
Cash and cash equivalents at beginning of year 2 --
--------- ---------
Cash and cash equivalents at end of year $ 2 $ 1
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 18,813 $ 20,548
========= =========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
10
<PAGE>
CF&I STEEL, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The financial statements include the accounts of CF&I Steel, L.P.
("CF&I"). Oregon Steel Mills, Inc. ("Oregon Steel") owns an 87 percent
interest in New CF&I, Inc. ("Company") which owns a 95.2 percent interest
in CF&I. Oregon Steel also owns directly an additional 4.3 percent
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 1999 Annual Report on Form 10-K for
additional disclosures including a summary of significant accounting
policies.
Certain reclassifications have been made in prior periods to conform to
the current period presentation. Such reclassifications do not affect
results of operations as previously reported.
2. INVENTORIES
-----------
Inventories consist of:
September 30, December 31,
2000 1999
-------------- ------------
(In thousands)
Raw materials $ 8,978 $10,504
Semifinished product 8,487 6,439
Finished product 16,348 13,348
Stores and operating supplies 5,353 4,866
------- -------
Total inventory $39,166 $35,157
======= =======
3. CONTINGENCIES
-------------
ENVIRONMENTAL
All material environmental remediation liabilities, 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.
The Company owns a 95.2 percent interest in CF&I which owns the Pueblo,
Colorado steel mill ("Pueblo Mill"). In connection with the 1993
acquisition of CF&I, the Company accrued a liability of $36.7 million for
environmental remediation at the Pueblo Mill. The Company believed this
amount was the best estimate from a range of $23.1 million to $43.6
million. The Company's estimate of this liability was based on two
separate remediation investigations conducted by independent environmental
engineering consultants. The liability includes 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 is substantially reflective of a straight-line rate of expenditure
over 30 years. The State of Colorado mandated that the
11
<PAGE>
schedule for corrective action could be accelerated if new data indicated
a greater threat to the environment than was presently believed to exist.
At September 30, 2000, the accrued liability was $32.6 million, of which
$30.9 million was classified as non-current in the balance sheet.
The CDPHE has inspected the Pueblo Mill for possible environmental
violations, and in the fourth quarter of 1999, issued a Compliance
Advisory indicating that air quality regulations had been violated. During
the first quarter of 2000, the CDPHE filed a judicial enforcement action,
which could result in the levying of significant fines and penalties,
requirements to alter its operating procedures, requirements to accelerate
or expand the capital expenditure program or a combination of any of the
above. Although the CDPHE has not quantified the action against the
Company, a resolution of the action will likely include payment of
penalties and an agreement to implement additional pollution controls.
The Company has commenced an engineering study to determine to what extent
operating practices can be altered, and has allocated up to $2 million in
capital expenditures to reach resolution with the CDPHE. It is not
presently possible to determine if further expenditures will be necessary
to satisfy the liability, if any, associated with the action.
In a related matter, on April 27, 2000, the United Steel Workers of
America ("Union") filed suit in U.S. District Court in Denver, Colorado,
asserting that CF&I had violated the Clean Air Act Amendments of 1990 at
the Pueblo Mill for a period extending over five years. The suit seeks
damages and to compel CF&I to incur significant capital improvements or
alter its operating procedures so that the Pueblo Mill would be in
compliance with more stringent environmental standards than CF&I currently
is operating under. CF&I does not believe as a matter of law that it has
an obligation to meet these standards. It is not presently possible to
estimate the ultimate liability as a result of such a finding in the event
of an adverse finding.
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 for approximately 1,000
bargaining unit employees. The parties 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 permanent
replacement workers, 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 to return to work. At the time of this offer, only a
few vacancies existed at the Pueblo Mill. As of September 30, 2000, 285
former striking employees had returned to work as a result of their
unconditional offer. Approximately 560 former striking workers remain
unreinstated ("Unreinstated Employees").
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"). CF&I not only denies the allegations, but rather believes that
both the facts and the law fully support its contention that the strike
was economic in nature and that it was not obligated to displace the
properly hired permanent replacement employees. 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 upholding certain
allegations against CF&I. On August 2, 2000, CF&I filed an appeal with the
NLRB in Washington D.C. The ultimate determination of the issues may
require a ruling from the appropriate United States appellate court.
In the event there is an adverse determination of the issues, Unreinstated
Employees could be entitled to back pay, including benefits, from the date
of the Union's unconditional offer to return to work through the date of
the adverse determination. The number of Unreinstated Employees entitled
to back pay would probably be limited to the number of replacement
workers; however, the Union might assert that all Unreinstated Employees
could be entitled to back pay. Back pay is generally measured 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. 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
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constitute misconduct and violations of certain provisions of the NLRA.
Given the inability to either determine the extent the adverse and
offsetting mitigating factors discussed above will impact the liability or
to quantify the financial impact of any of these factors, it is not
presently possible to estimate the ultimate liability if there is an
adverse determination.
GUARANTEES
Oregon Steel has $228.3 million principal amount of 11% First Mortgage
Notes ("Notes"), due 2003, payable to outside parties. CF&I guaranteed the
obligations of Oregon Steel under the Notes, and those guarantees are
secured by a lien on substantially all of the property, plant and
equipment and certain other assets of CF&I, excluding accounts receivable
and inventory.
In addition, Oregon Steel maintains a $125 million credit agreement with a
syndicate of lenders that is collateralized, in part, by CF&I's accounts
receivable and inventory, and is guaranteed by CF&I.
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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
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are subject to risks and
uncertainties and actual results could differ materially from those projected.
Such 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;
potential equipment malfunction; work stoppages, and plant construction and
repair delays, and failure of the Company to accurately 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 percent owned subsidiary and
the Colorado & Wyoming Railway Company, a wholly-owned short-line railroad,
serving principally the Pueblo, Colorado steel mill ("Pueblo Mill"). For the
three and nine month periods ended September 30, sales of CF&I were 97.7 percent
and 97.6 percent, respectively, in 2000, and 97.4 percent and 97.5 percent,
respectively, in 1999, of the consolidated sales of the Company. For the three
and nine months ended September 30, cost of sales of CF&I were 98.0 percent and
98.1 percent, respectively, in 2000 and 97.4 percent and 97.5 percent,
respectively, in 1999, of the Company's consolidated cost of sales.
Results of Operations
---------------------
The following table sets forth for the Company tonnage sold, sales and average
selling price per ton:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
--------- -------- -------- --------
Tonnage sold:
Rail 82,300 71,300 237,500 240,000
Rod and Bar 99,500 105,300 288,700 305,800
Seamless Pipe -- 1,900 -- 18,000
Semifinished 17,700 2,900 36,500 7,900
-------- -------- -------- --------
Total 199,500 181,400 562,700 571,700
======== ======== ======== ========
Sales (in thousands): $ 71,462 $ 60,774 $200,491 $196,732
Average selling price per ton: $ 358 $ 335 $ 356 $ 344
---------------------
The Company shipped 199,500 and 562,700 tons of rail, rod and bar and
semifinished products for the three month and nine month periods ended September
30, 2000, respectively, compared to 181,400 and 571,700 tons, respectively, of
product, during the corresponding 1999 periods. The increase in shipments for
the third quarter of 2000 resulted primarily from increased rail and
semifinished product shipments partially offset by decreased rod and bar product
shipments for the three months ended September 30, 2000 as compared to the
respective period in 1999. The slight decrease in shipments for the nine month
period ended September 30, 2000 as compared to the respective period in 1999 was
a result of similar factors, except that rail shipments for 2000 trailed
shipments slightly for 1999, and the lack of shipments of seamless pipe for 2000
as compared to shipments for 1999. Shipments of seamless pipe nearly ceased for
the third quarter of 1999, after the seamless mill shut down operation in May
1999.
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The Company's average selling prices of $358 and $356 per ton of product
for the three and nine month periods ended September 30, 2000, respectively,
were increases from the average selling price of $335 and $344 per ton,
respectively, for the comparable periods in 1999. Higher average selling prices
per ton for rail, rod and bar, and semifinished products in both periods as
compared to the corresponding periods in 1999 were the primary reasons for the
increases, partially offset by the lack of seamless pipe sales for the
corresponding periods. Average selling prices for rod and bar products continued
to show improvement for the periods, increasing from $264 and $254 per ton for
the three month and the nine month periods in 1999 to $282 and $276 per ton,
respectively, for the corresponding periods in 2000. Average selling prices for
rail products were improved from the respective periods in 1999, increasing from
$422 and $439 per ton for the first three and nine months of 1999 to $449 and
$445 per ton for the corresponding periods in 2000. One of the factors causing
the increases for both periods in average selling prices for rail was the
increase in specialty rail shipments relative to total rail shipments.
Gross profits for the three month and nine month periods ended September
30, 2000 were $11.7 million or 16.4 percent and $24.7 million or 12.3 percent,
respectively, compared to $4.8 million or 7.8 percent and $14.2 million or 7.2
percent, respectively, for the corresponding 1999 periods. Gross profit was
favorably affected by the increases in rod and bar profitability due to the
increased average selling prices noted above, offset partially by the increased
costs of producing rail products. Gross profit for the nine months ended
September 30, 1999, and to a lesser extent, for the three months ended September
30, 1999, was unfavorably effected by the operating losses for the seamless pipe
business in 1999 and the resulting shutdown and severance costs incurred in the
temporary closure of the seamless pipe business in May 1999.
Selling, general and administrative expenses increased $175,000 for the
three months ended September 30, 2000 but decreased $1.9 million for the nine
month period ended September 30, 2000 from the corresponding 1999 periods. These
expenses decreased as a percentage of sales to 6.4 percent and 6.5 percent in
the three and nine month periods ended September 30, 2000, respectively, from
7.2 percent and 7.6 percent for the corresponding 1999 periods. The decrease in
cost for the nine month period ended September 30, 2000 is due primarily to
reduced shipping expenses.
For the three and nine months ended September 30, 1999, the Company
recorded gains of $855,000 and $4.5 million, respectively, resulting from
settlements of litigation with various graphite electrode suppliers.
Total interest expense was $6.6 million and $20.0 million for the three
and nine month periods ended September 30, 2000, respectively, compared to $6.5
million and $19.6 million for the corresponding 1999 periods. The increases in
expense for the periods were primarily due to increases in the average
borrowings for the periods as compared to the corresponding periods in 1999.
Other income, net for the three and nine month periods ended September 30,
2000 was $62,000 and $2.7 million, respectively, compared to $129,000 and
$317,000 for the corresponding 1999 periods. In the second quarter of 2000, the
Company realized a pre-tax gain of $ 2.5 million on the sale of undeveloped
land.
The Company's effective income tax rates were 14.5 percent and 39.1
percent for the three and nine month periods ended September 30, 2000,
respectively, as compared to 43.9 percent for the corresponding 1999 periods.
The rate is higher for the periods in 1999 due to write-offs of state tax
credits recognized during the periods.
Liquidity and Capital Resources
-------------------------------
The Company's cash flow provided by operations for the nine months ended
September 30, 2000 was $10.6 million compared to $4.5 million for the nine
months ended September 30, 1999. The major items affecting this $6.1 million
increase were an increase in accounts payable for the 2000 period versus a
decrease for the 1999 period ($27.2 million), a decreased net loss in 2000 as
compared to 1999 ($5.4 million), and a smaller increase in deferred taxes in
2000 than in 1999 ($4.2 million). Offsetting these increases in operating cash
flows were decreased cash flows resulting from increases in the accounts
receivable and inventories for the 2000 period versus decreases for the 1999
period ($16.5 million and $14.6 million, respectively).
During the nine month period ended September 30, 2000, the Company expended
$4.3 million, excluding capitalized interest, on capital projects.
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Since its acquisition by Oregon Steel Mills, Inc. ("Oregon Steel") in March
1993, the Company has required substantial amounts of cash to fund its
operations and capital expenditures. Borrowing requirements for capital
expenditures and other cash needs, both short-term and long-term, are provided
through a loan from Oregon Steel. As of September 30, 2000, $199.9 million of
aggregate principal amount of the loan was outstanding, all of which was
classified as long-term. The principal is due on demand or, if no demand is
made, December 31, 2002. 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.
In addition, Oregon Steel is not required to provide financing to the Company
and, although demand for repayment is not expected in 2000, it may in any event
demand repayment of the loan at any time. If Oregon Steel were to demand
repayment of the loan, it is unlikely that the Company would be able to obtain
from external sources financing necessary to repay the loan or to fund its
capital expenditures and other cash needs. Failure to obtain alternative
financing would have a material adverse effect on the Company and CF&I. If the
Company were able to obtain the necessary financing, it is likely that such
financing would be at interest rates and on terms substantially less favorable
to the Company than those provided by Oregon Steel.
CF&I incurred $67.5 million in term debt in 1993 as part of the purchase
price of the Pueblo Mill. This debt is without stated collateral and is payable
over 10 years with interest at 9.5 percent. As of September 30, 2000, the
outstanding balance on the debt was $23.2 million, of which $14.5 million was
classified as long-term.
Oregon Steel has $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 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 maintains a $125 million credit agreement with a
syndicate of lenders that is collateralized, in part, by the Guarantors'
accounts receivable and inventory, and also guaranteed by the Guarantors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1, "Consolidated Financial Statements - Note 3, Contingencies"
for discussion of status of administrative hearing regarding alleged violations
of the National Labor Relations Act and incorporated by reference herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Notice of Stock Option Grant between the
Company and its Executive Officers (filed as
Exhibit 10.3 to the Form 10-Q of Oregon Steel Mills,
Inc., dated September 30, 2000, and incorporated by
reference herein.)
27.1 Financial Data Schedule - New CF&I, Inc.
27.2 Financial Data Schedule - CF&I Steel, L.P.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW CF&I, INC.
Date: November 14, 2000 /s/ Jeff S. Stewart
-----------------------------------
Jeff S. Stewart
Corporate Controller
CF&I STEEL, L.P.
By: New CF&I, Inc.
General Partner
Date: November 14, 2000 /s/ Jeff S. Stewart
----------------------------------
Jeff S. Stewart
Corporate Controller
New CF&I, Inc.
