<PAGE> 1
SECOND QUARTER - 1999
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 June 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 August 10, 1999.
<PAGE> 2
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
INDEX
<TABLE>
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 Six Months Ended June 30, 1999 2
Condensed Consolidated Statements of Comprehensive
Income for the Three and Six Months Ended June 30, 1999 2
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 1999 3
Condensed Consolidated Balance Sheets as of June 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
Three and Six Months Ended June 30, 1998 11
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 1998 12
Condensed Consolidated Balance Sheets as of June 30, 1998 13
Notes to Condensed Consolidated Financial Statements 14
ITEM 2. Management's Narrative Analysis of Results of Operations 15 - 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 5. Other 17
ITEM 6. Exhibits and Reports on Form 8-K 19
</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>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1999
------------- -------------
<S> <C> <C>
NET SALES $615.4 $1,235.3
------ --------
OPERATING COSTS AND EXPENSES
Cost of goods sold 534.4 1,098.5
Selling, general and administrative expenses 10.9 21.1
Depreciation 26.8 53.5
------ -------
Total 572.1 1,173.1
------ -------
OPERATING PROFIT 43.3 62.2
General corporate expense, net of income items 0.8 2.1
Interest and other expense on debt 21.3 43.1
------ -------
INCOME BEFORE INCOME TAXES 21.2 17.0
PROVISION FOR INCOME TAXES 7.2 5.8
------ -------
NET INCOME $ 14.0 $ 11.2
====== =======
</TABLE>
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in Millions)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Net income $14.0 $11.2
Other comprehensive income, net of tax:
Unrealized gain on securities 0.4 0.8
----- -----
COMPREHENSIVE INCOME $14.4 $12.0
===== =====
</TABLE>
See notes to unaudited condensed consolidated financial statements
-2-
<PAGE> 4
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollars in Millions)
================================================================================
<TABLE>
SIX MONTHS
ENDED
JUNE 30, 1999
-------------
<S> <C>
OPERATING ACTIVITIES
Net income $ 11.2
------
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 53.5
Deferred employee benefit cost (35.2)
Amortization of debt premium (0.7)
Deferred income taxes (9.1)
Change in: Receivables (1.8)
Inventories 104.6
Accounts payable 24.5
Bank overdrafts (1.6)
Payables to/receivables from related companies (27.5)
Accrued salaries and wages (6.0)
Other accrued liabilities (1.8)
Other items (44.7)
------
Net adjustments 54.2
------
Net cash from operating activities 65.4
------
INVESTING ACTIVITIES
Capital expenditures (10.5)
Investments in and advances to joint ventures, net 21.5
------
Net cash from investing activities 11.0
------
FINANCING ACTIVITIES
Payments of long term debt (7.5)
Dividends paid (6.9)
Proceeds from note receivable from related company 0.8
Short-term borrowings (53.0)
------
Net cash from financing activities (66.6)
------
Net increase in cash and cash equivalents 9.8
Cash and cash equivalents -- beginning of period 15.7
------
Cash and cash equivalents -- end of period $ 25.5
======
</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>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 15.7 $ 25.5
Receivables, net 241.4 243.2
Inventories (Note 3) 585.5 480.9
-------- --------
Total current assets 842.6 749.6
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES 227.7 228.6
PROPERTY, PLANT AND EQUIPMENT, NET 1,968.7 1,940.9
RECEIVABLES FROM RELATED COMPANIES 11.9 10.4
DEFERRED INCOME TAXES 2.9 11.6
OTHER ASSETS 55.7 68.1
-------- --------
Total Assets 3,109.5 $3,009.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $185.0 $209.5
Bank overdrafts 17.8 16.2
Borrowings under Revolving Credit Facilities (Note 4) 100.0 47.0
Payables to related companies 30.7 2.5
Accrued liabilities 171.5 172.8
Long-term debt due within one year
Related companies 7.0 7.0
Other 4.0 6.3
-------- --------
Total current liabilities 516.0 461.3
LONG-TERM DEBT
Related companies (Note 6) 689.5 686.0
Other 281.9 274.9
DEFERRED EMPLOYEE BENEFITS 1,135.5 1,100.3
OTHER CREDITS 65.1 60.1
COMMITMENTS AND CONTINGENCIES (Note 7)
-------- --------
Total liabilities 2,688.0 2,582.6
STOCKHOLDERS' EQUITY
Preferred stock (Note 5) 90.0 90.0
Common stock (Note 5) 320.0 320.0
Retained earnings 12.3 16.6
Accumulated other comprehensive loss (0.8) -
-------- --------
Total stockholders' equity 421.5 426.6
-------- --------
Total Liabilities and Stockholders' Equity $3,109.5 $3,009.2
======== ========
</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 has been allocated to assets
and liabilities of the Company based on their respective fair values. The
finalization of purchase accounting resulted in additional liabilities that
increased Property, Plant and Equipment by $15.6.
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.
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)
(Dollars in Millions except per share data)
===============================================================================
NOTE 3/INVENTORIES
Inventories consist of the following: DECEMBER 31, JUNE 30,
1998 1999
------------ --------
<TABLE>
<S> <C> <C>
In process and finished steel $398.8 $322.5
Raw materials and supplies:
Iron ore 104.5 86.7
Scrap and other raw materials 69.2 58.9
Supplies 13.0 12.8
------ ------
186.7 158.4
------ ------
Total $585.5 $480.9
====== ======
</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 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 June 30,
1999, $27 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 June 30, 1999, $20 was
borrowed under this facility.
NOTE 5/EQUITY
Common Stock
On June 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 June 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.
-6-
<PAGE> 8
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(Dollars in Millions except per share data)
===============================================================================
NOTE 6/RELATED PARTY TRANSACTIONS
The Company was charged $1.6 and $2.9 by Ispat for the three and six months
ended June 30, 1999, respectively, for management, financial and legal services
provided to the Company. The Company was also charged $1.3 by Ispat North
America for corporate expense allocation during the three and six month period
ended June 30, 1999.
The Company purchased $14.6 and $21.9 of slabs from a subsidiary of Ispat
during the three and six months ended June 30, 1999, 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
$36.5 and $73.2 for such tolling services for the three and six months ended
June 30, 1999, 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 $101.2 and $189.0
for the three and six months ended June 30, 1999, respectively.
The Company's debt due to a related company of $693.0 as of June 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 receivable from related companies of $10.4 at June 30, 1999 consists
of $10.0 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 $.4 is from
other related companies for trade and other intercompany expenses. The Company's
payable to related companies of $2.5 at June 30, 1999 consists of trade and
other intercompany expenses.
NOTE 7/COMMITMENTS AND CONTINGENCIES
At June 30, 1999, the Company guarantees $12 and $155 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 and made a cash contribution of $25 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
January 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 June 30, 1999, the estimated minimum tolling charges remaining
over the life of this agreement were approximately $256.8.
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.
-7-
<PAGE> 9
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/COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 June 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 $15 at June 30, 1999.
The United States Attorney for the Middle District of Louisiana has
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 December 1, 1999
while the Company reviews the matter. The Company has been informed by the U.S.
Attorney's office of a damage claim in such matter, which, if successfully
proved, would be material to the financial position and results of operations of
the Company. However, the Company is in the process of reviewing the factual
basis of such a claim and the method by which such damages may be calculated. 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.
-8-
<PAGE> 10
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(Dollars in Millions except per share data)
===============================================================================
NOTE 8/PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA
The following unaudited pro forma condensed combined statements of
operations of the Company for the six months ended June 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
six months ended June 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.
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>
SIX MONTHS ENDED
JUNE 30, 1998
------------------------------------
PREDECESSOR PRO FORMA PRO FORMA
COMPANY ADJUSTMENTS TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
NET SALES $1,226.0 $1,226.0
-------- --------
OPERATING COSTS AND EXPENSES
Cost of goods sold 1,079.5 (2.0)(a) 1,077.5
Selling, general and
administrative expenses 21.3 21.3
Depreciation 69.2 (18.0)(b) 51.2
-------- ------ --------
Total 1,170.0 (20.0) 1,150.0
-------- ------ --------
OPERATING PROFIT 56.0 20.0 76.0
General corporate expense,
net of income items 7.0 7.0
Interest and other expense on debt 20.3 22.0 (c) 42.3
-------- ------ --------
INCOME(LOSS) BEFORE INCOME TAXES 28.7 (2.0) 26.7
PROVISION FOR INCOME TAXES 10.5 0.7 Cr.(d) 9.8
-------- ------ --------
NET INCOME (LOSS) $18.2 ($1.3) $16.9
======== ====== ========
Cr. = Credit
</TABLE>
-9-
<PAGE> 11
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(Dollars in Millions except per share data)
================================================================================
NOTE 8/PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA (CONTINUED)
(a) Reflects the change in pension and retiree health and life insurance
expense as a result of the actuarial valuation.
(b) Reflects change in depreciation based upon the revaluation of the
property, plant and equipment.
(c) Reflects the net adjustments to interest expense as a result of the
transaction as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
-------------
<S> <C>
Revolving Credit Facility and commitment fees $ 1.3
Acquisition related debt 28.6
Other bank charges 3.5
Elimination of historical interest expense (11.4)
-----
Total interest expense adjustments $22.0
=====
</TABLE>
(d) Reflects the tax effects of the pro forma adjustments to income (loss)
before income taxes based on the estimated applicable statutory tax
rates.
NOTE 9/SUBSEQUENT EVENT
The Company and the United Steelworkers of America tentatively agreed, on
July 24, 1999, to new labor agreements, effective August 1, 1999, covering wages
and benefits through July 31, 2004 for approximately 7,000 employees in five
different bargaining units. The agreements are subject to a union membership
ratification process which is expected to be completed in several weeks. Among
other things, the agreements generally provide for wage increases of $.50 per
hour in 2000 and 2001 and $1.00 per hour in 2003. These agreements also provide
significant pension improvements for active employees who retire after August 1,
1999 and additional monthly supplements for certain current retirees. The
renewed agreements continue many provisions of past labor contracts, including
employment security provisions. In addition, the Company agreed to maintain
certain operations through investment in steel manufacturing facilities at the
Indiana Harbor Works, in exchange for productivity improvements and an agreement
to either adopt the industry pattern labor settlement in 2004 or use arbitration
to resolve unsettled issues, thereby precluding a work stoppage in 2004.
-10-
<PAGE> 12
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in Millions)
===============================================================================
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- --------------
NET SALES $619.9 $1,226.0
------ --------
OPERATING COSTS AND EXPENSES
Cost of goods sold 542.5 1,082.2
Selling, general and
administrative expenses 11.2 21.3
Depreciation 34.6 69.2
Gain from sale of assets (Note 3) (2.7) (2.7)
------ --------
Total 585.6 1,170.0
------ --------
OPERATING PROFIT 34.3 56.0
General corporate expense,
net of income items 4.0 7.0
Interest and other expense on debt 10.1 20.3
------ --------
INCOME BEFORE INCOME TAXES 20.2 28.7
PROVISION FOR INCOME TAXES 7.3 10.5
------ --------
NET INCOME $ 12.9 $ 18.2
====== ========
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>
SIX MONTHS
ENDED
JUNE 30, 1998
-------------
<S> <C>
OPERATING ACTIVITIES
Net income $18.2
-----
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 69.2
Deferred employee benefit cost 5.6
Deferred income taxes 3.2
Gain from sale of assets (2.7)
Change in: Receivables (4.1)
Inventories (0.8)
Accounts payable (56.5)
Payables to related companies 11.3
Accrued salaries and wages (0.7)
Other accrued liabilities 7.5
Other items 1.7
-----
Net adjustments 33.7
-----
Net cash from operating activities 51.9
-----
INVESTING ACTIVITIES
Capital expenditures (38.6)
Investments in and advances to joint ventures 25.2
Proceeds from sale of assets 5.2
-----
Net cash from investing activities (8.2)
-----
FINANCING ACTIVITIES
Long term debt retired (14.9)
Change in notes payable to related companies (1.8)
Dividends paid (12.9)
-----
Net cash from financing activities (29.6)
-----
Net increase in cash and cash equivalents 14.1
Cash and cash equivalents -- beginning of period --
-----
Cash and cash equivalents -- end of period $14.1
=====
</TABLE>
See notes to unaudited condensed consolidated financial statements
-12-
<PAGE> 14
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Dollars in Millions)
================================================================================
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14.1
Receivables, net 223.3
Inventories - principally at LIFO
In process and finished products $ 140.4
Raw materials and supplies 60.9 201.3
-------
Deferred income taxes 24.9
--------
Total current assets 463.6
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES 214.5
PROPERTY, PLANT AND EQUIPMENT
Valued on basis of cost 4,112.5
Less: Reserve for depreciation,
amortization and depletion 2,703.0
Allowance for terminated facilities 100.7 1,308.8
-------
PREPAID PENSION COSTS 60.6
DEFERRED INCOME TAXES 191.7
OTHER ASSETS 45.5
--------
Total Assets $2,284.7
========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $182.4
Payables to related companies
Notes 228.9
Trade & other 5.5
Accrued liabilities 149.0
Long-term debt due within one year 35.0
--------
Total current liabilities 600.8
LONG-TERM DEBT 258.0
DEFERRED EMPLOYEE BENEFITS 1,122.1
OTHER CREDITS 58.8
COMMITMENTS AND CONTINGENCIES (Note 3)
--------
Total liabilities 2,039.7
STOCKHOLDER'S EQUITY 245.0
--------
Total Liabilities and Stockholder's Equity $2,284.7
========
</TABLE>
See notes to unaudited condensed consolidated financial statements
-13-
<PAGE> 15
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 as of June 30, 1998 and for the three and six
month periods ended June 30, 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
first six months of 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 first six months
of 1998 totaled $9.5.
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>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Net Product Sales $47.4 $97.0
Net Product Purchases 4.2 8.3
</TABLE>
Note 3/SALE OF ASSETS
During the second quarter of 1998, the 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 June 30, 1998.
-14-
<PAGE> 16
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. ("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 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.
RESULTS OF OPERATIONS - Comparison of Second Quarter 1999 to Second Quarter 1998
The Company reported a consolidated net income of $14.0 for the second
quarter of 1999 compared to net income of $12.9 for the second quarter of 1998.
Increased operating profit offset by increased interest expense were the major
factors for the increase.
Net sales of $615.4 for the second quarter of 1999 were .7 percent less
than the year ago quarter as volume increased by 11.1 percent but was offset by
a 10.6 percent decrease in the average selling price per ton.
Cost of goods sold of $534.4 decreased 1.0 percent from the year-ago
quarter due to reduced spending during the current quarter in spite of increased
volume.
Depreciation expense of $26.8 for the current quarter decreased by $7.8, or
22.5 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 16, 1998 acquisition date.
Operating profit increased to $43.3 for the current quarter compared to
$34.3 a year ago as a result of the items noted above.
Selling, general and administrative expenses of $10.9 decreased 2.7 percent
from the year-ago quarter due to reduced spending during the current quarter.
General corporate expense, net of income items of $0.8 decreased 80 percent
from the year-ago quarter due to reduced spending during the current quarter as
well as the changes in the corporate structure.
Interest expense increased $11.2 in the 1999 second quarter from the
comparable quarter of last year due to the additional debt incurred as a result
of the acquisition.
-15-
<PAGE> 17
RESULTS OF OPERATIONS - Comparison of First Six Months of 1999 to First Six
Months of 1998
The Company reported a consolidated net income of $11.2 for the first six
months of 1999 compared to net income of $18.2 for the first six months of 1998.
Increased interest expense which offset an increase in operating profit were the
major factors for the decline.
Net sales of $1,235.3 for the first six months of 1999 were .8 percent more
than the year ago six month period as volume increased by 12.1 percent but was
offset by a 10.1 percent decrease in the average selling price per ton.
Cost of goods sold of $1,098.5 increased 1.8 percent due to the increase in
volume shipped during the first six months.
Depreciation expense of $53.5 for the current six month period decreased by
$15.7, or 22.7 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 16, 1998 acquisition date.
Operating profit increased to $62.2 for the current six month compared to
$56.0 a year ago as a result of the items noted above.
Selling, general and administrative expenses of $21.1 decreased .9 percent
from the year ago six month period due to reduced spending during the current
six month period.
General corporate expense, net of income items of $2.1 decreased 70.0
percent from the year ago six month period due to reduced spending during the
current period as well as the changes in the corporate structure.
Interest expense increased $22.8 in the 1999 first six month period from
the comparable period of last year due to the additional debt incurred as a
result of the acquisition.
-16-
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The United States Attorney for the Middle District of Louisiana has
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. ss. 3729, et seq. The U.S. Attorney and the Company have agreed that no
criminal charges will be filed against the Company prior to December 1, 1999
while the Company reviews the matter. The Company has been informed by the
U.S. Attorney's office of a damage claim in such matter, which, if successfully
proved, would be material to the financial position and results of operations of
the Company. However, the Company is in the process of reviewing the factual
basis of such a claim and the method by which such damages may be calculated. 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 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.
The Company's Year 2000 readiness project consisted 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 the 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 critical Information Technology and Process
Automation systems have been validated as Year 2000 ready with the exception of
two small systems. These systems require vendor software upgrades which will be
completed by the end of August 1999. A few small non-critical business systems
are in the final stages of testing and will be completed by the end of
-17-
<PAGE> 19
September 1999. 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
as to their Year 2000 readiness and the potential risk to the Company, and
contingency plans have been developed for all high risk critical suppliers.
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 testing and contingency planning is scheduled for completion by the end of
August 1999.
The Sales Department is communicating with our customers to advise 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 their contingency plans right down to the
actual time of the millennium rollover.
All critical business systems will again be tested in the October-November
1999 time frame 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 $6.7 through June 30, 1999 and
anticipates that the remaining costs will be $1.8. 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
-18-
<PAGE> 20
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 any and all plant equipment.
Contingency and rollover plans are in the development phase with scheduled
completion in the third quarter of 1999. 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
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
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 June 30, 1999.
-19-
<PAGE> 21
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: August 13, 1999
-20-
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- ----------
<S> <C> <C>
[The registrant hereby agrees to provide a copy of any
agreement relating to long-term debt not being registered and
not exceeding 10% of consolidated assets upon request by the
Commission.]
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 262,400
<ALLOWANCES> 19,200
<INVENTORY> 480,900
<CURRENT-ASSETS> 749,600
<PP&E> 2,041,100
<DEPRECIATION> 100,200
<TOTAL-ASSETS> 3,009,200
<CURRENT-LIABILITIES> 461,300
<BONDS> 960,900
0
90,000
<COMMON> 320,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,009,200
<SALES> 1,233,900
<TOTAL-REVENUES> 1,235,300
<CGS> 1,150,800
<TOTAL-COSTS> 1,152,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,100
<INCOME-PRETAX> 17,000
<INCOME-TAX> 5,800
<INCOME-CONTINUING> 11,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,200
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
