<PAGE>
Third Quarter - 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
------------------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _______ to _______
------------------
Commission file number 1-2438
I.R.S. Employer Identification Number 36-1262880
ISPAT INLAND INC.
(a Delaware Corporation)
30 West Monroe Street
Chicago, Illinois 60603
Telephone: (312) 346-0300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 _____
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 100 shares of the
Company's Common Stock ($.01 par value per share) were outstanding as of
November 11, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Condensed Consolidated Statement of Operations (Unaudited)
===========================================================================
<TABLE>
<CAPTION>
Dollars in Millions
-------------------
Period from
July 17, 1998
through
September 30, 1998
-------------------
<S> <C>
NET SALES $483.0
------
OPERATING COSTS AND EXPENSES
Cost of goods sold 439.9
Selling, general and administrative expenses 8.3
Depreciation 21.6
------
Total 469.8
------
OPERATING PROFIT 13.2
General corporate expense, net of income items 1.5
Interest and other expense on debt 18.8
------
LOSS BEFORE INCOME TAXES (7.1)
PROVISION FOR INCOME TAXES (Note 9) 2.7 Cr.
------
NET LOSS (4.4)
Other comprehensive loss, net of tax:
Unrealized loss on securities (0.6)
-------
COMPREHENSIVE LOSS ($5.0)
======
Cr. = Credit
</TABLE>
See notes to unaudited condensed consolidated financial statements
-1-
<PAGE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Condensed Consolidated Statement of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
================================================================================
Dollars in Millions
-------------------
Period from
July 17, 1998
through
September 30, 1998
-------------------
<S> <C>
OPERATING ACTIVITIES
Net loss ($4.4)
---------
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation 21.6
Deferred employee benefit cost (23.0)
Deferred income taxes (3.7)
Change in: Receivables (12.1)
Inventories (31.5)
Accounts payable 30.0
Payables to related companies 1.3
Accrued salaries and wages 1.5
Other accrued liabilities (2.6)
Other items (16.3)
---------
Net adjustments (34.8)
---------
Net cash from operating activities (39.2)
---------
INVESTING ACTIVITIES
Capital expenditures (11.7)
Investments in and advances to joint ventures 6.6
Payments for acquisition (1,147.4)
---------
Net cash from investing activities (1,152.5)
---------
FINANCING ACTIVITIES
Proceeds from sale of common stock 320.0
Proceeds from sale of preferred stock 90.0
Long term debt issued 700.0
Long term debt retired (6.8)
Proceeds from note receivable from related company 0.6
Short-term borrowings 60.0
---------
Net cash from financing activities 1,163.8
---------
Net change in cash and cash equivalents (27.9)
Cash and cash equivalents - beginning of period 27.9
---------
Cash and cash equivalents - end of period $ -
=========
SUPPLEMENTAL DISCLOSURES
Cash paid (received) during the period for:
Interest (net of amount capitalized) $ 15.7
Income taxes, net $ 0.3
</TABLE>
See notes to unaudited condensed consolidated financial statements
-2-
<PAGE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Condensed Consolidated Balance Sheet (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Dollars in Millions
-------------------
September 30, 1998
-------------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ -
Receivables 232.9
Inventories (Note 3) 564.2
--------
Total current assets 797.1
INVESTMENTS IN AND ADVANCES
TO JOINT VENTURES 222.2
PROPERTY, PLANT AND EQUIPMENT, NET (Note 4) 1,968.4
RECEIVABLES FROM RELATED COMPANIES 10.6
DEFERRED INCOME TAXES (Note 9) 3.7
OTHER ASSETS 43.1
--------
Total Assets $3,045.1
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 199.3
Borrowings under Revolving Credit Facility (Note 5) 110.0
Payables to related companies 1.3
Accrued liabilities 167.1
Long-term debt due within one year (Note 6):
Related companies 7.0
Other 4.0
--------
Total current liabilities 488.7
LONG-TERM DEBT (Note 6)
Related companies 691.3
Other 274.6
DEFERRED EMPLOYEE BENEFITS (Note 8) 1,132.0
OTHER CREDITS 53.5
COMMITMENTS AND CONTINGENCIES (Note 11)
--------
Total liabilities 2,640.1
STOCKHOLDERS' EQUITY
Preferred stock (Note 7) 90.0
Common stock (Note 7) 320.0
Retained earnings (4.4)
Accumulated other comprehensive loss (0.6)
--------
Total Liabilities and Stockholders' Equity $3,045.1
========
</TABLE>
See notes to unaudited condensed consolidated financial statements
-3-
<PAGE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in Millions except per share data)
================================================================================
Note 1/THE ACQUISITION
On July 17, 1998, Ispat International N.V. ("Ispat") acquired Inland Steel
Company ("Predecessor Company") from Inland Steel Industries, Inc.
("Industries") in accordance with an Agreement and Plan of Merger ("Agreement"),
dated as of May 27, 1998, amended as of July 16, 1998 (the "Acquisition").
Inland Steel Company was renamed Ispat Inland Inc. ("Sucessor Company") or (the
"Company") on September 1, 1998. The Predecessor Company was acquired for
$1,147.4, which is subject to certain post-closing adjustments, as defined in
the Agreement.
Note 2/SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The capital structure and accounting basis of the assets and liabilities of
the Company as of July 17, 1998 and thereafter differ from those of the
Predecessor Company in prior periods as a result of the Acquisition. The
Acquisition is being accounted for under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Accounting for
Business Combinations." The total purchase price has been allocated to assets
and liabilities of the Company based on preliminary estimates of their
respective values. Accordingly, the allocation of the purchase price reflected
in the accompanying condensed consolidated balance sheet may be adjusted upon
final determination of the purchase price adjustments and upon the final results
of gathering certain necessary information primarily related to the finalization
of liabilities assumed. The final asset and liability values may differ from
those set forth in such balance sheet; however, changes, if any, are not
expected to have a material effect on the results of operations and financial
position of the Company.
The condensed consolidated financial statements are unaudited, but in the
opinion of management, contain all adjustments (which, except as set forth in
the prior paragraph, are of a normal recurring nature) necessary to present
fairly the financial position and results of operations and cash flows for the
period presented. All significant intercompany accounts and transactions have
been eliminated.
The results of operations for the interim period shown in this report are
not necessarily indicative of the results to be expected for a full year.
Accounting for Equity Investments
The Company's investments in less than majority-owned companies, joint
ventures and partnerships, and the Company's majority interest in the I/N Tek
partnership, are accounted for under the equity method.
Inventory valuation
Inventories are carried at the lower of cost or market. Cost is principally
determined on a first-in, first-out ("FIFO") method. Costs include the purchase
costs of raw materials, the conversion costs such as direct labor, and an
allocation of fixed and variable production overhead.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the
straight line method over their useful lives. Major improvements which add to
productive capacity or extend the life of an asset are capitalized while repairs
and maintenance are charged to expense as incurred.
Cash Equivalents
Cash equivalents are highly liquid, short-term investments with maturities
of three months or less.
Deferred financing costs
Deferred financing costs are amortized over the expected terms of the
related debt.
Income taxes
Income tax expense (benefit) is based upon reported results of operations
and reflects the impact of temporary differences between the amount of assets
and liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes.
- 4 -
<PAGE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in Millions except per share data)
================================================================================
Comprehensive Income
During the third quarter of 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." In accordance with Statement of SFAS No. 130, the Company changed its
reporting to display comprehensive income and its components in the Company's
Condensed Consolidated Statement of Operations. As of September 30, 1998, the
components of comprehensive income includes unrealized loss on securities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Actual results may differ
from such estimates.
Recent Accounting Pronouncements
In 1997 the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." In
1998, FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" and SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 131 and SFAS No. 132 are effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
SFAS No. 132 revises current disclosure requirements for employers' pensions and
other retiree benefits. The requirements of these statements only impact
financial statement disclosure. Accordingly, these statements will have no
impact on the Company's financial position or the results of its operations.
SFAS No. 133 requires recognition of all derivative instruments in the statement
of financial position as either assets or liabilities, measured at fair value,
and is effective for fiscal years beginning after June 15, 1999. This statement
additionally requires changes in the fair value of derivatives to be recorded
each period in current earnings or comprehensive income depending on the
intended use of the derivatives. The Company is currently assessing the impact
of this statement on its results of operations, financial position and cash
flows.
Note 3/INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
In process and finished steel $395.7
Raw materials and supplies 168.5
------
Total $564.2
======
</TABLE>
As a result of the Acquisition, inventories were recorded at their fair
values at July 17, 1998. Such fair value for finished goods and work in process
represented selling price less estimated costs of completion, selling costs and
a reasonable profit allowance for the selling and completion effort. Raw
materials were valued at replacement cost. The fair value of inventories was in
excess of their inventoriable cost which resulted in a one-time charge to cost
of goods sold during the period of $20.7.
Note 4/PROPERTY, PLANT AND EQUIPMENT
Fixed assets consist of the following:
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Land $ 43.4
Buildings 141.3
Machinery and equipment 1,805.3
--------
1,990.0
Accumulated depreciation 21.6
--------
Property, plant and equipment, net $1,968.4
========
</TABLE>
As a result of the Acquisition, property, plant and equipment was recorded
at its estimated fair value at July 17, 1998.
- 5 -
<PAGE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in Millions except per share data)
================================================================================
Note 5/BORROWING ARRANGEMENTS
Inland Steel Administrative Service Company ("ISAS"), a wholly owned
subsidiary of the Company established to provide a supplemental source of short-
term funds to the Company, has a $125 revolving credit facility with a group of
banks. In July, 1998, ISAS entered into an agreement with a bank to provide
another $25 revolving credit facility with terms essentially identical to those
of the existing facility. Both the facilities extend to November 30, 2000. The
Company has agreed to sell substantially all of its receivables to ISAS to
secure these facilities. The facilities require the maintenance of various
financial ratios including minimum net worth and leverage ratios.
Note 6/LONG-TERM DEBT
In connection with the financing of the Acquisition, an affiliate of the
Company, Ispat Inland, L.P. (the "Borrower"), entered into a Credit Agreement
dated July 16, 1998 (the "Credit Agreement") for a senior secured term credit
facility and letter of credit with a syndicate of financial institutions for
whom Credit Suisse First Boston is the agent (the "Agent"). The Credit Agreement
consists of a $350 Tranche B Term Loan due July 16, 2005 (the "Tranche B Loan"),
a $350 million Tranche C Term Loan due July 16, 2006 (the "Tranche C Loan" and
together with the Tranche B Loan, the "Term Loans") (together the "Term Loan
Facility") and a $160 letter of credit extending to July 16, 2003, (the "LC",
and together with the Term Loan Facility, the "Facilities").
Each of the Tranche B Loan and Tranche C Loan amortizes by $.875 per
quarter until maturity. The lenders are committed to renewing the LC annually
for five years, so long as the Company and Borrower can make certain
representations and warranties.
On July 16, 1998, the Company issued $875 of First Mortgage Bonds as
security both for the Facilities and for an interest rate hedge required under
the Credit Agreement (the "Hedge"). Series U, in a principal amount of $700, was
issued to an indirect subsidiary of the Borrower which in turn pledged the Bonds
to the Agent for the benefit of the Term Loan lenders. Series V, in a principal
amount of $160, was issued to the Agent for the benefit of the Pension Benefit
Guarantee Corporation ("PBGC") under the LC. Series W, in a principal amount of
$15, was issued to the Agent for the benefit of the counterparty to the Hedge.
As a further credit enhancement under the Credit Agreement, the Facilities
and the Hedge are fully and unconditionally guaranteed by the Company, certain
subsidiaries of the Company and Ispat.
Borrowings under the Term Loans bear interest at a rate per annum equal to,
at the Borrower's option, the higher of (1) the Agent's prime rate or (2) the
rate which is 1/2 of 1% in excess of the Federal Funds effective rate (together
the "Base Rate"), plus 1.25% for Tranche B Loans and 1.75% for Tranche C Loans
or the LIBO Rate (as defined in the Credit Agreement) plus 2.25% for Tranche B
Loans and 2.75% for Tranche C Loans. The fee for the LC is 2.25% of the LC
amount per annum (the "LC Fee"). The spread over the LIBO Rate and Base Rate and
the LC Fee will be reduced if the Company's Consolidated Leverage Ratio (as
defined in the Credit Agreement) falls to specified levels.
The Company is obligated to pay interest on the Series U First Mortgage
Bonds at the rate paid by the Borrower to the Term Loan lenders, plus 1/2 of 1%
per annum and on the Series V First Mortgage Bonds at a rate equal to the LC
Fee.
Each series of First Mortgage Bonds issued by the Company is limited to the
principal amount outstanding, with the Pollution Control Series 1977 Bonds and
the Series R First Mortgage Bonds subject to a sinking fund. A substantial
portion of the property, plant and equipment owned by the Company at its Indiana
Harbor Works is subject to the lien of the First Mortgage. This property had a
book value of approximately $1,900 on September 30, 1998.
The Credit Agreement contains covenants that among other things, limit or
prohibit the ability of the Company or the Borrower to incur indebtedness,
create liens, pay dividends, make investments, engage in transactions with
affiliates, sell assets and engage in mergers and consolidations. Additionally,
the Company must maintain a minimum Consolidated EBITDA (as defined in the
Credit Agreement).
In conjunction with the Acquisition of the Company by Ispat on July 16,
1998, the Company repaid $228.9 owed to Inland Steel Industries, Inc., its
parent company prior to the Acquisition.
Maturities of long-term debt obligations are: $1.8 in the fourth quarter of
1998, $11.0 in 1999, $13.3 in 2000, $13.3 in 2001, $13.3 in 2002, $12.0 in the
first 9 months of 2003 and $912.2 thereafter.
- 6 -
<PAGE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Notes to Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(Dollars in Millions except per share data)
================================================================================
Note 7/EQUITY
Common Stock
- ------------
On September 30, 1998, the Company had 1,000 shares authorized of common
stock, $.01 par value ("Common Stock"), of which 100 shares were issued,
outstanding and owned by a wholly owned subsidiary of Ispat.
Preferred Stock
- ---------------
On September 30, 1998, the Company had 100 shares issued and outstanding of
Series A 8% Preferred Stock, $.01 par value ("Preferred Stock"), which is owned
by a wholly owned subsidiary of Ispat. The Preferred Stock has liquidation
preference over the common stock.
Note 8/RETIREMENT BENEFITS
Pensions
- --------
The Company Pension Plan and Pension Trust, which covers certain employees
of the Company, is a non-contributory defined benefit plan with pensions based
on final pay and years of service for all salaried employees and certain wage
employees, and years of service and a fixed rate (in most instances based on
frozen pay or on job class) for all other wage employees, including members of
the United Steelworkers of America.
The funded status of the pension plan at July 17, 1998, the Acquisition
date, was as follows:
<TABLE>
<S> <C>
Fair value of plan assets $2,018.5
--------
Actuarial present value of benefits for service rendered to date:
Accumulated Benefit Obligation based on compensation to date 2,073.8
Additional benefits based on estimated future compensation levels 74.4
--------
Projected Benefit Obligation 2,148.2
--------
Plan assets shortfall to Projected Benefit Obligation $ 129.7
========
</TABLE>
The calculation of benefit obligations was based on a discount (settlement)
rate of 6.75%; a rate of compensation increase of 4.0%; and a rate of return on
plan assets of 9.5%.
Pension credit for the Company for the period from July 17, 1998 through
September 30, 1998 was $4.1. The Company made a $25.0 contribution to the
Pension Trust in July 1998 as a result of the agreement reached with the PBGC
(See Note 11).
- 7 -
<PAGE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Notes to Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(Dollars in Millions except per share data)
================================================================================
Benefits Other than Pension
- ---------------------------
Substantially all of the Company's employees are covered under
postretirement life insurance and medical benefit plans that involve deductible
and co-insurance requirements. The postretirement life insurance benefit formula
used in the determination of postretirement benefit cost is primarily based on
applicable annual earnings at retirement for salaried employees and specific
amounts for hourly employees. The Company does not prefund any of these
postretirement benefits. Effective January 1, 1994, a Voluntary Employee Benefit
Association Trust was established for payment of health care benefits made to
United Steelworkers of America retirees. Funding of the Trust is made as claims
are submitted for payment.
The amount of net periodic postretirement benefit cost for the period is
composed of the following:
<TABLE>
<CAPTION>
Period from
July 17, 1998 through
September 30, 1998
--------------------
<S> <C>
Service cost $ 3.1
Interest cost 14.0
-------
Total net periodic postretirement benefit cost $ 17.1
=======
</TABLE>
The accumulated postretirement benefit obligation at July 17, 1998, the
Acquisition date, was $1,010.2.
The calculation of the plan's accumulated postretirement benefit obligation
at July 17, 1998 was based on a discount rate of 6.75%; a rate of compensation
of 4.0%; and a medical cost trend rate of 4.5%.
Note 9/INCOME TAXES
The provision (benefit) for income taxes for the period from July 17, 1998
through September 30, 1998 consists of the following:
<TABLE>
<S> <C>
Current state $ 1.0
Deferred federal 3.7 Credit
-------
Total $ 2.7 Credit
=======
</TABLE>
The effective tax rate does not materially differ from the statutory rate.
Deferred tax assets and liabilities arise from the impact of temporary
differences between the amount of assets and liabilities recognized for
financial reporting purposes and such amounts recognized for tax purposes and
resulted from the following:
<TABLE>
<S> <C>
Noncurrent deferred tax assets:
Operating loss carryforwards $ 2.7
Retirement benefit obligations 450.0
Other 31.0
-------
Total noncurrent deferred tax assets $483.7
=======
Noncurrent deferred tax liabilities:
Property, plant and equipment $480.0
-------
Total noncurrent deferred tax liabilities $480.0
=======
</TABLE>
Based on estimates of projected future taxable income, the Company believes
that it is more likely than not that the tax benefits currently generated will
be realized in future periods. Accordingly, no valuation allowance has been
established as of September 30, 1998.
- 8 -
<PAGE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Notes to Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(Dollars in Millions except per share data)
================================================================================
Note 10/RELATED PARTY TRANSACTIONS
The Company has agreed to procedures established by Ispat for charging
Ispat administrative expenses to the Company. Pursuant to these procedures, the
Company was charged $1.3 by Ispat for the period from July 17, 1998 through
September 30, 1998 for management, financial and legal services provided to the
Company.
The Company purchased $26.2 of slabs from a subsidiary of Ispat during the
period.
I/N Tek is a joint venture which owns and operates a cold-rolling facility
and is 60% owned by a wholly-owned subsidiary of the Company. Under a tolling
arrangement between the Company and I/N Tek, the Company was charged $32.1 for
such tolling services for the period from July 17, 1998 through September 30,
1998.
I/N Kote is a joint venture that owns and operates an electrogalvanizing
line and hot-dip galvanizing line which is 50% owned by the Company. Purchases
of cold rolled steel by I/N Kote from the Company amounted to $66.0 for the
period from July 17, 1998 through September 30, 1998.
The Company's long-term debt due to a related company of $698.3 as of
September 30, 1998 is payable to Ispat Inland Finance Corp. LLC, a wholly owned
subsidiary of Ispat. This debt arose in connection with the financing of the
Acquisition (See Note 6). The Company's receivable from a related company of
$10.6 at September 30, 1998 is due from Ispat Inland L.P., a wholly owned
subsidiary of Ispat. This receivable also arose in connection with the financing
of the Acquisition and will be paid to the Company over the life of the Term
Loans.
Note 11/COMMITMENTS AND CONTINGENCIES
At September 30, 1998, the Company guarantees $15 and $167 of long-term
debt attributable to PCI Associates and I/N Kote, two of its equity investments,
respectively. The Company owns a 50% interest in the PCI Associates joint
venture which is a pulverized coal injection facility located at the Indiana
Harbor Works.
The Company has an agreement with the PBGC to provide certain financial
assurances with respect to the Company's Pension Plan. In accordance with this
agreement, the Company provided the PBGC a letter of credit in the amount of
$160, made a cash contribution of $25 to the Pension Trust and committed to fund
normal cost of the Pension Plan plus an additional $5 per year for the next five
years. In addition, the Company granted to the PBGC a first priority lien on
selected assets. The Agreement has a term of at least five years or until
certain financial tests are met, whichever is later; however, the agreement
could terminate within five years if certain other financial tests are met.
As part of the agreement covering the 1990 sale of the Inland Lime & Stone
Company division assets, the Company agreed, subject to certain exceptions, to
purchase, at prices which approximate market, the annual limestone needs of the
Indiana Harbor Works through 2002.
It is anticipated that the Company will make capital expenditures of $2 to
$5 annually in each of the next five years for the construction, and have
ongoing annual expenditures of $40 to $50 for the operation of air and water
pollution control facilities to comply with current federal, state and local
laws and regulations. The Company is involved in various environmental and other
administrative or judicial actions initiated by governmental agencies. While it
is not possible to predict the results of these matters, the Company does not
expect environmental expenditures, excluding amounts that may be required in
connection with the consent decree in the 1990 EPA lawsuit, to materially affect
the Company's results of operations or financial position. Corrective actions
relating to the EPA consent decree may require significant expenditures over the
next several years that may be material to the results of operations or
financial position of the Company. At September 30, 1998, the Company's reserves
for environmental liabilities totaled $26, $20 of which is related to the
sediment remediation under the 1993 EPA consent decree.
The total amount of firm commitments of the Company and its subsidiaries to
contractors and suppliers, primarily in connection with additions to property,
plant and equipment, was $12 at September 30, 1998.
- 9 -
<PAGE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Notes to Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(Dollars in Millions except per share data)
================================================================================
Note 12/PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA
The following unaudited pro forma condensed combined statements of
operations of the Company for the nine months ended September 30, 1998 and 1997
has been presented to give effect to the Acquisition, described in Note 1, as if
it had occurred on January 1, 1997. The unaudited pro forma operating results
for the nine months ended September 30, 1998 and 1997 include the historical
results of the Predecessor Company shown herein adjusted for interest cost on
borrowings to finance the Acquisition and purchase accounting adjustments.
The pro forma results presented below are not necessarily indicative of
what actually would have occurred if the acquisition had been completed as of
the beginning of each of the periods presented, nor are they necessarily
indicative of future results.
<TABLE>
<CAPTION>
Nine Months Ending
------------------------------------------------------------------------------------------------------
September 30, 1998 September 30, 1997
-------------------------------------------------------- ------------------------------------------
Predecessor Successor
Company Company
January 1, July 17,
1998 through 1998 through Predecessor
July 16, Sept. 30, Pro Forma Pro Forma Predecessor Pro Forma Company
1998 1998 Adjustments Total Company Adjustments Pro Forma
----------- ------------ ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES $1,310.0 $483.0 $1,793.0 $1,866.1 $1,866.1
----------- ---------- --------- ---------- -----------
OPERATING COSTS AND EXPENSES
Cost of goods sold 1,163.8 439.9 ($20.7)(a) 1,580.8 1,616.0 ($1.3)(b) 1,614.7
(2.2)(b)
Selling, general and
administrative expenses 23.5 8.3 31.8 31.4 31.4
Depreciation 74.8 21.6 (19.9)(c) 76.5 100.4 (26.8)(c) 73.6
Gain from sale of assets (2.7) (2.7) (9.0) (9.0)
----------- ---------- -------- --------- ---------- -------- -----------
Total 1,259.4 469.8 (42.8) 1,686.4 1,738.8 (28.1) 1,710.7
----------- ---------- -------- --------- ---------- -------- -----------
OPERATING PROFIT 50.6 13.2 42.8 106.6 127.3 28.1 155.4
General corporate expense,
net of income items 6.9 1.5 8.4 10.8 10.8
Interest and other expense
on debt 22.0 18.8 24.8 (d) 65.6 30.6 34.3 (d) 64.9
----------- ---------- -------- --------- ---------- -------- -----------
INCOME(LOSS) BEFORE
INCOME TAXES 21.7 (7.1) 18.0 32.6 85.9 (6.2) 79.7
PROVISION FOR INCOME TAXES 7.9 2.7 Cr. 6.8 (e) 12.0 33.0 2.4 Cr. (e) 30.6
----------- ---------- -------- --------- ---------- -------- -----------
NET INCOME (LOSS) $13.8 ($4.4) $11.2 $20.6 $52.9 ($3.8) $49.1
=========== ========== ======== ========= ========== ======== ===========
</TABLE>
Cr. = Credit
- 10 -
<PAGE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor Company)
Notes to Condensed Consolidated Financial Statements (Unaudited) - (Continued)
(Dollars in Millions except per share data)
================================================================================
(a) Reflects the elimination of the one-time charge to cost of goods sold
of $20.7 for the period of July 17 through September 30, 1998 related
to the inventory write-up as a result of the Acquisition.
(b) Reflects the change in pension and retiree health and life insurance
expense as a result of the actuarial valuation.
(c) Reflects change in depreciation based upon the revaluation of the
property, plant and equipment.
(d) Reflects the net adjustments to interest expense as a result of the
transaction as follows:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1998 1997
------ ------
<S> <C> <C>
Revolving Credit Facility and commitment fees $ 1.5 $ 2.3
Tranche B and C Term Loans 30.9 43.2
Other bank charges 3.8 5.3
Elimination of historical interest expense (11.4) (16.5)
------ ------
Total interest expense adjustments $ 24.8 $ 34.3
====== ======
</TABLE>
(e) Reflects the tax effects of the pro forma adjustments to income (loss)
before income taxes based on the estimated applicable statutory tax
rates.
- 11 -
<PAGE>
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (Predecessor Company)
Condensed Consolidated Statement of Operations (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Dollars in Millions
--------------------------------------------------------------------------
July 1, 1998 January 1, 1998 Three Months Nine Months
through through Ended Ended
July 16, 1998 July 16, 1998 September 30, 1997 September 30, 1997
-------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C>
NET SALES $ 84.0 $1,310.0 $ 615.7 $1,866.1
-------------- --------------- ------------------ ------------------
OPERATING COSTS AND EXPENSES
Cost of goods sold 81.6 1,163.8 532.8 1,616.0
Selling, general and
administrative expenses 2.2 23.5 9.3 31.4
Depreciation 5.6 74.8 33.6 100.4
Gain from sale of assets - (2.7) - (9.0)
-------------- --------------- ------------------ ------------------
Total 89.4 1,259.4 575.7 1,738.8
-------------- --------------- ------------------ ------------------
OPERATING PROFIT (5.4) 50.6 40.0 127.3
General corporate expense,
net of income items (0.1) 6.9 3.2 10.8
Interest and other expense on debt 1.7 22.0 9.0 30.6
-------------- --------------- ------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAXES (7.0) 21.7 27.8 85.9
PROVISION FOR INCOME TAXES 2.6 Cr. 7.9 9.6 33.0
-------------- --------------- ------------------ ------------------
NET INCOME (LOSS) ($4.4) $ 13.8 $ 18.2 $ 52.9
-------------- --------------- ------------------ ------------------
</TABLE>
Cr. = Credit
See notes to unaudited condensed consolidated financial statements
- 12 -
<PAGE>
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (Predecessor Company)
Condensed Consolidated Statement of Cash Flows (Unaudited)
================================================================================
<TABLE>
Dollars in Millions
------------------------------------
January 1, 1998 Nine Months
through Ended
July 16, 1998 September 30, 1997
--------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 13.8 $ 52.9
------ -------
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation 74.7 100.4
Deferred employee benefit cost 6.1 (21.4)
Deferred income taxes (3.3) 38.9
Gain from sale of assets (2.7) (9.0)
Change in: Receivables 13.8 (8.7)
Inventories 3.0 4.2
Accounts payable (79.9) (3.3)
Payables to related companies 3.1 4.7
Accrued salaries and wages 1.1 12.2
Other accrued liabilities 14.4 12.4
Other items (.4) (14.4)
------ -------
Net adjustments 29.9 116.0
------ -------
Net cash from operating activities 43.7 168.9
------ -------
INVESTING ACTIVITIES
Capital expenditures (40.8) (56.1)
Investments in and advances to joint ventures, net 25.4 17.1
Proceeds from sale of assets 5.2 15.0
------ -------
Net cash from investing activities (10.2) (24.0)
------ -------
FINANCING ACTIVITIES
Long term debt retired (40.9) (7.7)
Short-term borrowings 50.0 --
Change in notes payable to related companies (1.8) (117.8)
Dividends paid (12.9) (19.4)
------ -------
Net cash from financing activities (5.6) (144.9)
------ -------
Net change in cash and cash equivalents 27.9 --
Cash and cash equivalents--beginning of year -- --
------ -------
Cash and cash equivalents--end of period $ 27.9 $ --
====== =======
SUPPLEMENTAL DISCLOSURES
Cash paid (received) during the period for:
Interest (net of amount capitalized) $ 25.1 $ 25.2
Income taxes, net 7.6 (5.8)
</TABLE>
See notes to unaudited condensed consolidated financial statements
- 13 -
<PAGE>
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (Predecessor Company)
Condensed Consolidated Balance Sheet (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Dollars in Millions
-------------------
ASSETS December 31, 1997
- ------ -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ -
Receivables 219.2
Receivables from related companies 5.8
Inventories - principally at LIFO
In process and finished products 120.9
Raw materials and supplies 79.6 200.5
Deferred income taxes ------- 24.9
--------
Total current assets 450.4
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES 234.0
PROPERTY, PLANT AND EQUIPMENT
Valued on basis of cost 4,075.1
Less: Reserve for depreciation,
amortization and depletion 2,634.0
Allowance for terminated facilities 100.7 1,340.4
-------
PREPAID PENSION COSTS 60.5
DEFERRED INCOME TAXES 194.9
OTHER ASSETS 52.9
--------
Total Assets $2,333.1
========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable $ 238.9
Payables to related companies
Notes 230.7
Trade & other -
Accrued liabilities 142.3
Long-term debt due within one year 45.9
--------
Total current liabilities 657.8
LONG-TERM DEBT 262.0
DEFERRED EMPLOYEE BENEFITS 1,116.3
OTHER CREDITS 57.3
COMMITMENTS AND CONTINGENCIES (Note 4) --------
Total liabilities 2,093.4
STOCKHOLDER'S EQUITY 239.7
--------
Total Liabilities and Stockholder's Equity $2,333.1
========
</TABLE>
See notes to unaudited condensed consolidated financial statements
-14-
<PAGE>
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (Predecessor Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in Millions except per share data)
================================================================================
Note 1/BASIS OF PRESENTATION
On July 17, 1998, Ispat International N.V. ("Ispat") acquired Inland Steel
Company ("Predecessor Company") from Inland Steel Industries, Inc. in accordance
with an Agreement and Plan of Merger (the "Agreement"), dated as of May 27,
1998, amended as of July 16, 1998 (the "Acquisition"). Inland Steel Company was
renamed Ispat Inland Inc. ("Successor Company") or (the "Company") on September
1, 1998. The Predecessor Company was acquired for $1,147.4, which is subject to
certain post-closing adjustments, as defined in the Agreement.
Financial information with regard to the January 1, 1998 through July 16,
1998 period and for the three and nine months ended September 30, 1997 are
unaudited but in the opinion of management contain all adjustments, which are of
a normal and recurring nature, necessary to present the Predecessor Company's
results of operations and cash flows. The results of operations for these
periods are not necessarily indicative of the results to be expected for the
full year.
Note 2/RELATED PARTY TRANSACTIONS
Prior to July 16, 1998, the Predecessor Company was a wholly owned
subsidiary of Inland Steel Industries, Inc. ("Industries"). The Predecessor
Company had agreed to procedures established by Industries for charging
Industries' administrative expenses to the operating companies owned by it.
Pursuant to these procedures, the Company was charged $7.1 for the period from
January 1, 1998 to July 16, 1998 and $12.3 for the first nine months of 1997 for
management, financial and legal services provided to the Company.
Procedures were established to charge interest on all intercompany loans
within the Industries group of companies. Such loans bore interest at the prime
rate. The Company's net intercompany interest expense for the period from
January 1, 1998 through July 16, 1998 totaled $10.3 as compared with $13.9 for
the first nine months of 1997.
The Predecessor Company sold to and purchased products from other companies
within the Industries group of companies. Such transactions were made at
prevailing market prices. These transactions are summarized as follows:
<TABLE>
<CAPTION>
July 1, 1998 January 1, 1998 Three Months Nine Months
through through Ended Ended
July 16, 1998 July 16, 1998 September 30, 1997 September 30, 1997
------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net Product Sales $6.6 $103.6 $46.3 $157.7
Net Product Purchases .7 9.0 3.8 12.1
</TABLE>
Note 3/SALE OF ASSETS
During the second quarter of 1998, the Predecessor Company sold its
remaining interest in Walbridge resulting in a pretax gain of $2.7.
Note 4/COMMITMENTS AND CONTINGENCIES
The total amount of firm commitments of the Company and its subsidiaries to
contractors and suppliers, primarily in connection with additions to property,
plant and equipment, was $19 at July 16, 1998 compared with $22 at December 31,
1997.
-15-
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Dollars in Millions)
On July 17, 1998, Ispat International N.V. ("Ispat") acquired Inland Steel
Company ("Predecessor Company") from Inland Steel Industries, Inc. in accordance
with an Agreement and Plan of Merger ("Agreement"), dated as of May 27, 1998,
amended as of July 16, 1998 (the "Acquisition"). Inland Steel Company was
renamed Ispat Inland Inc. ("Successor Company") or (the "Company") on September
1, 1998. The Predecessor Company was acquired for $1,147.4, which is subject to
certain post-closing adjustments, as defined in the Agreement.
The capital structure and accounting basis of the assets and liabilities of
the Company as of July 17, 1998 and thereafter differ from those of the
Predecessor Company in prior periods as a result of the Acquisition. Financial
data of the Predecessor Company for periods prior to July 17, 1998 are presented
on a historical cost basis. Financial data of the Company as of July 17, 1998
and thereafter reflect the Acquisition under the purchase method of accounting,
under which the purchase price has been allocated to assets and liabilities
based upon their estimated fair values.
To facilitate the discussion below of the three and nine month periods
ended September 30, 1998 against the results of operations for the same period
of 1997, the historical operations of the Successor Company and Predecessor
Company have been combined.
<TABLE>
Dollars in Millions
------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1998 1997 1998 1997
------ ------ -------- --------
<S> <C> <C> <C> <C>
Net Sales $567.1 $615.7 $1,793.0 $1,866.1
------ ------ -------- --------
Cost of goods sold 521.6 532.8 1,603.7 1,616.0
Selling, general and administrative expenses 10.5 9.3 31.8 31.4
Depreciation 27.2 33.6 96.4 100.4
Gain from sale of assets -- -- (2.7) (9.0)
------ ------ -------- --------
Operating Profit 7.8 40.0 63.8 127.3
General corporate expense, net of income items 1.4 3.2 8.4 10.8
Interest and other expense on debt 20.5 9.0 40.8 30.6
------ ------ -------- --------
Income (Loss) before income taxes (14.1) 27.8 14.6 85.9
Provision for income taxes 5.4 Cr. 9.6 5.2 33.0
------ ------ -------- --------
Net Income (Loss) $ (8.7) $ 18.2 $ 9.4 $ 52.9
====== ====== ======== ========
</TABLE>
Cr. = Credit
- 16 -
<PAGE>
RESULTS OF OPERATIONS - Comparison of Third Quarter 1998 to Third Quarter 1997
The Company reported a consolidated net loss of $8.7 for the third quarter
of 1998 compared to net income of $18.2 for the third quarter of 1997. The
decrease in operating profit was the major factor for the decline.
Net sales of $567.1 for the third quarter of 1998 were 7.9 percent less
than the year ago quarter as volume declined by 7.5 percent due primarily to the
strike at the General Motors plants and the impact of imports on the cold-
finished bar market.
Cost of goods sold of $521.6, after excluding the one-time charge of $20.7
related to the write up of inventory for purchase accounting under APB No. 16,
decreased 6.0 percent due to the reduction in volume shipped during the current
quarter.
Depreciation expense of $27.2 for the current quarter decreased by $6.4 or
19.0 percent from the prior year due to the change in depreciable value and
remaining useful lives resulting from the valuation of property, plant, and
equipment as of the July 17, 1998 acquisition date.
Operating profit decreased to $7.8 for the current quarter compared to
$40.0 a year ago as a result of the items noted above.
Interest expense increased $11.5 in the 1998 third quarter from the
comparable quarter of last year due to the $700.0 of additional debt incurred as
a result of the acquisition.
Comparison of First Nine Months of 1998 to First Nine Months of 1997
The Company's consolidated net income of $9.4 for the first nine months of
1998 compared to a net income of $52.9 for the comparable period last year. The
decline in operating profit was the major reason for this reduction.
Net sales of $1,793.0 for the first nine months of 1998 were 3.9 percent
less than the prior year as sales volume declined by 2.4 percent and average
selling prices decreased 1.5 percent. The decline in volume occurred in the
third quarter for the reasons noted above in the third quarter comparison.
Cost of sales for the current year, excluding the one-time charge of $20.7
in the third quarter, decreased 2.0 percent as a result of the reduction in
sales volume.
Depreciation expense for the 1998 period decreased $4.0 from the prior year
for the reason noted above in the third quarter comparison.
The first nine months operating profits were favorably impacted by $2.7 in
1998 as a result of the gain on the sale of the Company's interest in the
Walbridge coating line joint venture and by $9.0 in 1997 due to the gain from
the sale of the Company's interest in the Wabush iron ore property.
Operating profit of $63.8 for the current year was $63.5 less than the
prior year's results for the reasons noted above.
Interest expense increased by $10.2 from last year due to additional debt
incurred in the 1998 third quarter as noted above.
- 17 -
<PAGE>
Liquidity and Financing
The Company had no cash or cash equivalents at September 30, 1998 compared
with $14 at June 30, 1998. There were no short term borrowings at June 30 but
$110 was borrowed under the $150 revolving credit facilities at September 30,
leaving $40 available.
In connection with the acquisition of the Company by Ispat on July 16,
1998, the Company received $320 from the sale of common stock, $90 from the sale
of preferred stock and $700 from the issuance of First Mortgage Bonds. The
Company immediately paid this $1,110 along with $37 of other cash on hand, to
Inland Steel Industries, Inc. ("Industries"), its parent prior to July 17, 1998,
as payment for the Company's capital stock owned by Industries and to repay
intercompany loans and other obligations to Industries.
In connection with the financing of the acquisition, an affiliate of the
Company, Ispat Inland, L.P. (the "Borrower"), entered into a Credit Agreement
dated July 16, 1998 (the "Credit Agreement") for a senior secured term credit
facility and letter of credit with a syndicate of financial institutions for
whom Credit Suisse First Boston is the agent (the "Agent"). The Credit Agreement
consists of a $350 Tranche B Term Loan due July 16, 2005 (the "Tranche B Loan"),
a $350 Tranche C Term Loan due July 16, 2006 (the "Tranche C Loan" and together
with the Tranche B Loan, the "Term Loans") (together the "Term Loan Facility")
and a $160 letter of credit extending to July 16, 2003 (the "LC", and together
with the Term Loan Facility, the "Facilities").
On July 16, 1998, the Company issued $875 of First Mortgage Bonds as
security both under the Facilities and for an interest rate hedge required under
the Credit Agreement (the "Hedge"). Series U, in a principal amount of $700, was
issued to an indirect subsidiary of the Borrower who in turn pledged the Bonds
to the Agent for the benefit of the Term Loan lenders. Series V, in a principal
amount of $160, was issued to the Agent of the benefit of the Pension Benefit
Guarantee Corporation ("PBGC") under the LC. Series W, in a principal amount of
$15 was issued to the Agent of the benefit of the counterparty to the Hedge.
As a further credit enhancement under the Credit Agreement, the Facilities
and the Hedge are fully and unconditionally guaranteed by the Company, certain
subsidiaries of the Company and Ispat.
The Credit Agreement contains covenants that among others things limit or
prohibit, the ability of the Company or the Borrower to incur indebtedness,
create liens, pay dividends, make investments, engage in transactions with
affiliates, sell assets and engage in mergers and consolidations. Additionally,
the Company must maintain a minimum Consolidated EBITDA (as defined in the
Credit Agreement).
During the quarter ended September 30, 1998, the Predecessor Company
defeased the remaining $26 of Series T First Mortgage Bonds, due December 1,
1998. Additionally, in July, 1998, the Company contributed $25 to the pension
plan.
At September 30, 1998, the Company had $150 of committed revolving credit
facilities. Inland Steel Administrative Service Company ("ISAS"), a wholly owned
subsidiary of the Company established to provide a supplemental source of short-
term funds to the Company, has a $125 revolving credit facility with a group of
banks. In July 1998, ISAS entered into an agreement with a bank to provide
another $25 revolving credit facility with terms essentially identical to those
of the existing facility. Both the facilities extend to November 30, 2000. The
Company has agreed to sell substantially all of its receivables to ISAS to
secure these facilities. The facilities require the maintenance of various
financial ratios including minimum net worth and leverage ratios.
The Company guarantees a pulverized coal injection joint venture loan and
its 50 percent share of I/N Kote borrowing amounting to $15 and $167,
respectively, at September 30, 1998. As neither of these guarantees has been
invoked since inception, the Company does not believe these guarantees will be
called upon.
- 18 -
<PAGE>
The ratio of the Company's long-term debt, including the portion due within
one year, to capitalization was 71% at September 30, 1998.
The Company believes that cash flows from operating activities and its
ability to borrow under the revolving credit facilities will be adequate to meet
the Company's debt service obligations, working capital needs and planned
capital expenditures for the foreseeable future.
- 19 -
<PAGE>
Year 2000
- ---------
In mid-1995 the Company initiated a Formal program to analyze potential
Year 2000 problems in business and process systems, to remediate and test all
non-compliant systems needed in the new millennium, and to evaluate the Year
2000 status of critical suppliers and service providers.
In order to coordinate the Year 2000 efforts throughout the Company, a Year
2000 Steering Committee was created to review progress to plan and to address
any major issues that may be encountered. The committee meets on a regular basis
and representatives from sixteen key areas of the Company report on status of
their respective areas.
Information Technology has identified all business systems, and all
components of the hardware infrastructure. At this time, the two major critical
business systems (Order Fulfillment System and Manufacturing Automation System)
have been remediated and tested to be Year 2000 compliant. All other critical
business systems are in the remediation or final testing phases with planned
completion dates in the fourth quarter of 1998 and the first quarter of 1999.
Non-critical business systems are in the remediation or testing phase with
planned completion dates in the second quarter of 1999. The major mainframe IBM
operating systems and ancillary support systems, and the Client Server
environments are currently being tested with planned completion dates in the
first quarter of 1999. The Information Technology teams are also working with
end users in departments across the Company to ensure critical management
reporting, spreadsheets, personal computers, and equipment with imbedded
microprocessors are Year 2000 compliant.
Process Automation has identified over 16,000 pieces of equipment
throughout the Company's manufacturing complex and is on schedule with its
remediation and testing plan. Planned completion of all areas is December 31,
1998 with the exception of one furnace control system scheduled for replacement
in the first quarter of 1999 at the Hot Mill, and two process systems at I/N Tek
and I/N Kote, joint ventures of the Company.
The Company's personnel are also working with key customers, critical
suppliers and service providers to assure that potential Year 2000 issues are
remediated and tested in systems interfaces with these business partners. In
addition, all Company suppliers have been notified of the Year 2000 issue and
the Company's Year 2000 position. Critical suppliers and critical service
providers are currently being identified for further assessment of their Year
2000 readiness.
A Company team is working with all outside processors to assure all
communications and business procedures are Year 2000 tested and compliant. The
customer communications Information Technology team is working to assure all
customer-required communication protocols, formats, and business procedures are
Year 2000 tested and compliant. The work of these two teams is to reduce the
risk of any type of business disruption to our customers or outside processors.
The Sales Department is communicating with our customers to assure them
that the Company is being proactive in addressing the Year 2000 problem. The
Sales Department is also doing a risk assessment of the Company's key customers
to understand the ramifications should one or more of these customers fail due
to Year 2000 issues.
All critical business systems will again be tested in late 1999 for
assurance that nothing has changed since the 1998 remediation and testing
phases.
The costs include providing awareness of Year 2000 issues, inventory of
systems and equipment, impact analysis of systems and equipment, remediation of
software and hardware, testing of all systems and hardware, risk assessment of
suppliers and customers, and contingency planning. The Company has spent $4.3 to
date and anticipates that the remaining costs will be $4.4. The cost of
remediation and testing of the two I/N Tek and I/N Kote systems (ASRS & EGL)
have not been included in the above figures. Impact analysis and cost estimates
are currently being prepared and will be completed in November 1998.
-20-
<PAGE>
The Company is doing everything reasonably possible to reduce the risk of
disruptions to the Company due to the Year 2000 problem. Although the Company
considers it unlikely, the failure by major customers or suppliers, or any delay
or oversight in the Company's address of Year 2000 compliance issues could
result in an adverse impact on the Company, which could be material, on the
results of operations of financial position.
Contingency plans are in the development phase with scheduled completion in
the third quarter of 1999. The plans will be constantly reviewed right down to
the actual millennium rollover. A Year 2000 command center will be assembled to
address any Year 2000 issues as they may occur. The command center will have
plans for emergencies such as power outages, communication failures, police,
fire, and emergency medical services requests; have on hand certain types of
spare equipment for rapid deployment to departments; have access to programmers
and process automation engineers; and any other type of service or equipment
that appears to be reasonable to have available in case of failures.
Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------
Item 305 of Regulation S-K, quantitative and qualitative disclosures about
market risk, does not apply to the Company for the quarter ended September 30,
1998. The Company will address the disclosure requirements of Item 305 in its
Form 10-K for the year ended December 31, 1998.
-21-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 1, 1998, the United States Environmental Protection
Agency ("U.S. EPA") served the Company with a Complaint, Compliance
Order and Notice of Opportunity for Hearing, alleging violations of
the Resource Conservation and Recovery Act ("RCRA") arising out of an
October 1997 inspection. The Company is in the process of attempting
to resolve this matter with U.S. EPA. Based on discussions with U.S.
EPA, it is the opinion of the Company that the resolution of this
matter will not affect the Company's financial position in any
material extent.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits required to be filed by Item 601 of Regulation
S-K are listed in the Exhibit Index which is attached hereto, and
incorporated by reference herein.
(b) Reports on Form 8-K.
On July 30, 1998 the Company filed a Current Report on Form 8-K,
reporting under Item 1 "Change in Control of Registrant" that, on July
16, 1998, the Company, a former wholly owned subsidiary of Industries
which constituted the steel manufacturing and related operations
segment of Industries consolidated operations, merged with Inland
Merger Sub, Inc., a subsidiary of Ispat International N.V. ("Ispat"),
pursuant to an agreement and plan of merger dated May 27, 1998, as
amended as of July 16, 1998 (the "Merger Agreement"), among
Industries, the Predecessor Company, Ispat and Inland Merger Sub, Inc.
(The "ISC/Ispat Transaction"). The Company was the surviving company
in the merger. As a result of the ISC/Ispat Transaction, the Company
became a wholly owned subsidiary of Ispat.
On August 28, 1998 the Company filed a Current Report on Form
8-K, reporting under Item 4 "Changes in Registrant's Certifying
Accountant" a change in the Company's certifying accountant.
- 22 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISPAT INLAND INC.
By: Michael G. Rippey
---------------------------
Michael G. Rippey
Vice President - Finance
and Chief Financial Officer
Date: November 11, 1998
-23-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page No.
- ------- ----------- ----------
<S> <C> <C>
2. Agreement and Plan of Merger, dated as of May 27, 1998 between Ispat International
N.V., Inland Steel Industries, Inc., Inland Merger Sub, Inc. and Inland Steel Company.
(Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on June 9,
1998, and incorporated by reference herein.) --
2.1 Amendment to Agreement and Plan of Merger dated as of July 16, 1998 between Ispat
International N.V., Inland Steel Industries, Inc., Inland Merger Sub, Inc. and Inland
Steel Company. (Filed as Exhibit 2.2 to the Inland Steel Industries, Inc. Current Report
on Form 8-K filed on July 20, 1998, and incorporated by reference herein.) --
3.(i) Copy of Restated Certificate of Incorporation of the Company..............................
3.(ii) Copy of By-Laws of the Company, as amended. (Filed as Exhibit 3.(ii) to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, and
incorporated by reference herein.) --
27 Financial Data Schedule...................................................................
</TABLE>
-i-
<PAGE>
Exhibit 3.(i)
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ISPAT INLAND INC.
ISPAT INLAND INC., incorporated on February 6, 1917, hereby amends and
restates the Restated Certificate of Incorporation in accordance with Sections
228, 242 and 245 of the General Corporation Law of the State of Delaware.
ARTICLE I
Name
The name of the corporation is Ispat Inland Inc. (the "Corporation").
ARTICLE II
Registered Office and Registered Agent
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered agent of the
Corporation at such address is The Corporation Trust Company.
ARTICLE III
Corporate Purpose
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware (the "General Corporation Law").
ARTICLE IV
Capital Stock
The total number of shares of all classes of stock that the Corporation
shall have authority to issue is 1100, consisting of the following:
(1) 1,000 Shares of Common Stock, par value $.01 per share; and
<PAGE>
(2) 100 Shares of Preferred Stock, par value $.01 per share. The relevant
rights, preferences and powers related to the Preferred Stock is in the
Certificate of Designation.
ARTICLE V
Directors
(1) Elections of directors of the Corporation need not be by written
ballot, except and to the extent provided in the By-laws of the Corporation.
(2) To the fullest extent permitted by the General Corporation Law as it
now exists and as it may hereafter be amended, no director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director.
ARTICLE VI
Indemnification of Directors, Officers and Others
(1) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person seeking indemnification did not act
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
(2) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if
<PAGE>
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(3) To the extent that a present or former director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections (1) and (2) of this Article
VI, or in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith.
(4) Any indemnification under Sections (1) and (2) of this Article VI
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the present or
former director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in such Sections
(1) and (2). Such determination shall be made, with respect to a director or
officer of the time of such determination, (a) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (b) by a committee of such directors designated by
majority vote of such directors, even though less than a quorum, or (c) if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (d) by the stockholders of the Corporation.
(5) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article VI. Such expenses (including attorneys' fees)
incurred by former directors and officers or other employees and agents may be
so paid upon such terms and conditions, if any, as the Corporation deems
appropriate.
(6) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other sections of this Article VI shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in an official capacity
and as to action in another capacity while holding such office.
(7) The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted
<PAGE>
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
him against such liability under the provisions of Section 145 of the General
Corporation Law.
(8) For purposes of this Article VI, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Article VI with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(9) For purposes of this Article VI, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves service by, such director, officer, employee or
agent with respect to any employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
VI.
(10) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VI shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
ARTICLE VII
By-Laws
The directors of the Corporation shall have the power to adopt, amend or
repeal by-laws.
<PAGE>
ARTICLE VIII
Reorganization
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
ARTICLE IX
Amendment
The Corporation reserves the right to amend, alter, change or repeal any
provision of this Certificate of Incorporation, in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders in this Certificate
of Incorporation are subject to this reservation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS, THE CONSOLIDATED BALANCE SHEET, AND THE
SUMMARY OF STOCKHOLDERS' EQUITY CONTAINED IN THE QUARTERLY REPORT ON FORM 10-Q
TO WHICH THIS EXHIBIT IS ATTACHED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL SCHEDULES
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 249,900
<ALLOWANCES> 17,000
<INVENTORY> 564,200
<CURRENT-ASSETS> 797,100
<PP&E> 1,990,000
<DEPRECIATION> 21,600
<TOTAL-ASSETS> 3,045,100
<CURRENT-LIABILITIES> 488,700
<BONDS> 965,900
0
90,000
<COMMON> 320,000
<OTHER-SE> (600)
<TOTAL-LIABILITY-AND-EQUITY> 3,045,100
<SALES> 1,790,900
<TOTAL-REVENUES> 1,793,000
<CGS> 1,695,600
<TOTAL-COSTS> 1,697,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,800
<INCOME-PRETAX> 14,600
<INCOME-TAX> 5,200
<INCOME-CONTINUING> 9,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,400
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
