<PAGE> 1
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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, 1999
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)
3210 WATLING STREET
EAST CHICAGO, INDIANA 46312
TELEPHONE: (219) 399-1200
Registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
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 10,
1999.
- --------------------------------------------------------------------------------
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<PAGE> 2
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
(Unaudited)
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (Successor
Company)
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended September 30, 1999
and for the Period from July 17, 1998 through
September 30, 1998.................................. 2
Condensed Consolidated Statements of Comprehensive
Income for the Three and Nine Months Ended September
30, 1999 and for the Period from July 17, 1998
through September 30, 1998.......................... 2
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1999 and for the
Period from July 17, 1998 through September 30,
1998................................................ 3
Condensed Consolidated Balance Sheets as of September
30, 1999 and December 31, 1998...................... 4
Notes to Condensed Consolidated Financial
Statements.......................................... 5-10
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES
(Predecessor Company)
Condensed Consolidated Statements of Operations for
the Period from July 1, 1998 to July 16, 1998 and
for the Period from January 1, 1998 to July 16,
1998................................................ 11
Condensed Consolidated Statement of Cash Flows for
the Period from January 1, 1998 to July 16, 1998.... 12
Notes to Condensed Consolidated Financial
Statements.......................................... 13
ITEM 2. Management's Narrative Analysis of Results of
Operations........................................ 14-15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................. 16
ITEM 5. Other............................................. 16-17
ITEM 6. Exhibits and Reports on Form 8-K.................. 17
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 17, 1998
THREE MONTHS ENDED NINE MONTHS ENDED THROUGH
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net sales.................................. $576.9 $1,812.2 $483.0
------ -------- ------
Operating costs and expenses
Cost of goods sold....................... 502.5 1,601.0 439.9
Selling, general and administrative
expenses.............................. 13.6 34.8 8.8
Depreciation............................. 26.8 80.2 21.6
------ -------- ------
Total............................ 542.9 1,716.0 470.3
------ -------- ------
Operating profit........................... 34.0 96.2 12.7
General corporate expense, net of income
items.................................... 1.3 3.3 1.0
Interest and other expense on debt......... 21.2 64.4 18.8
------ -------- ------
Income (loss) before income taxes.......... 11.5 28.5 (7.1)
Provision (benefit) for income taxes....... 3.6 9.4 (2.7)
------ -------- ------
Net income (loss).......................... $ 7.9 $ 19.1 $ (4.4)
====== ======== ======
</TABLE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 17, 1998
THREE MONTHS ENDED NINE MONTHS ENDED THROUGH
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net income (loss)........................ $7.9 $19.1 $(4.4)
Other comprehensive income (loss), net of
tax:
Unrealized gain (loss) on securities... 0.6 1.4 (0.6)
---- ----- -----
COMPREHENSIVE INCOME (LOSS).............. $8.5 $20.5 $(5.0)
==== ===== =====
</TABLE>
2
<PAGE> 4
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS JULY 17, 1998
ENDED THROUGH
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 19.1 $ (4.4)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation.............................................. 80.2 21.6
Deferred employee benefit cost............................ (40.1) (23.0)
Amortization of debt premium.............................. (1.1) (0.1)
Deferred income taxes..................................... (5.8) (3.7)
Change in:
Receivables............................................ (2.9) (12.1)
Inventories............................................ 105.1 (31.7)
Accounts payable....................................... 29.1 30.0
Bank overdrafts........................................ 0.6 --
Payables to/receivables from related companies......... (16.9) 1.3
Accrued salaries and wages............................. (1.0) 1.5
Other accrued liabilities.............................. (0.2) (2.6)
Other items............................................... (62.9) (16.0)
------ --------
Net adjustments........................................... 84.1 (34.8)
------ --------
Net cash from operating activities................ 103.2 (39.2)
INVESTING ACTIVITIES
Capital expenditures...................................... (25.1) (11.7)
Payments for acquisition.................................. -- (1,147.4)
Investments in and advances to joint ventures, net........ 29.1 6.6
------ --------
Net cash from investing activities................ 4.0 (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
Payments on long-term debt................................ (15.5) (6.8)
Dividends paid............................................ (8.7) --
Proceeds from note receivable from related company........ 2.1 0.6
Short-term borrowings..................................... (70.0) 60.0
------ --------
Net cash from financing activities.......................... (92.1) 1,163.8
------ --------
Net increase (decrease) in cash and cash equivalents........ 15.1 (27.9)
Cash and cash equivalents -- beginning of period............ 15.7 27.9
------ --------
Cash and cash equivalents -- end of period.................. $ 30.8 $ --
====== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements
3
<PAGE> 5
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 30.8 $ 15.7
Receivables, net.......................................... 244.3 241.4
Prepaid expenses.......................................... 1.8 --
Inventories (Note 3)...................................... 507.0 612.1
-------- --------
Total current assets.............................. 783.9 869.2
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES............... 237.9 227.7
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 1,903.3 1,942.1
RECEIVABLES FROM RELATED COMPANIES.......................... 10.2 11.9
DEFERRED INCOME TAXES....................................... 7.9 2.9
OTHER ASSETS................................................ 65.2 55.7
-------- --------
Total Assets...................................... $3,008.4 $3,109.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 214.1 $ 185.0
Bank overdrafts........................................... 18.4 17.8
Borrowings under Revolving Credit Facilities (Note 4)..... 30.0 100.0
Payables to related companies............................. 14.2 30.7
Accrued liabilities....................................... 179.4 171.5
Long-term debt due within one year
Related companies...................................... 7.0 7.0
Other.................................................. 1.0 4.0
-------- --------
Total current liabilities......................... 464.1 516.0
LONG-TERM DEBT
Related companies (Note 6)................................ 684.3 689.5
Other..................................................... 273.5 281.9
DEFERRED EMPLOYEE BENEFITS.................................. 1,095.4 1,135.5
OTHER CREDITS............................................... 57.8 65.1
COMMITMENTS AND CONTINGENCIES (NOTE 7)
-------- --------
Total liabilities................................. 2,575.1 2,688.0
STOCKHOLDERS' EQUITY
Preferred stock (Note 5).................................. 90.0 90.0
Common stock (Note 5)..................................... 320.0 320.0
Retained earnings......................................... 22.6 12.3
Accumulated other comprehensive income (loss)............. 0.7 (0.8)
-------- --------
Total stockholders' equity........................ 433.3 421.5
-------- --------
Total Liabilities and Stockholders' Equity........ $3,008.4 $3,109.5
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements
4
<PAGE> 6
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 16, 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. ("Successor Company" or the
"Company") on September 1, 1998. The Predecessor Company was acquired for
$1,143.1, plus the assumption of certain liabilities or obligations.
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 was allocated to assets and
liabilities of the Company based on their respective fair values.
The condensed consolidated financial statements are unaudited, but in the
opinion of management, contain all adjustments necessary to present fairly the
financial position and results of operations and cash flows for the periods
presented. All significant intercompany accounts and transactions have been
eliminated. These financial statements should be read in conjunction with the
financial statements and related notes contained in the Annual Report on Form
10-K for the year ended December 31, 1998.
The results of operations for the interim periods shown in this report are
not necessarily indicative of the results to be expected for a full year.
Certain amounts on the Condensed Consolidated Financial Statements have
been reclassified to conform with current year presentation.
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires recognition of all
derivative instruments in the statement of financial position as either assets
or liabilities, measured at fair value. 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. In June 1999, FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133 -- an amendment of FASB Statement No. 133" which deferred the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
The Company is currently assessing the impact of this statement on its results
of operations, cash flows and financial position.
5
<PAGE> 7
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 3 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
In process and finished steel....................... $313.5 $398.8
Raw materials and supplies:
Iron ore.......................................... 88.0 104.5
Scrap and other raw materials..................... 68.2 69.2
Supplies.......................................... 37.3 39.6
------ ------
193.5 213.3
------ ------
Total..................................... $507.0 $612.1
====== ======
</TABLE>
NOTE 4 -- BORROWING ARRANGEMENTS
Ispat Inland Administrative Service Company ("IIASC"), 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, IIASC 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 credit facilities extend to November
30, 2000. The Company has agreed to sell substantially all of its receivables to
IIASC to secure these facilities. Provisions of the credit agreement limit or
prohibit the Company from merging, consolidating, or selling its assets and
require IIASC to meet minimum net worth and leverage ratio tests. At September
30, 1999, $5 was borrowed under the facilities.
On January 22, 1999, the Company established a five-year $120 revolving
credit facility with a group of banks. The Company has agreed to sell
substantially all of its raw material, in-process and finished goods inventory
to Ispat Inland Inventory, LLC, a wholly owned subsidiary of the Company, to
secure this facility. Provisions of the credit agreement require Ispat Inland
Inventory, LLC to maintain a minimum net worth. At September 30, 1999, $25 was
borrowed under this facility.
NOTE 5 -- EQUITY
Common Stock
On September 30, 1999, 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, 1999, the Company had 100 shares authorized, 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 6 -- RELATED PARTY TRANSACTIONS
The Company was charged $1.5, $4.4 and $1.3 by Ispat for the three and nine
months ended September 30, 1999 and the period from July 17, 1998 through
September 30, 1998, respectively, for management, financial and legal services
provided to the Company. The Company was also charged $.6 and $1.9 by Ispat
North America for corporate expense allocation for the three and nine months
ended September 30, 1999, respectively.
6
<PAGE> 8
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Company purchased $7.1, $29.0 and $26.2 of slabs from a subsidiary of
Ispat during the three and nine months ended September 30, 1999 and the period
from July 17, 1998 through September 30, 1998, respectively. The Company
purchased $16.6, $16.8 and $0 of blooms from a subsidiary of Ispat during the
three and nine months ended September 30, 1999 and the period from July 17, 1998
through September 30, 1998, respectively. The Company purchased $.5, $.9 and $.0
of bars from a subsidiary of Ispat during the three and nine months ended
September 30, 1999 and the period from July 17, 1998 through September 30, 1998,
respectively. The Company purchased $0, $3.0, and $0 of direct reduced iron from
a subsidiary of Ispat during the three and nine months ended September 30, 1999
and the period from July 17, 1998 through September 30, 1998, respectively.
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 $35.3,
$108.5 and $32.1 for such tolling services for the three and nine months ended
September 30, 1999 and the period from July 17, 1998 through September 30, 1998,
respectively.
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 $94.7, $283.7 and
$66.0 for the three and nine months ended September 30, 1999 and the period from
July 17, 1998 through September 30, 1998, respectively.
The Company's debt due to a related company of $691.3 as of September 30,
1999 is payable to Ispat Inland Finance LLC, a wholly owned subsidiary of Ispat.
This debt arose in connection with the financing of the Acquisition. The
Company's receivables from related companies of $10.2 at September 30, 1999
consists of $8.8 from Ispat Inland, L.P., a wholly owned subsidiary of Ispat,
that arose in connection with the financing of the Acquisition and payment is
due on July 16, 2006 unless Ispat Inland, L.P. chooses to prepay. The remaining
$1.4 is from other related companies for trade and other intercompany expenses.
The Company's payable to related companies of $14.2 at September 30, 1999
consists of trade and other intercompany expenses.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
At September 30, 1999, the Company guarantees $11.2 and $129.9 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 Pension Benefit Guaranty Company (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 $160.0 and made a cash contribution of $25.0
to the Pension Trust in 1998. The Company also committed to fund at least normal
cost of the Pension Plan plus an additional $5 per year for five years. In 1999,
$23.7 was contributed to the Trust under these provisions. 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.
The Company has an agreement with a third party to purchase 1.2 million
tons of coke annually for approximately 15 years on a take-or-pay basis at
prices determined by certain cost factors from a heat recovery coke battery
facility located on land leased from the Company. Under a separate tolling
agreement with another third party, the Company has committed to pay tolling
charges over approximately 15 years to desulphurize flue gas from the coke
battery and to convert the heat output from the coke battery to electrical power
and steam. As of September 30, 1999, the estimated minimum tolling charges
remaining over the life of this agreement were approximately $249.6.
7
<PAGE> 9
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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, 1999, the Company's reserves
for environmental liabilities totaled $26, $21 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 $14 at September 30, 1999.
Several months ago, the United States Attorney for the Middle District of
Louisiana informed the Company that it is a target of a federal criminal grand
jury investigation and one of several defendants in a civil qui tam lawsuit
filed by a private individual on behalf of the government, alleging violations
of 31 U.S.C. section 3729, et seq. The U.S. Attorney and the Company have agreed
that no criminal charges will be filed against the Company prior to March 5,
2000 while the Company reviews the matter. If a potential claim by the U.S.
Attorney was successfully proven with respect to such matter and the damages
asserted were established, it would be material to the financial position,
results of operations and cash flows of the Company. However, the Company has
not yet had an opportunity to review the factual basis of such a claim, which
appears to relate to conduct that allegedly took place prior to mid-1997, or the
method by which damages would be calculated if the claim were established. In
addition, the Company has not yet determined the extent to which other potential
corporate defendants are involved. The Company has given notice of this matter
to Ryerson Tull, Inc. pursuant to the indemnification provisions of the Merger
Agreement, dated as of May 27, 1998, among Ispat International N.V., the
Company, Inland Merger Sub, Inc. and Inland Steel Industries, Inc. (the
predecessor company to Ryerson Tull, Inc.) as amended.
NOTE 8 -- 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 has been
presented to give effect to the Acquisition, described in Note 1, as if it had
occurred on January 1, 1998. The unaudited pro forma operating results for the
nine months ended September 30, 1998 include the historical results of the
Predecessor Company shown herein adjusted for interest cost on borrowings to
finance the Acquisition and purchase accounting adjustments.
8
<PAGE> 10
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 the period presented, nor are they necessarily indicative of
future results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------
PREDECESSOR SUCCESSOR
COMPANY COMPANY
JAN. 1, 1998 JULY 17, 1998
THROUGH THROUGH PRO FORMA PRO FORMA
JULY 16, 1998 SEPT. 30, 1998 ADJUSTMENTS TOTAL
------------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
NET SALES.................................. $1,310.0 $483.0 $1,793.0
-------- ------ --------
OPERATING COSTS AND EXPENSES
Cost of goods sold....................... 1,163.8 439.9 (20.7)(a) 1,580.8
(2.2)(b)
Selling, general and administrative
expenses.............................. 24.5 8.8 33.3
Depreciation............................. 74.8 21.6 (19.9)(c) 76.5
Gain from sale of assets................. (2.7) (2.7)
-------- ------ ------ --------
Total............................ 1,260.4 470.3 (42.8) 1,687.9
-------- ------ ------ --------
OPERATING PROFIT........................... 49.6 12.7 42.8 105.1
General corporate expense, net of income
items.................................... 5.9 1.0 6.9
INTEREST AND OTHER EXPENSE ON DEBT......... 22.0 18.8 24.8(d) 65.6
-------- ------ ------ --------
INCOME (LOSS) BEFORE INCOME TAXES.......... 21.7 (7.1) 18.0 32.6
PROVISION (BENEFIT) FOR INCOME TAXES....... 7.9 (2.7) 6.8(e) 17.4
-------- ------ ------ --------
NET INCOME (LOSS).......................... $ 13.8 $ (4.4) $ 11.2 $ 20.6
======== ====== ====== ========
</TABLE>
- ---------------
(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
------------------
<S> <C>
Revolving Credit Facility and commitment fees....... $ 1.5
Tranche B and C Term Loans.......................... 30.9
Other bank charges.................................. 3.8
Elimination of historical interest expense.......... (11.4)
------
Total interest expense adjustments........ $ 24.8
======
</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.
9
<PAGE> 11
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 9 -- RETIREMENT BENEFITS
In connection with the Company's new labor agreement with the United
Steelworkers of America, the pension and postretirement medical benefit plans
were amended, effective August 1, 1999, to provide for plan changes as a result
of the new labor agreement. The pension plan was amended to provide for
increased benefit levels. The postretirement medical plan was amended to provide
for employee and retiree copayments, vision care, retiree life insurance
benefits and retiree contributions. As a result of these plan amendments, the
Company remeasured its pension and postretirement benefit obligations under FASB
Statement No. 87 and 106, respectively, as of August 1, 1999. These
remeasurements incorporated the effect of the union plan changes as well as the
effects of changes in actuarial assumptions to reflect more current information.
The assumptions used are as follows:
<TABLE>
<CAPTION>
POSTRETIREMENT
BENEFIT
PENSION OBLIGATION
------- --------------
<S> <C> <C>
Discount rate............................................... 7.75% 7.75%
Rate of compensation increase............................... 4.00% 4.00%
Expected return on plan assets.............................. 9.50% N/A
Health care cost trend rate................................. N/A 4.50%
</TABLE>
The net effect of these changes for 1999 was as follows:
Pension:
<TABLE>
<S> <C>
Plan expense increase...................................... $ 12.2
Pension benefit obligation................................. 2,052.1
Funded status.............................................. 55.7
</TABLE>
Postretirement benefits:
<TABLE>
<S> <C>
Plan expense decrease...................................... $ 11.2
Accumulated postretirement benefit obligation.............. 685.7
</TABLE>
For the first nine months of 1999, the pension and postretirement benefit
expenses were $(17.4) and $40.2, respectively.
10
<PAGE> 12
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 1, 1998 TO JANUARY 1, 1998 TO
JULY 16, 1998 JULY 16, 1998
--------------- ------------------
<S> <C> <C>
NET SALES................................................... $84.0 $1,310.0
----- --------
OPERATING COSTS AND EXPENSES
Cost of goods sold........................................ 81.6 1,163.8
Selling, general and administrative expenses.............. 2.2 24.5
Depreciation.............................................. 5.6 74.8
Gain from sale of assets.................................. (2.7)
----- --------
Total............................................. 89.4 1,260.4
----- --------
OPERATING PROFIT (LOSS)..................................... (5.4) 49.6
General corporate expense, net of income items.............. (0.1) 5.9
Interest and other expense on debt.......................... 1.7 22.0
----- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (7.0) 21.7
PROVISION (BENEFIT) FOR INCOME TAXES........................ (2.6) 7.9
----- --------
NET INCOME (LOSS)........................................... $(4.4) $ 13.8
===== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements
11
<PAGE> 13
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1998
TO JULY 16, 1998
----------------
<S> <C>
OPERATING ACTIVITIES
Net income................................................ $ 13.8
------
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation........................................... 74.7
Deferred employee benefit cost......................... 6.1
Gain from sale of assets............................... (2.7)
Deferred income taxes.................................. (3.3)
Change in:
Receivables.......................................... 13.8
Inventories.......................................... 3.0
Accounts payable..................................... (79.9)
Payables to/receivables from related companies....... 3.1
Accrued salaries and wages........................... 1.1
Other accrued liabilities............................ 14.4
Other items............................................ (0.4)
------
Net adjustments........................................ 29.9
------
Net cash from operating activities................ 43.7
INVESTING ACTIVITIES
Capital expenditures...................................... (40.8)
Investments in and advances to joint ventures, net........ 25.4
Proceeds from sale of assets.............................. 5.2
------
Net cash from investing activities................ (10.2)
FINANCING ACTIVITIES
Payments on long-term debt................................ (40.9)
Dividends paid............................................ (12.9)
Change in note payable to related company................. (1.8)
Short-term borrowings..................................... 50.0
------
Net cash from financing activities................ (5.6)
------
Net increase in cash and cash equivalents................... 27.9
Cash and cash equivalents -- beginning of period............ --
------
Cash and cash equivalents -- end of period.................. $ 27.9
======
</TABLE>
See notes to unaudited condensed consolidated financial statements
12
<PAGE> 14
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 16, 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 $1,143.1, plus the assumption of
certain liabilities or obligations.
The financial statements for the period from January 1, 1998 to July 16,
1998 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 by Industries for the
period from January 1, 1998 to July 16, 1998 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.
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 TO JANUARY 1, 1998 TO
JULY 16, JULY 16,
1998 1998
--------------- ------------------
<S> <C> <C>
Net product sales...................................... $6.6 $103.6
Net product purchases.................................. 0.7 9.0
</TABLE>
NOTE 3 -- 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.
13
<PAGE> 15
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (DOLLARS IN
MILLIONS)
On July 16, 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. ("Company") on September 1, 1998. The Predecessor
Company was acquired for $1,143.1, plus the assumption of certain liabilities or
obligations.
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 fair values. The purchase accounting adjustments were finalized
in the second quarter of 1999.
RESULTS OF OPERATIONS
Comparison of Third Quarter 1999 to Third Quarter 1998
Net sales of $576.9 for the third quarter of 1999 increased by 1.7 percent
over $567.0 in the year-ago quarter as volume increased by 15.6 percent but was
offset by a 12.0 percent decrease in the average selling price per ton.
Cost of goods sold of $502.5 decreased 3.6 percent from $521.5 in the
year-ago quarter due to reduced spending for energy and purchased materials in
spite of increased volume.
Depreciation expense of $26.8 for the current quarter decreased by 1.5
percent from $27.2 in the year-ago quarter, due to the change in depreciable
value resulting from the valuation of property, plant, and equipment as of the
July 16, 1998 acquisition date.
Operating profit increased to $34.0 for the current quarter compared to
$7.3 in the year-ago quarter as a result of the items noted above.
Selling, general and administrative expenses of $13.6 increased 23.6
percent from $11.0 in the year-ago quarter due to increased spending related to
legal and other fees paid during the current quarter.
General corporate expense, net of income items of $1.3 increased 44.4
percent from $.9 in the year-ago quarter due to increased charges from the
corporate office.
Interest expense of $21.2 in the current quarter increased by $.7 from
$20.5 in the year ago quarter due to interest rate changes.
Comparison of First Nine Months of 1999 to First Nine Months of 1998
Net sales of $1,812.2 for the first nine months of 1999 were 1.1 percent
more than $1,793.0 in the year-ago nine month period as volume increased by 13.2
percent but was offset by a 10.7 percent decrease in the average selling price
per ton.
Cost of goods sold of $1,601.0 was virtually unchanged from $1,603.7 in the
year-ago nine month period with the effect of an increase in volume shipped
being offset by a decrease in spending for energy and purchased materials during
the first nine months.
Depreciation expense of $80.2 for the current nine month period decreased
by $16.2, or 16.8 percent from $96.4 in 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 16, 1998 acquisition date.
Operating profit increased to $96.2 for the current nine month period
compared to $62.3 a year ago as a result of the items noted above.
14
<PAGE> 16
Selling, general and administrative expenses of $34.8 increased .5 percent
from $33.3 in the year-ago nine month period due to increased spending related
to legal fees and compensation costs partially offset by a pension credit for
non-production employees during the current nine month period.
General corporate expense, net of income items of $3.3 decreased 52.2
percent from $6.9 in the year-ago nine month period due to the changes in the
corporate structure.
Interest expense of $64.4 in the 1999 first nine month period increased by
$23.6 from $40.8 in the comparable period of last year due to interest rate
changes as well as the additional debt incurred as a result of the acquisition.
15
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Several months ago, the United States Attorney for the Middle District of
Louisiana informed the Company that it is a target of a federal criminal grand
jury investigation and one of several defendants in a civil qui tam lawsuit
filed by a private individual on behalf of the government, alleging violations
of 31 U.S.C. section 3729, et seq. The U.S. Attorney and the Company have agreed
that no criminal charges will be filed against the Company prior to March 5,
2000 while the Company reviews the matter. If a potential claim by the U.S.
Attorney was successfully proven with respect to such matter and the damages
asserted were established, it would be material to the financial position,
results of operations and cash flows of the Company. However, the Company has
not yet had an opportunity to review the factual basis of such a claim, which
appears to relate to conduct that allegedly took place prior to mid-1997, or the
method by which damages would be calculated if the claim were established. In
addition, the Company has not yet determined the extent to which other potential
corporate defendants are involved. The Company has given notice of this matter
to Ryerson Tull, Inc. pursuant to the indemnification provisions of the Merger
Agreement, dated as of May 27, 1998, among Ispat International N.V., the
Company, Inland Merger Sub, Inc. and Inland Steel Industries, Inc. (the
predecessor company to Ryerson Tull, Inc.) as amended.
ITEM 5. OTHER
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 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.
The Company's Year 2000 readiness project consists of generating awareness
of the Y2K issues, developing an inventory of hardware, software, and micro-chip
embedded equipment, performing an impact analysis on all items in inventory,
remediating and testing of all effected items, and developing contingency plans
for all critical systems.
Information Technology has identified all business systems, and all
components of the hardware infrastructure. Process Automation has identified all
equipment throughout the manufacturing complex with embedded computer
technology. At this time, all Information Technology and Process Automation
systems have been validated as Year 2000 ready.
The Information Technology teams have also completed working with end-users
in departments across the Company to ensure critical management reports,
spreadsheets, personal computers, and equipment with embedded microprocessors
are Year 2000 ready.
Company personnel have been working with key customers, critical suppliers,
and critical service providers to assure that potential Year 2000 issues have
been identified, remediated, and tested. Critical suppliers have been assessed
for their Year 2000 readiness and potential risk to the Company, and contingency
plans have been developed for all high risk critical suppliers.
A Company team worked with all outside processors to assure all
communications and business procedures are Year 2000 tested and compliant. The
customer communications Information Technology team also worked to assure all
customer-required communication protocols, formats, and business procedures were
Year 2000 tested and compliant. The work of these two teams was to reduce the
risk of any type of business disruption to our customers or outside processors.
The testing and contingency planning has now been completed.
16
<PAGE> 18
The Sales Department is communicating with our customers to inform them
that the Company is being proactive in addressing the Year 2000 problem. The
Sales Department is also performing a risk assessment of the Company's key
customers to understand the ramifications of customer problems due to Year 2000
issues. Initial risk assessments have been completed and contingency plans have
been developed. The Sales Department is treating risk assessment as an on-going
activity and will continue to refine its contingency plans until the actual time
of the millennium rollover.
All critical business systems will again be tested between October 23, 1999
and November 24, 1999, for assurance that nothing has changed since the 1998
remediation and testing phases. After this assurance test, a freeze on all
discretionary software changes will be in effect through the month of January
2000.
The costs of becoming Year 2000 compliant include providing awareness of
Year 2000 issues, inventory of systems and equipment, impact analysis of systems
and equipment, remediation of software and hardware, testing and validation of
all systems and hardware, risk assessment of suppliers and customers, and
contingency planning. The Company has spent $7.3 through September 30, 1999 and
anticipates that the remaining costs will be $0.9. Impact analysis and cost
estimates are updated monthly. At this time, there are no other projects being
delayed that will affect operations or estimated costs due to Year 2000
projects.
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 effort to address Year 2000 compliance issues
could result in an adverse impact on the Company, which could be material to its
result of operations or financial position.
A most likely "Worst Case Scenario" would be the loss of electrical power
from our local utility, Northern Indiana Public Service Company. If this event
should occur, manufacturing areas will revert to internally generated power to
maintain certain critical facilities such as the blast furnaces, basic oxygen
furnaces, and casters. Every effort will also be made to maintain the
galvanizing, normalizing, and annealing facilities. All other facilities will be
required to remain in a powered down mode. During this event the safety of all
personnel will be paramount, and every endeavor will be made to prevent damage
to all plant equipment.
Contingency and rollover plans have been developed. Current rollover plans
address how the Company will actually operate during the millennium weekend. The
plans will be constantly reviewed through the actual millennium rollover. A Year
2000 command center will be assembled to address any Year 2000 issues as they
may occur. The Company 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
have available other service equipment that appears to be appropriate in case of
failures.
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.
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1999.
17
<PAGE> 19
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 /s/ MICHAEL G. RIPPEY
-----------------------------------
Michael G. Rippey
Vice President --
Finance and CFO
Principal Financial Officer
Date: November 12, 1999
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 261,400
<ALLOWANCES> 17,100
<INVENTORY> 507,000
<CURRENT-ASSETS> 783,900
<PP&E> 2,030,300
<DEPRECIATION> 127,000
<TOTAL-ASSETS> 3,008,400
<CURRENT-LIABILITIES> 464,100
<BONDS> 957,800
0
90,000
<COMMON> 320,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,008,400
<SALES> 1,810,100
<TOTAL-REVENUES> 1,812,200
<CGS> 1,679,600
<TOTAL-COSTS> 1,681,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,400
<INCOME-PRETAX> 28,500
<INCOME-TAX> 9,400
<INCOME-CONTINUING> 19,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,100
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
