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, 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
June 30, 2000 (unaudited) and
December 31, 1999 ...............................2
Consolidated Statements of Income (unaudited)
Three months and six months ended
June 30, 2000 and 1999 ..........................3
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2000 and 1999 .........4
Notes to Consolidated Financial Statements
(unaudited)....................................5-7
FINANCIAL STATEMENTS - CF&I STEEL, L.P.
----------------
Balance Sheets
June 30, 2000 (unaudited) and
December 31, 1999 ...............................8
Statements of Operations (unaudited)
Three months and six months ended
June 30, 2000 and 1999 ..........................9
Statements of Cash Flows (unaudited)
Six months ended June 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)
June 30, December 31,
2000 1999
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5 $ 5
Trade accounts receivable, net 21,929 27,214
Inventories 35,952 38,191
Deferred tax asset 4,007 4,013
Other 839 938
--------- ---------
Total current assets 62,732 70,361
--------- ---------
Property, plant and equipment:
Land and improvements 3,470 3,574
Buildings 18,525 18,525
Machinery and equipment 243,767 242,634
Construction in progress 1,981 1,416
--------- ---------
267,743 266,149
Accumulated depreciation (68,756) (61,845)
--------- ---------
198,987 204,304
--------- ---------
Costs in excess of net assets acquired, net 33,393 33,903
Other assets 30,235 28,013
--------- ---------
$ 325,347 $ 336,581
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 8,234 $ 7,861
Accounts payable 45,155 32,680
Accrued expenses 15,682 17,871
--------- ---------
Total current liabilities 69,071 58,412
Long-term debt 18,949 23,162
Long-term debt - Oregon Steel Mills, Inc. 186,705 201,090
Environmental liability 30,850 30,850
Deferred employee benefits 7,218 7,099
--------- ---------
312,793 320,613
--------- ---------
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 (25,890) (22,476)
--------- ---------
(9,286) (5,872)
--------- ---------
$ 325,347 $ 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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 63,332 $ 64,236 $129,028 $135,958
--------- --------- -------- ---------
Costs and expenses:
Cost of sales 56,992 63,082 116,076 126,565
Selling, general and administrative
expenses 4,288 5,353 8,479 10,526
Gain on sale of assets (458) -- (446) --
Settlement of litigation -- (3,684) -- (3,684)
--------- --------- -------- ---------
60,822 64,751 124,109 133,407
--------- --------- -------- ---------
Operating income (loss) 2,510 (515) 4,919 2,551
Other income (expense):
Interest and dividend income 31 27 62 54
Interest expense, net (6,705) (6,702) (13,424) (13,054)
Minority interests 258 359 508 536
Other, net 2,578 95 2,615 188
--------- --------- -------- ---------
Loss before income taxes (1,328) (6,736) (5,320) (9,725)
Benefit for income taxes 347 3,315 1,906 4,268
--------- --------- -------- ---------
Net loss $ (981) $ (3,421) $ (3,414) $ (5,457)
========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
<PAGE>
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss $ (3,414) $ (5,457)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,576 7,798
Deferred income taxes (2,240) (4,271)
Minority interests (508) (536)
Loss (gain) on sale of operating and
non-operating assets (2,945) 43
Changes in operating assets and
liabilities, net:
Trade accounts receivable 5,285 4,989
Inventories 2,239 1,312
Operating liabilities 10,579 (14,317)
Other, net 433 (671)
--------- ---------
Net cash provided by (used in) operating
activities 17,005 (11,110)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,669) (1,976)
Proceeds from sales of operating and
non-operating assets 3,049 --
Other, net (160) (2,013)
--------- ---------
Net cash provided by (used in) investing
activities 1,220 (3,989)
--------- ---------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 127,411 85,000
Payments to Oregon Steel Mills, Inc. (141,796) (66,400)
Payment of long-term debt (3,840) (3,500)
--------- ---------
Net cash provided by (used in) financing
activities (18,225) 15,100
--------- ---------
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 $ 13,570 $ 13,045
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
<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.
2. INVENTORIES
-----------
Inventories consist of:
June 30, December 31,
2000 1999
-------- ------------
(In thousands)
Raw materials $ 7,748 $10,504
Semifinished product 5,368 6,439
Finished product 15,784 13,348
Stores and operating supplies 7,052 7,900
------- -------
Total inventory $35,952 $38,191
======= =======
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
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
schedule for corrective action could be accelerated if new data indicated
a greater threat to the environment than was presently believed to exist.
At June 30, 2000, the accrued liability was $32.8 million, of which $30.9
million was classified as non-current in the consolidated balance sheet.
-5-
<PAGE>
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. It is not presently possible to estimate the ultimate liability as
a result of the action.
On April 27, 2000, the United Steel Workers of America ("Union") filed
suit in U.S. District Court in Denver 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 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 June 30, 2000, 181 former
striking employees had returned to work as a result of their unconditional
offer. Approximately 620 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
reasonable steps to mitigate the liability for back pay by seeking
employment elsewhere that has comparable working conditions and
compensation. Additionally, CF&I has filed a motion asserting that the
Unreinstated Employees' rights to reinstatement should be invalidated due
to misconduct and violations of the NLRA perpetuated by the Union or on
its behalf. A separate hearing concluded in February 2000, with a
different Judge 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.
It is not presently possible to estimate the ultimate liability in the
event of 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, Inc. that provides rail service to the Pueblo Mill,
-6-
<PAGE>
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)
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2 $ 2
Trade accounts receivable, net 20,343 26,167
Inventories 35,719 37,950
Other 477 747
-------- --------
Total current assets 56,541 64,866
-------- --------
Property, plant and equipment:
Land and improvements 3,465 3,569
Buildings 18,419 18,419
Machinery and equipment 241,261 240,131
Construction in progress 1,932 1,416
-------- --------
265,077 263,535
Accumulated depreciation (67,146) (60,342)
-------- --------
197,931 203,193
-------- --------
Costs in excess of net assets acquired, net 33,393 33,903
Other assets 12,942 12,966
-------- --------
$300,807 $314,928
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 8,234 $ 7,861
Accounts payable 54,450 40,834
Accrued expenses 16,652 18,649
-------- --------
Total current liabilities 79,336 67,344
Long-term debt 18,949 23,162
Long-term debt - Oregon Steel Mills, Inc. 186,705 201,090
Long-term debt - New CF&I, Inc. 21,756 21,756
Environmental liability 30,850 30,850
Deferred employee benefits 7,218 7,099
-------- --------
344,814 351,301
-------- --------
Contingencies (Note 3)
PARTNERS'
DEFICIT
General partner (44,007) (36,373)
-------- --------
$300,807 $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 Six Months Ended
June 30, June 30,
----------------------- ----------------------
2000 1999 2000 1999
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 61,912 $ 62,569 $ 125,804 $ 132,606
--------- --------- --------- ---------
Costs and expenses:
Cost of sales 56,020 61,490 113,915 123,437
Selling, general and administrative
expenses 4,134 5,219 8,177 10,259
Gain on sale of assets (458) -- (446) --
Settlement of litigation -- (3,684) -- (3,684)
--------- --------- --------- ---------
59,696 63,025 121,646 130,012
--------- --------- --------- ---------
Operating income (loss) 2,216 (456) 4,158 2,594
Other income (expense):
Interest and dividend income -- 2 -- 3
Interest expense, net (7,211) (7,124) (14,407) (13,897)
Other, net 2,577 95 2,615 188
--------- --------- --------- ---------
Net loss $ (2,418) $ (7,483) $ (7,634) $ (11,112)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
-9-
<PAGE>
CF&I STEEL, L.P.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
------------ ----------
Cash flows from operating activities:
Net loss $ (7,634) $ (11,112)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,469 7,672
Loss (gain) on sale of operating and
non-operating assets (2,945) 45
Changes in operating assets and
liabilities, net:
Trade accounts receivable 5,824 5,140
Inventories 2,232 1,306
Operating liabilities 11,738 (13,918)
Other, net 270 (247)
--------- ---------
Net cash provided by (used in)
operating activities 16,954 (11,114)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,618) (1,972)
Proceeds from sale of operating and
non-operating assets 3,049 --
Other, net (160) (2,013)
--------- ---------
Net cash provided by (used in) investing
activities 1,271 (3,985)
--------- ---------
Cash flows from financing activities:
Borrowings from related parties 127,411 85,000
Payments to related parties (141,796) (66,400)
Payment of long-term debt (3,840) (3,500)
--------- ---------
Net cash provided by (used in) financing
activities (18,225) 15,100
--------- ---------
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 $ 13,570 $ 13,045
========= =========
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.
2. INVENTORIES
-----------
Inventories consist of:
June 30, December 31,
2000 1999
-------- ------------
(In thousands)
Raw materials $ 7,748 $10,504
Semifinished product 5,368 6,439
Finished product 15,784 13,348
Stores and operating supplies 6,819 7,659
------- -------
Total inventory $35,719 $37,950
======= =======
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 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 schedule for
corrective action could be accelerated if new data indicated a greater
threat to the environment than was presently believed to exist. At June
30, 2000, the accrued liability was $32.8 million, of which $30.9 million
was classified as non-current in the balance sheet.
-11-
<PAGE>
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. It is not presently possible to estimate the ultimate liability as
a result of the action.
On April 27, 2000, the United Steel Workers of America ("Union") filed
suit in U.S. District Court in Denver 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 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 June 30, 2000, 181 former
striking employees had returned to work as a result of their unconditional
offer. Approximately 620 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. Additionally, CF&I has filed a motion
asserting that the Unreinstated Employees' rights to reinstatement should
be invalidated due to misconduct and violations of the NLRA perpetuated by
the Union or on its behalf. A separate hearing concluded in February
2000, with a different Judge 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. It is not presently possible to estimate the ultimate liability
in the event of an adverse determination.
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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 six month periods ended June 30, sales of CF&I were 97.8 percent and
97.5 percent, respectively, in 2000, and 97.5 percent for both periods in 1999,
of the consolidated sales of the Company. For the three and six months ended
June 30, cost of sales of CF&I were 98.3 percent and 98.1 percent, respectively,
in 2000 and 97.5 percent, for both periods 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 Six Months Ended
June 30, June 30,
-------------------- ------------------
2000 1999 2000 1999
------- ------ ------- -------
Tonnage sold:
Rail 80,200 73,700 155,200 168,700
Rod and Bar 94,600 107,400 189,200 200,500
Seamless Pipe - 7,600 - 16,100
Semifinished 2,300 2,900 18,800 5,000
------- ------- ------- -------
Total 177,100 191,600 363,200 390,300
======= ======= ======= =======
Sales (in thousands): $63,332 $ 64,236 $129,028 $135,958
Average selling price per ton: $ 358 $ 335 $ 355 $ 348
--------------------
The Company shipped 177,100 and 363,200 tons of rail, rod, bar and
semifinished products for the three month and six month periods ended June 30,
2000, respectively, compared to 191,600 and 390,300 tons, respectively, of
product, including seamless pipe, during the corresponding 1999 periods. The
reduction in shipments resulted primarily from decreased rod, bar and seamless
pipe shipments for the three month and six month periods ended June 30, 2000 as
compared to the respective periods in 1999. The reduction in shipments for these
periods were partially offset by increased rail shipments for the three months
ended June 30, 2000 and by increased shipments of semifinished products for the
six months ended June 30, 2000 as compared to the corresponding periods in 1999.
The Company's average selling prices of $358 and $355 per ton of product
for the three and six month periods ended June 30, 2000, respectively, were
increases from the average selling price of $335 and $348 per ton, respectively,
for the comparable periods in 1999. Higher average selling prices per ton for
rod, bar, and semifinished products in both periods as compared to the
corresponding periods in 1999 were the primary reason for the increase,
partially offset by reduced average selling prices per ton for rail and the lack
of seamless pipe
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sales for the corresponding periods. In particular, average
selling prices for rod and bar products showed the most improvement for the
periods, increasing from $249 per ton for both the three months and the six
month periods in 1999 to $275 and $273 per ton, respectively, for the
corresponding periods in 2000.
Gross profits for the three month and six month periods ended June 30,
2000 were $6.3 million or 10 percent and $13 million or 10 percent,
respectively, compared to $1.2 million or 1.8 percent and $9.4 million or 6.9
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. The closure of the seamless mill in May 1999,
which had operated unprofitably for the second quarter in 1999, unfavorably
impacted 1999 profitability.
Selling, general and administrative expenses decreased $1.1 million and
$2.0 million for the three and six month periods ended June 30, 2000,
respectively, from the corresponding 1999 periods. These expenses decreased as a
percentage of sales to 6.8 percent and 6.6 percent in the three and six month
periods ended June 30, 2000, respectively, from 8.3 percent and 7.7 percent for
the corresponding 1999 periods. The decrease in cost is due primarily to reduced
shipping expenses and lower volume of shipments as compared to the prior year.
The Company recorded a $458,000 and $446,000 gain on sale of assets for
the three months and the six months ended June 30, 2000, respectively, resulting
primarily from the sale of idle machinery and equipment.
The Company recorded a $3.7 million gain for the three months and the six
months ended June 30, 1999, resulting from a settlement of litigation with a
graphite electrode supplier.
Total interest expense was $6.7 million and $13.4 million for the three
and six month periods ended June 30, 2000, respectively, compared to $6.7
million and $13.1 million for the corresponding 1999 periods. The increase in
expense for the six month period was primarily due to increases in the average
borrowings for the period as compared to the corresponding period in 1999.
Other income, net for both the three and six month periods ended June 30,
2000 was $2.6 million, compared to $95,000 and $188,000 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 26.1 percent and 35.8
percent for the three and six month periods ended June 30, 2000, respectively,
as compared to 49.2 percent and 43.9 percent, respectively, for the
corresponding 1999 periods. The rate is higher for the two quarters 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 second quarter of
2000 was $17 million compared to an outflow of $11.1 million in the second
quarter of 1999. The major items affecting this $28.1 million increase in cash
were an increase in accounts payable for 2000 versus a decrease in 1999 ($24.9
million), a smaller increase in deferred taxes in 2000 than in 1999 ($2 million)
and the smaller net loss in 2000 than in 1999 ($2 million).
During the three and six month period ended June 30, 2000, the Company
expended $1 million and $1.7 million, respectively, excluding capitalized
interest, on capital projects.
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 June 30, 2000, $186.7 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
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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 June 30, 2000, the outstanding
balance on the debt was $27.2 million, of which $18.9 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 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
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: August 14, 2000 /s/ Jeff S. Stewart
--------------------------------
Jeff S. Stewart
Corporate Controller
CF&I STEEL, L.P.
By: New CF&I, Inc.
General Partner
Date: August 14, 2000 /s/ Jeff S. Stewart
--------------------------------
Jeff S. Stewart
Corporate Controller
New CF&I, Inc.
