ITEM 1. BUSINESS.
Ispat Inland Inc. (the "Company" or the "Successor Company"), a Delaware corporation and an indirect wholly owned subsidiary of Ispat International N.V. ("Ispat"), is an integrated domestic steel company. The Company produces and sells a wide range of steels, of which approximately 99% consists of carbon and high-strength low-alloy steel grades. It is also a participant in certain iron ore production and steel-finishing joint ventures.
The Company has a single business segment, which comprises the operating companies and divisions involved in the manufacturing of basic steel products and in related raw materials operations.
On July 16, 1998, Ispat acquired Inland Steel Company (the "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"). The Predecessor Company was renamed Ispat Inland Inc. on September 1, 1998. Ispat paid $1,143.1 million, plus an assumption of certain liabilities or obligations, to acquire the Predecessor Company.
OPERATIONS
The Company is directly engaged in the production and sale of steel and related products. Certain Company subsidiaries and affiliates are engaged in the mining and pelletizing of iron ore and in the operation of a cold-rolling mill and steel galvanizing lines. All raw steel made by the Company is produced at its Indiana Harbor Works located in East Chicago, Indiana, which also has facilities for converting the steel produced into semi-finished and finished steel products.
The Company has two divisions - the Flat Products division and the Bar division. The Flat Products division manages the Company's iron ore operations, conducts its ironmaking operations, and produces the major portion of its raw steel. This division also manufactures and sells steel sheet, strip and certain related semi-finished products for the automotive, steel service center, appliance, office furniture and electrical motor markets. The Bar division manufactures and sells special quality bars and certain related semi-finished products to the automotive industry directly as well as through forgers and cold finishers, and also sells to steel service centers and heavy equipment manufacturers.
The Company and Nippon Steel Corporation ("NSC") are in joint ventures that operate steel-finishing facilities near New Carlisle, Indiana. The total cost of these two facilities, I/N Tek and I/N Kote, was approximately $1.1 billion. I/N Tek, owned 60% by a wholly owned subsidiary of the Company and 40% by an indirect wholly owned subsidiary of NSC, operates a cold-rolling mill. I/N Kote, owned equally by a wholly owned subsidiary of the Company and by an indirect wholly owned subsidiary of NSC, operates two galvanizing lines.
RAW STEEL PRODUCTION AND MILL SHIPMENTS
The following table shows, for the three years indicated, the Company's production of raw steel and, based upon American Iron and Steel Institute data, its share by percentage of total domestic raw steel production:
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* Net tons of 2,000 pounds. ** Based on preliminary data from the American Iron and Steel Institute.
The annual raw steelmaking capacity of the Company is 6.0 million net tons. The basic oxygen process accounted for 92% of raw steel production of the Company in both 1999 and in 1998. The remainder of such production was accounted for by the electric furnace process.
The total tonnage of steel mill products shipped by the Company for each of the five years 1995 through 1999 was: 5.8 million tons in 1999; 5.2 million tons in 1998; 5.3 million tons in 1997; and 5.1 million tons in each of 1996 and 1995. In both 1999 and 1998, sheet, strip and certain related semi-finished products accounted for 84% of the total tonnage of steel mill products shipped from the Indiana Harbor Works, and bar and certain related semi-finished products accounted for 16%.
In each of 1999 and 1998, approximately 92% of the shipments of the Flat Products division and 94% and 96%, respectively, of the shipments of the Bar division were to customers in 20 mid-American states. Approximately 74% of the shipments of the Flat Products division and 85% of the shipments of the Bar division in 1999 were to customers in a five-state area comprised of Illinois, Indiana, Ohio, Michigan and Wisconsin, compared to 74% and 89%, respectively in 1998. Both divisions compete in these geographical areas, principally on the basis of price, service and quality, with the nation's largest producers of raw steel as well as with foreign producers and with many smaller domestic mills.
The steel market is highly competitive with major integrated producers, including the Company, facing competition from a variety of sources. Many steel products compete with alternative materials such as plastics, aluminum, ceramics, glass and concrete. Domestic steel producers have also been adversely impacted by imports from foreign steel producers. Imports of steel products accounted for 26.6% of the domestic market in 1999, down modestly from 30.1% in 1998. The issue surrounding unfairly traded imports aggravates market conditions as suspension agreements are written and foreign government subsidies are used to offset operating losses by foreign producers.
Mini-mills provide significant competition in various product lines. Mini-mills are relatively efficient, low-cost producers that manufacture steel principally from scrap in electric furnaces and, at this time, generally have lower capital, overhead, employment and environmental costs than the integrated steel producers, including the Company. Mini-mills have been adding capacity and expanding their product lines in recent years to produce larger structural products and certain flat rolled products. Thin-slab casting technologies have allowed mini-mills to enter certain sheet markets traditionally supplied by integrated producers. Several mini-mills using this advanced technology are in operation in the United States and a significant increase in modern mini-mill capacity is underway in the United States.
For the three years indicated, shipments by market classification of steel mill products produced by the Company at its Indiana Harbor Works are set forth below. As shown in the table, a substantial portion of shipments by the Flat Products division was to steel service centers and transportation-related markets.
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(1) The service center percentages above include shipments to prior affiliates of the Company of 6% in 1998, and 9% in 1997. The reduced amount in 1998 reflects the change in status of Ryerson Tull, Inc. to a non-affiliate due to the Ispat acquisition of the Company on July 16, 1998.
Some value-added steel processing operations for which the Company does not have facilities are performed by outside processors, including joint ventures, prior to shipment of certain products to the Company's customers. In 1999 and in 1998, respectively, approximately 43% and 42% of the products produced by the Company were processed further through value-added services such as electrogalvanizing, painting and slitting.
Approximately 73% of the finished steel shipped to customers during 1999 was transported by truck, with 26% transported by rail, and under 1% by barge. A wholly owned truck transport subsidiary of the Company was responsible for shipment of approximately 15% of the total tonnage of products transported by truck in 1999.
Substantially all of the steel mill products produced by the Flat Products division are marketed through its own selling organization, with offices located in Chicago, Illinois; Southfield, Michigan; and Nashville, Tennessee. Substantially all of the steel mill products produced by the Bar division are marketed through its sales office in East Chicago, Indiana.
See "Product Classes" below for information relating to the percentage of consolidated net sales accounted for by certain classes of similar products of steel manufacturing operations.
RAW MATERIALS
The Company obtains iron ore pellets primarily from two iron ore properties, in which subsidiaries of the Company have varying interests--the Empire Mine in Michigan and the Minorca Mine in Minnesota.
During the second quarter of 1997, the Company completed the sale of its interest in the Wabush Mines located in Labrador and Quebec, Canada. The Company entered into a contract with the purchaser of such interest, effective January 1, 1997 and expiring December 31, 2006, to sell to the Company, at prices approximating market, any of the Company's iron ore pellet requirements up to one million gross tons annually not met by pellet sources in which the Company owns an equity interest. See "Properties Relating to Operations--Raw Materials Properties and Interests" in Item 2
ITEM 2. PROPERTIES.
PROPERTIES RELATING TO OPERATIONS
STEEL PRODUCTION
All raw steel made by the Company is produced at its Indiana Harbor Works located in East Chicago, Indiana. The property on which this plant is located, consisting of approximately 1,900 acres, is held by the Company in fee. The basic production facilities of the Company at its Indiana Harbor Works consist of furnaces for making iron; basic oxygen and electric furnaces for making steel; a continuous billet caster, a continuous combination slab/bloom caster and two continuous slab casters; and a variety of rolling mills and processing lines which turn out finished steel mill products. Certain of these production facilities, including a continuous anneal line, are held by the Company under leasing arrangements. The Company purchased the equity interest of the lessor of the No. 2 BOF Shop Caster Facility in 1994. The Company has granted the Pension Benefit Guaranty Corporation ("PBGC") a lien upon the Caster Facility to secure the payment of future pension funding obligations. Substantially all of the remaining property, plant and equipment at the Indiana Harbor Works, other than the Caster Facility and leased equipment, is subject to the lien of the First Mortgage of the Company dated April 1, 1928, as amended and supplemented. The Indiana Harbor Works is
also subject to a second lien in favor of the United Steelworkers of America to secure a post retirement health benefit. See "Operations--Raw Steel Production and Mill Shipments" in Item 1 above for further information relating to capacity and utilization of the Company's properties. The Company's properties are adequate to serve its present and anticipated needs, taking into account those issues discussed in "Capital Expenditures and Investments in Joint Ventures" in Item 1 above.
I/N Tek, a partnership in which a subsidiary of the Company owns a 60% interest, has constructed a 1,500,000 ton annual capacity cold-rolling mill on approximately 200 acres of land, which it owns in fee, located near New Carlisle, Indiana. Substantially all the property, plant and equipment owned by I/N Tek is subject to a lien securing related indebtedness. The I/N Tek facility is adequate to serve the present and anticipated needs of the Company planned for such facility.
I/N Kote, a partnership in which a subsidiary of the Company owns a 50% interest, has constructed a 900,000 ton annual capacity steel galvanizing facility on approximately 25 acres of land, which it owns in fee, located adjacent to the I/N Tek site. Substantially all the property, plant and equipment owned by I/N Kote is subject to a lien securing related indebtedness. The I/N Kote facility is adequate to serve the present and anticipated needs of the Company planned for such facility.
During 1998, the Company sold its remaining interest in Walbridge Coatings, but retained the right to use the facility, on a tolling basis, for certain of its electrogalvanizing and other processing needs through the year 2001.
PCI Associates, a partnership in which a subsidiary of the Company owns a 50% interest, has constructed a pulverized coal injection facility on land located within the Indiana Harbor Works. The Company leases PCI Associates the land upon which the facility is located. Substantially all the property, plant and equipment owned by PCI Associates is subject to a lien securing related indebtedness. The PCI Associates facility is adequate to serve the present and anticipated needs of the Company planned for such facility.
The Company also owns property at the Indiana Harbor Works used in connection with its joint project with Sun and NIPSCO. For more information regarding this project, see the discussion under "Item 1. Business--Operations--Raw Materials" on page 4 and 5 of this document.
A subsidiary of the Company owns a fleet of 402 coal hopper cars (100-ton capacity each) used in unit trains to move coal and coke to the Indiana Harbor Works. The Company time-charters three vessels for the transportation of iron ore and limestone on the Great Lakes. During 1998, the Company transferred ownership of such vessels to a third party subject to a lien in favor of the PBGC on the vessels to secure the payment of future pension funding obligations. See "Operations--Raw Materials" in Item 1 above for further information relating to utilization of the Company's transportation equipment. Such equipment is adequate, when combined with purchases of transportation services from independent sources, to meet the Company's present and anticipated transportation needs.
The Company also owns and maintains research and development laboratories in East Chicago, Indiana, such facilities are adequate to serve its present and anticipated needs.
RAW MATERIALS PROPERTIES AND INTERESTS
Certain information relating to raw materials properties and interests of the Company and its subsidiaries is set forth below. See "Operations--Raw Materials" in Item 1 above for further information relating to capacity and utilization of such properties and interests.
Iron Ore
The operating iron ore properties of the Company's subsidiaries and of the iron ore ventures in which the Company has an interest are as follows:
The Empire Mine is operated by the Empire Iron Mining Partnership, in which the Company has a 40% interest. The Company, through a subsidiary, is the sole owner and operator of the Minorca Mine. The Company has granted the PBGC a lien on the Minorca Mine property to secure the payment of future pension funding obligations. The Company also owns a 38% interest in the Butler Taconite project (permanently closed in 1985) in Nashwauk, Minnesota.
The reserves at the Empire Mine and Minorca Mine are held under leases expiring, or expected at current production rates to expire, between 2012 and 2040. Substantially all of the reserves at Butler Taconite are held under leases. The Company's share of the production capacity of its interests in such iron ore properties is sufficient to provide the majority of its present and anticipated iron ore pellet requirements. Any remaining requirements have been and are expected to continue to be readily available from independent sources.
OTHER PROPERTIES
The Company and one of its subsidiaries lease, under an arrangement, approximately 20% of the space in the Inland Steel Building located at 30 West Monroe Street, Chicago, Illinois. The Company's lease agreement expires December 31, 2001.
A subsidiary of the Company holds in fee at various locations an aggregate of approximately 20 acres of land, all of which is for sale. The Company also holds in fee approximately 300 acres of land adjacent to the I/N Tek and I/N Kote sites, which land is available for future development. Approximately 1,060 acres of rural land, which are held in fee at various locations in the north-central United States by various raw materials ventures, are also for sale.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Office of the United States Attorney for the Middle District of Louisiana ("the U.S. Attorney") 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 the False Claims Act, 31 U.S.C. Section 3729, et seq. The investigation and the lawsuit relate to the sale of polymer coated steel by the Company to a culvert fabricator for use in federal and state highway construction projects in Louisiana. The Company has not seen or been served with a copy of the complaint in the qui tam lawsuit, and is not required formally to respond to it until the seal is lifted and the complaint is served on the Company. With respect to the criminal investigation, the Company has agreed to extend the statute of limitations for the filing of any potential criminal charges against the Company through September 30, 2000.
If a potential claim by the U.S. Attorney were successfully proved with respect to such matter and the damages asserted were established, it would be material to the financial position and results of operations of the Company. However, the Company is investigating the factual basis of such a claim; whether any of the coated culvert is defective and, if so, the extent of such defects and the remedial options; the method by which damages would be calculated if the claims were established; and the relative responsibilities of other corporate defendants to satisfy such a claim. In cooperation with the U.S. Attorney and federal and state highway officials, the Company will conduct field inspections and analysis of many of the coated culverts at issue. At
this stage, the Company is unable to determine the extent of its potential liability, if any, and whether this matter could materially affect the Company's financial position or results of operations.
All the allegations by the U.S. Attorney appear to relate to events that occurred prior to the May 27, 1998 execution of the Merger Agreement among Ispat, the Company, Inland Merger Sub, Inc. and Inland Steel Industries, Inc. (the predecessor company to Ryerson Tull, Inc.), as amended. Ispat and the Company have notified Ryerson Tull, Inc. of their intention to seek indemnification and other remedies, under the Merger Agreement and on other grounds, for any losses in connection with this matter.
In addition to the foregoing, the Company is a party to a number of legal proceedings arising in the ordinary course of our business. The Company does not believe that the adverse determination of any such pending routine litigation, either individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects.
On June 10, 1993, the U.S. District Court for the Northern District of Indiana entered a consent decree that resolved all matters raised by a lawsuit filed by the EPA in 1990 (the "1993 EPA Consent Decree") against, among others, Inland Steel Company (the "Predecessor Company"). The 1993 EPA Consent Decree assessed a $3.5 million cash fine, environmentally beneficial projects at the Indiana Harbor Works, and requires $19 million plus interest to be spent in remediating sediment in portions of the Indiana Harbor Ship Canal and Indiana Harbor Turning Basin. The Company has paid the fine and substantially completed the $7 million project. The Company's reserve for the remaining environmental obligations under the 1993 EPA Consent Decree totaled $26 million as of December 31, 1999. The 1993 EPA Consent Decree also requires remediation of the Company's Indiana Harbor Works site. The 1993 EPA Consent Decree establishes a three-step process, each of which requires approval by the EPA, consisting of: assessment of the site (including stabilization measures), evaluation of remediation alternatives and remediation of the site. The Company is presently assessing the extent of environmental contamination. It is anticipated that this assessment will cost approximately $2 million to $4 million per year over the next several years. Because neither the nature and the extent of the contamination nor the remedial actions can be determined until the first two steps are completed, the Company cannot presently reasonably estimate the costs of, or the time required to satisfy, our obligations under the consent decree, but it is expected that remediation of the site will require significant expenditures over the next several years that may be material to the Company's financial position and results of operations. Insurance coverage with respect to work required under the 1993 EPA Consent Decree is not significant.
In October 1996, the Indiana Department of Environmental Management, as lead administrative trustee, notified the Company and other potentially responsible parties that the natural resource trustees (which also include the Indiana Department of Natural Resources, the U.S. Department of the Interior, the Fish and Wildlife Service and the National Park Service) intend to perform a natural resource damage assessment on the Grand Calumet River and Indiana Harbor Canal System. The notice states that the Company has been identified as a potentially responsible party due to alleged releases of hazardous substances from its Indiana Harbor Works facility. Because of the preliminary nature of this matter, it is not possible at this time to accurately predict the amount of the Company's potential liability or whether this potential liability could materially affect our financial position.
The U.S. Comprehensive Environmental Response, Compensation, and Liability Act, also known as Superfund, and analogous state laws can impose liability for the entire cost of cleanup at a site upon any of the current or former owners or operators or parties who sent waste to the site, regardless of fault or the lawfulness of the activity that caused the contamination. The Company is a potentially responsible party at several state and federal Superfund sites. Except for the Four County Landfill described below, the Company believes its liability at these sites is either de minimis or substantially resolved. The Company could, however, incur additional costs or liabilities at these sites if additional cleanup is required, private parties sue for personal injury or property damage, or other responsible parties sue for reimbursement of costs incurred to clean up the sites. The Company could also be named a potentially responsible party at other sites if its wastes or its predecessors generated were disposed of at a site that later became a Superfund site.
The Company received a Special Notice of Potential Liability from the Indiana Department of Environmental Management on February 18, 1992 relating to releases of hazardous substances from the Four
County Landfill Site in Fulton County, Indiana. In August 1993, the Company along with other potentially responsible parties, entered into an agreed order with the Indiana Department of Environmental Management pursuant to which the potentially responsible parties agreed to perform a remedial investigation and feasibility study for the Four County Landfill Site, pay certain past and future Indiana Department of Environmental Management costs, and provide funds for operation and maintenance necessary for stabilization of the Four County Landfill Site. The costs which the Company has agreed to assume under the agreed order are not currently anticipated to exceed $700,000. The final remedy will not be selected until the remedial investigation and feasibility study is completed. The Company is therefore unable to reasonably estimate its remaining liability, if any, at this site, but based on the allocated share of liability and the number of financially viable potentially responsible parties, the Company believes this matter will not have a material adverse effect on our financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction I(2), the information called for by this Item.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company is an indirect wholly owned subsidiary of Ispat. No common stock dividends have been declared during the past two years. In connection with the acquisition, an affiliate of the Company entered into a credit agreement dated July 16, 1998 (the "Credit Agreement") for a $860 million senior secured term credit facility. The terms of the Credit Agreement restricts the payment of dividends and other Restricted Payments (as defined in the Credit Agreement). At December 31, 1999, $11.5 million of dividends or other Restricted Payments could have been paid.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The Company meets the conditions set forth in General Instruction I(2)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction I(2), the information called for by this Item.
ITEM 7.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS .
On July 16, 1998, Ispat acquired Inland Steel Company (the "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"). The Predecessor Company was renamed Ispat Inland Inc. on September 1, 1998. Ispat paid $1,143.1 million, plus an assumption of certain liabilities or obligations, to acquire the Predecessor Company.
As a result of the Acquisition, the capital structure and accounting basis of the assets and liabilities of the Company after July 16, 1998 differ from those of the Predecessor Company in prior periods. Financial data of the Predecessor Company for periods prior to and through July 16, 1998 are presented on a historical cost basis. Financial data of the Company thereafter reflects the Acquisition under the purchase method of accounting, under which the purchase price has been allocated to assets and liabilities based upon their estimated fair values.
To facilitate the discussion below of the year ended December 31, 1999 against the results of operations for the same period of 1998, the historical operations of the Successor Company and Predecessor Company have been combined.
The following table summarizes selected earnings and other data:
Net sales in 1999 of $2,392.5 million were 0.3 percent more than net sales of $2,385.4 million in 1998. The increase in sales was due to an increase in shipments of 11.5 percent, which was mostly offset by a decrease of 10 percent in average realizing prices. The reduction in prices resulted mainly from the increase in imports, partially offset by the improved mix of products sold.
Cost of goods sold (excluding depreciation) of $2,101.5 million decreased 0.7 percent for 1999, with the effect of an increase in volume shipped being offset by a decrease in spending for labor costs, energy, and purchased materials during 1999. A one-time charge of $20.7 million for the period of July 17 through December 31, 1998 was included in the 1998 cost of goods sold and related to the inventory write-up which resulted from the Acquisition.
Depreciation expense of $106.3 million decreased by $15.2 million or 12.5 percent from $121.5 million in the prior year, due to the change in depreciable value and remaining useful lives resulting from the re-valuation of property, plant, and equipment as of the July 16, 1998 acquisition date.
Selling, general and administrative expense of $42.8 million increased 8.6 percent from $39.4 million in the year-ago 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 year.
Operating profit increased to $141.9 million compared to $111.1 million a year ago as a result of the items noted above.
General corporate expense, net of income items of $0.7 million decreased 92.6 percent from $9.5 million in 1998 due to the changes in the corporate structure.
Interest expense of $86.2 million in 1999 increased by $23.1 million from $63.1 in 1998 due to the additional debt incurred as a result of the acquisition and interest rate changes.
YEAR 2000
The Company's business and process system transition from 1999 to 2000 occurred without disruption to manufacturing operations, shipments to customers, or deliveries by critical suppliers. Of the more than 500 business systems and 16,000 pieces of shop floor equipment, only six minor problems were detected, and these problems were remediated within minutes to several hours of detection. The Company will continue to monitor the business and process systems during 2000. Through December 31, 1999, the Company spent $7.8 million for the remediation effort compared to a budget of $8.5 million.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company had $963.7 million of long-term debt (including debt due within one year) outstanding at December 31, 1999. Of this amount, $689.5 million is floating rate debt of which $450.0 million is hedged by a five year interest rate collar. The remaining $274.2 million of fixed rate debt had a fair value of $238.8 million. Assuming a hypothetical 10% decrease in interest rates at December 31, 1999, the fair value of this fixed rate debt would be estimated to be $252.7 million. Fair market values are based upon market prices or current borrowing rates with similar rates and maturities.
The Company utilizes derivative commodity instruments not for trading purposes but to hedge exposure to fluctuations in the costs of natural gas and certain nonferrous metal commodities. A hypothetical 10%
decrease in commodity prices for open derivative commodity instruments as of December 31, 1999 would reduce pre-tax income by $2.0 million.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements (including the financial statement schedules listed under Item 14(a)1 of this report) of the Successor Company called for by this Item, together with the Independent Auditors' Report dated January 19, 2000, are set forth on pages to inclusive, of this Report on Form 10-K, and are hereby incorporated by reference into this Item. Consolidated financial statements (including the financial statement schedules listed under Item 14(a)1 of this report) of the Predecessor Company called for by this Item, together with the Report of Independent Accountants dated January 8, 1999, are set forth on pages to inclusive, of this Report on Form 10-K, and are hereby incorporated by reference into this Item. Financial statement schedules not included in this Report on Form 10-K have been omitted because they are not applicable or because the information called for is shown in the consolidated financial statements or notes thereto.
Consolidated quarterly sales and earnings information of the Successor Company for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998 is set forth in Note 17 of Notes to Consolidated Financial Statements (see), which is hereby incorporated by reference into this Item. Consolidated quarterly sales and earnings information of the Predecessor Company for the period from January 1, 1998 through July 16, 1998 and the year 1997 is set forth in Note 14 of Notes to Consolidated Financial Statements (see), which is hereby incorporated by reference into this Item.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction I(2), the information called for by this Item.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction I(2), the information called for by this Item.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction I(2), the information called for by this Item.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction I(2), the information called for by this Item.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS A PART OF THIS REPORT.
1. CONSOLIDATED FINANCIAL STATEMENTS. The consolidated financial statements listed below are set forth on pages to inclusive, of this Report and are incorporated by reference in Item 8 of this Annual Report on Form 10-K.
Independent Auditors' Report dated January 19, 2000
Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998--Successor Company
Consolidated Statements of Cash Flows for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998--Successor Company
Consolidated Balance Sheets at December 31, 1999 and 1998--Successor Company
Consolidated Statements of Stockholders' Equity for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998--Successor Company
Notes to Consolidated Financial Statements--Successor Company
Financial Statement Schedule II (Reserves) for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998--Successor Company
Report of Independent Accountants dated January 8, 1999
Consolidated Statements of Operations and Reinvested Earnings for the period from January 1, 1998 through July 16, 1998 and the year ended December 31, 1997--Predecessor Company
Consolidated Statements of Cash Flows for the period from January 1, 1998 through July 16, 1998 and the year ended December 31, 1997--Predecessor Company
Statement of Accounting and Financial Policies--Predecessor Company
Notes to Consolidated Financial Statements--Predecessor Company
Financial Statement Schedule II (Reserves) for the period from January 1, 1998 through July 16, 1998 and the year ended December 31, 1997--Predecessor Company
2. 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.
No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1999.
INDEX
TO
CONSOLIDATED FINANCIAL STATEMENTS
OF
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
AND
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of ISPAT INLAND INC.:
We have audited the accompanying consolidated balance sheets of Ispat Inland Inc. and its subsidiaries (the "Successor Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for the year ended December 31, 1999 and the period July 17, 1998 through December 31, 1998. Our audits also included the financial statement schedule II as of December 31, 1999 and 1998 and for the year ended December 31, 1999 and for the period July 17, 1998 through December 31, 1998 listed at Item 14a. These financial statements and schedule are the responsibility of the Successor Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Successor Company at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for the year ended December 31, 1999 and the period July 17, 1998 through December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule as of December 31, 1999 and 1998 and for the year ended December 31, 1999 and the period July 17, 1998 through December 31, 1998, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all respects the information set forth therein.
Deloitte & Touche LLP
Chicago, Illinois January 19, 2000
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See Notes to Consolidated Financial Statements
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 ("APB") 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.
Consolidation Policy
The consolidated financial statements include the accounts of the Company and all significant subsidiaries. Intercompany transactions have been eliminated in consolidation.
Accounting for Equity Investments
The Company's investments in less than majority-owned companies, joint ventures and partnerships, and the Company's majority interest in the I/N Tek (see Note 14) partnership are accounted for under the equity method.
Inventory Valuation
Inventories are carried at the lower of cost or market. Cost is principally determined on a first-in, first-out ("FIFO") method. Costs include the purchase costs of raw materials, conversion costs, and an allocation of fixed and variable production overhead.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the straight line method over the useful lives of the related assets, ranging from 25 to 45 years for buildings and 2 to 21.5 years for machinery and equipment. Major improvements which add to productive capacity or extend the life of an asset are capitalized while repairs and maintenance are charged to expense as incurred. The carrying amount for long-lived assets is reviewed whenever events or changes in circumstances indicate that an impairment may have occurred.
Cash Equivalents
Cash equivalents are highly liquid, short-term investments purchased with original maturities of three months or less when acquired.
Deferred Financing Costs
Deferred financing costs are amortized over the expected terms of the related debt.
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Stock Option Plan
In 1999, Ispat established the Ispat International N.V. Global Stock Option Plan (the "Ispat Plan"). Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company, which participates in the Ispat Plan, has chosen to account for stock options issued to employees using the intrinsic value method prescribed in APB No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the underlying Ispat stock at the date of the grant over the exercise price of the employee stock options. For disclosure purposes, proforma net income is provided as if the fair value method had been applied. The Company has adopted the disclosure requirements of SFAS No. 123.
Revenue Recognition
Sales are recognized when the Company's products are shipped to customers.
Income Taxes
Income tax expense is based upon reported results of operations and reflects the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes.
Derivatives
Derivative financial instruments are utilized to manage exposure to fluctuations in cost of natural gas and specific nonferrous metals used in the production process. The use of these financial instruments is intended for hedging purposes. Gains or losses are recognized as part of the cost of the underlying product or service when the contracts are closed. Additionally, derivatives are used to hedge exposure to interest rate fluctuations for floating rate debt for which the gains or losses are recognized in interest expense.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." In accordance with SFAS No. 130, the Company changed its reporting to display comprehensive income and its components in the Company's Consolidated Statements of Comprehensive Income. The components of comprehensive income include unrealized gain/loss on securities (see Note 14) and minimum pension liability adjustment related to joint ventures.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to financial statements. Actual results may differ from such estimates.
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board ("FASB") issued 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
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) 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, the FASB deferred the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company must adopt SFAS No. 133 no later than the first quarter of fiscal year 2001. The Company is currently assessing the impact of this statement on its results of operations and financial position.
Reclassifications
Certain reclassifications have been made to the period ended December 31, 1998 financial statements in order to conform to the 1999 classifications.
NOTE 3--INVENTORIES
Inventories consist of the following:
As a result of the Acquisition, inventories were recorded at their fair values at July 17, 1998. Such fair value for finished goods and work in process represented selling price less estimated costs of completion, selling costs and a reasonable profit allowance for the selling and completion effort. Raw materials were valued at replacement cost. The fair value of inventories was in excess of their inventoriable cost which resulted in a one-time charge to cost of goods sold during the period July 17, 1998 through December 31, 1998 of $20.7.
NOTE 4--PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
As a result of the Acquisition, property, plant and equipment was recorded at its estimated fair value at July 17, 1998. Final asset and liability adjustments made during 1999 were not significant.
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 5--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 at cost 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 December 31, 1999 and 1998, $43 and $100, respectively, were borrowed under the facilities, leaving $107 and $50, respectively, available.
In 1999, the Company established a five-year $120 revolving credit facility with a group of banks. The Company has agreed to sell at cost substantially all of its raw material, in-process and finished goods inventory to Ispat Inland Inventory, LLC ("III"), a wholly owned subsidiary of the Company, to secure this facility. Provisions of the credit agreement require III to maintain a minimum net worth. At December 31, 1999, there were no borrowings outstanding, leaving $67 available, based on collateral requirements.
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following:
In connection with the financing of the Acquisition, an affiliate of the Company, Ispat Inland, L.P. (the "Borrower"), entered into a Credit Agreement dated July 16, 1998 (the "Credit Agreement") for a senior secured term credit facility and letter of credit with a syndicate of financial institutions for whom Credit Suisse First Boston is the agent (the "Agent"). The Credit Agreement consists of a $350 Tranche B Term Loan due July 16, 2005 (the"Tranche B Loan"), a $350 Tranche C Term Loan due July 16, 2006 (the "Tranche C Loan" and together with the Tranche B Loan, the "Term Loans") and a $160 letter of credit extending to
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 6--LONG-TERM DEBT--(CONTINUED) July 9, 2003, (the "LC" and together with the Term Loans, the "Facilities"). The LC has not been drawn upon.
Each of the Tranche B Loan and Tranche C Loan has scheduled principal repayments of $.875 per quarter until maturity. The lenders are committed to renewing the LC annually for five years, contingent on the Company and Borrower making certain representations and warranties.
On July 16, 1998, the Company issued $875 of First Mortgage Bonds as security both for the Facilities and for an interest rate hedge required under the Credit Agreement (the "Hedge"). Series U, in a principal amount of $700, was issued to an indirect subsidiary of the Borrower which, in turn, pledged the Bonds to the Agent for the benefit of the Term Loan lenders. Series V, in a principal amount of $160, was issued to the Agent for the benefit of the LC lenders. Series W, in a principal amount of $15, was issued to the Agent for the benefit of the counterparty to the Hedge.
As a further credit enhancement under the Credit Agreement, the Facilities and the Hedge are fully and unconditionally guaranteed by the Company, certain subsidiaries of the Company and Ispat.
Borrowings under the Term Loans bear interest at a rate per annum equal to, at the Borrower's option: (1) the higher of (a) the Agent's prime rate or (b) the rate which is 1/2 of 1% in excess of the Federal Funds effective rate (together the "Base Rate"), plus 1.25% for Tranche B Loans and 1.75% for Tranche C Loans or (2) the LIBO Rate (as defined in the Credit Agreement) plus 2.25% for Tranche B Loans and 2.75% for Tranche C Loans. The fee for the LC is 2.25% of the LC amount per annum (the "LC Fee"). The spread over the LIBO Rate and Base Rate and the LC Fee will be reduced if the Company's Consolidated Leverage Ratio (as defined in the Credit Agreement) falls to specified levels.
In October 1998, the Borrower entered into the Hedge required under the Credit Agreement. The Hedge consists of a five-year interest rate collar. The Hedge is based on LIBOR with a floor of 4.50% and a ceiling of 6.26% on a notional amount of $450.
The Company is obligated to pay interest on the Series U First Mortgage Bonds at the rate paid by the Borrower to the Term Loan lenders, plus 1/2 of 1% per annum and on the Series V First Mortgage Bonds at a rate equal to the LC Fee.
With the exception of Series U, V and W, the First Mortgage Bonds are the obligation solely of the Company and have not been guaranteed or assumed by or, otherwise, become the obligation of Ispat or any of its other subsidiaries. Each series of First Mortgage Bonds issued by the Company is limited to the principal amount outstanding, with the Pollution Control Series 1977 Bonds and the Series R First Mortgage Bonds subject to a sinking fund. A substantial portion of the property, plant and equipment owned by the Company at its Indiana Harbor Works is subject to the lien of the First Mortgage. This property had a book value of approximately $1,700 on December 31, 1999 and $1,600 on December 31, 1998.
The Credit Agreement restricts the payment of dividends and other Restricted Payments (as defined in the Credit Agreement) to 50% of Consolidated Net Income (as defined in the Credit Agreement) plus certain specifically allowed types of Restricted Payments. At December 31, 1999 and 1998, $11.5 and $10.0, respectively, of dividends or other Restricted Payments, in addition to those specifically allowed, could have been paid.
The Credit Agreement contains other covenants that, among other things, limit or prohibit the ability of the Company or the Borrower to incur indebtedness, create liens, engage in transactions with affiliates, sell assets and engage in mergers and consolidations. Additionally, the Company must maintain a minimum Consolidated EBITDA (as defined in the Credit Agreement).
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 6--LONG-TERM DEBT--(CONTINUED) In conjunction with the Acquisition of the Company by Ispat on July 16, 1998, the Company repaid $228.9 owed to Industries, its parent company prior to the Acquisition. The remaining long-term debt at the Acquisition date was restated to its fair value which resulted in the debt increasing by $16.9.
Maturities of long-term debt obligations are: $8.0 in 2000, $12.3 in 2001, $13.3 in 2002, $13.8 in 2003, $13.8 in 2004 and $902.5 thereafter.
NOTE 7--EQUITY
COMMON STOCK
On December 31, 1999 and 1998, the Company had 1,000 shares authorized of common stock, $.01 par value ("Common Stock"), of which 100 shares were issued, outstanding and owned by a wholly owned subsidiary of Ispat.
CUMULATIVE PREFERRED STOCK
On December 31, 1999 and 1998, the Company had 100 shares authorized, issued and outstanding of Series A 8% Cumulative Preferred Stock, $.01 par value ("Preferred Stock"), which is owned by a wholly owned subsidiary of Ispat. The Preferred Stock has liquidation preference over the Common Stock.
NOTE 8--STOCK OPTION PLANS
Under the terms of the Ispat Plan, Ispat may grant options to senior management of Ispat and its affiliates for up to 6,000,000 shares of common stock. The exercise price of each option equals not less than the fair market value of Ispat stock on the date of grant, and an option's maximum term is 8 years. Options are granted at the discretion of the Ispat Board of Director's Plan Administration Committee or its delegate. The options vest either ratably upon each of the first three anniversaries of the grant date or upon the death, disability or retirement of the participant. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in APB No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of Ispat stock at the date of the grant over the amount an employee must pay to acquire the stock. Had compensation cost for the option plan been determined based on the fair value at the grant date for awards in 1999 consistent with the provisions of SFAS No. 123, the Company's net income for the year ended December 31, 1999 would have been reduced to the pro forma amounts indicated below:
The fair value of each option grant of Ispat stock is estimated on the date of grant using the Binomial Option Pricing Model with the following weighted-average assumptions used for grants in 1999: dividend yield of .86%; expected volatility of 63%; risk-free interest rate of 6.07%; and expected term of 10 years. The weighted average fair-value at the date of grant for options granted in 1999 was $7.9465.
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 8--STOCK OPTION PLANS--(CONTINUED) The activity of the Ispat Plan with respect to the Company is summarized below for the year ended December 31, 1998:
NOTE 9--RETIREMENT BENEFITS
In connection with the Company's new labor agreement with the United Steelworkers of America (the "USWA"), the pension and postretirement medical 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 primarily to provide for increased benefit levels. The postretirement medical plan was amended primarily 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 SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," 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.
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." The provisions of SFAS No. 132 revise employers' disclosures about pensions and other postretirement benefit plans. This statement does not change the measurement or recognition of these plans.
PENSIONS
The Company Pension Plan and Pension Trust, which covers certain employees of the Company, is a noncontributory defined benefit plan with pensions based on final pay and years of service for all salaried employees and certain wage employees, and years of service and a fixed rate (in most instances based on frozen pay or on job class) for all other wage employees, including members of the United Steelworkers of America.
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 9--RETIREMENT BENEFITS--(CONTINUED) Reconciliation of the pension benefit obligation and plan assets from December 1, 1998 and July 17, 1998 through the measurement date of November 30 was as follows:
The plan amendment loss for the period ended November 30, 1999 reflects the plan changes that resulted from the new labor agreement with the USWA as well as the effects of changes in actuarial assumptions. The plan amendments gain for the period ended November 30, 1998 reflects the plan change announced during the fourth quarter that became effective January 1, 1999. The amendment provides that pension benefits for most of the Company's non-represented salaried employees will be determined in "cash balance" arrangement. For each covered employee, a notional account is credited each quarter with a percentage of pay and interest. At termination, the account balance is available to the employee as either a lump-sum payment or an annuity.
The funded (unfunded) status of the pension plan is as follows:
The following weighted average assumptions were used in accounting for the pension plan:
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 9--RETIREMENT BENEFITS--(CONTINUED) The net periodic benefit cost (credit) was as follows:
The Company also sponsors a savings plan through which eligible salaried employees may elect to save a portion of their salary, and the Company matches the first five percent of each participant's salary contributed, subject to certain IRS limitations. Compensation expense related to this plan amounted to $4.9 and $2.3, respectively, for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998.
BENEFITS OTHER THAN PENSION
Substantially all of the Company's employees are covered under postretirement life insurance and medical benefit plans that require deductible and co-insurance payments from retirees. The postretirement life insurance benefit formula used in the determination of postretirement benefit cost is primarily based on applicable annual earnings at retirement for salaried employees and specific amounts for hourly employees. The Company does not prefund any of these postretirement benefits. Effective January 1, 1994, a Voluntary Employee Benefit Association Trust was established for payment of health care benefits made to United Steelworkers of America retirees. Funding of the Trust is made as claims are submitted for payment.
Reconciliation of the postretirement benefit obligation follows:
The plan amendments gain for the periods ended November 30, 1999 and 1998 result from a plan amendment effective January 1, 1999 requiring increased contributions from salaried retirees for health care coverage, as well as increases in deductibles and copays. In addition, life insurance coverage for salaried retirees has been reduced, effective at the same date. The gain for the 1999 period was also affected by the new labor agreement with the USWA which provided for employee and retiree copayments, vision care, retiree life insurance benefits and retiree contributions.
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 9--RETIREMENT BENEFITS--(CONTINUED) The unfunded status of the postretirement benefit obligation is as follows:
The following weighted average assumptions were used in accounting for the postretirement benefit plan:
The net periodic benefit cost was as follows:
An increase of 1% in the health care cost trend rate would increase the benefit obligation by $95.2 and the annual net periodic cost by $10.6. A 1% decrease would reduce the benefit obligation by $79.7 and the annual net periodic annual net cost by $8.8.
For purposes of measuring the expected cost of benefits covered by the plan for next year, a weighted average health care trend rate of 4.50% was assumed for 2000 and the years thereafter.
NOTE 10--INCOME TAXES
The provision for income taxes consists of the following:
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 10--INCOME TAXES--(CONTINUED) Total income taxes reflected in the Consolidated Statements of Operations differ from the amounts computed by applying the statutory federal corporate tax rate as follows:
Deferred tax assets and liabilities arise from the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes and resulted from the following:
Based on estimates of projected future taxable income, the Company believes that it is more likely than not that the tax benefits currently generated will be realized in future periods. Accordingly, no valuation allowance has been established.
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 11--RELATED PARTY TRANSACTIONS
The Company was charged $5.3 and $3.4 by Ispat for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998, respectively, for management, financial and legal services provided to the Company. The Company was also charged $2.5 by Ispat North America Holding Inc. for corporate expense allocation for the year ended December 31, 1999.
The Company purchased $82.8 and $56.7 of inventory from subsidiaries of Ispat for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998, respectively. The Company sold $22.2 of inventory to subsidiaries of Ispat for the year ended December 31, 1999.
The Company's long-term debt due to a related company of $689.5 and $696.5 as of December 31, 1999 and 1998, respectively, is payable to Ispat Inland Finance LLC, a wholly owned subsidiary of the Borrower and Ispat. Interest expense related to this debt was $56.5 and $29.5 for the year ended December 31, 1999 and the period from July 17, 1998 to December 31, 1998, respectively. This debt arose in connection with the financing of the Acquisition (see Note 6). The Company's receivable from a related company of $8.9 and $10.8 at December 31, 1999 and 1998, respectively, is due from Ispat Inland, L.P., a wholly owned subsidiary of Ispat. Interest income on this receivable was $0.8 and $0.4 for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998, respectively. This receivable also 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.
NOTE 12--COMMITMENTS AND CONTINGENCIES
At December 31, 1999 and 1998, the Company guarantees $10.5 and $142.6 of long-term debt attributable to PCI Associates and I/N Kote (see Note 14), two of its equity investments, respectively.
The Company has an agreement with the Pension Benefit Guaranty Corporation ("PBGC") to provide certain financial assurances with respect to the Company's Pension Plan. In accordance with this agreement, the Company provided the PBGC a letter of credit in the amount of $160, made a cash contribution of $23.7 in 1999 and $25.0 in 1998 to the Pension Trust and committed to certain minimum funding requirements, including to fund normal cost of the Pension Plan plus, for the next four years, an additional $5 per year. 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 the Pension Plan is terminated or the Company is sold and the purchaser meets certain tests.
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 December 31, 1999 and 1998, the estimated minimum tolling charges remaining over the life of this agreement were approximately $242.4 and $270.0, respectively.
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.
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 12--COMMITMENTS AND CONTINGENCIES -- (CONTINUED) 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 1993 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 December 31, 1999 and 1998, the Company's reserves for environmental liabilities totaled $25 and $27, respectively, of which $21 and $21, respectively, is related to the sediment remediation under the 1993 EPA consent decree.
The Company and its subsidiaries have various operating leases for which the minimum lease payments are $17.6 in 2000, $16.1 in 2001, $11.4 in 2002, $10.1 in 2003, $9.9 in 2004 and $12.0 thereafter. Rental expense for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998 was $27.2 and $13.8, respectively.
The total amount of firm commitments of the Company and its subsidiaries to contractors and suppliers in connection with construction projects primarily related to additions to property, plant and equipment, was $24.4 at December 31, 1999 and $7.0 at December 31, 1998.
The Company and an independent, unaffiliated producer of raw materials are parties to a long-term supply agreement under which the Company is obligated to fund an escrow account to indemnify said producer of raw materials against a specific contingency. Contributions to the escrow are determined by the agreement and the funds are restricted from Company use while in the escrow. The escrow will terminate not later than 2004. At December 31, 1999 and 1998, the escrowed funds amounted to $20.0 and $5.4, respectively, and is included in "Other assets" on the consolidated balance sheets. The Company anticipates full recovery of the escrowed amount.
The Office of the United States Attorney for the Middle District of Louisiana ("the U.S. Attorney") 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 the False Claims Act, 31 U.S.C. Section 3729, et seq. The investigation and the lawsuit relate to the sale of polymer coated steel by the Company to a culvert fabricator for use in federal and state highway construction projects in Louisiana. The Company has not seen or been served with a copy of the complaint in the qui tam lawsuit, and is not required formally to respond to it until the seal is lifted and the complaint is served on the Company. With respect to the criminal investigation, the Company has agreed to extend the statute of limitations for the filing of any potential criminal charges against the Company through September 30, 2000.
If a potential claim by the U.S. Attorney were successfully proved with respect to such matter and the damages asserted were established, it would be material to the financial position and results of operations of the Company. However, the Company is investigating the factual basis of such a claim; whether any of the coated culvert is defective and, if so, the extent of such defects and the remedial options; the method by which damages would be calculated if the claims were established; and the relative responsibilities of other corporate defendants to satisfy such a claim. In cooperation with the U.S. Attorney and federal and state highway officials, the Company will conduct field inspections and analysis of many of the coated culverts at issue. At this stage, the Company is unable to determine the extent of its potential liability, if any, and whether this matter could materially affect the Company's financial position or results of operations.
All the allegations by the U.S. Attorney appear to relate to events that occurred prior to the May 27, 1998 execution of the Merger Agreement among Ispat, the Company, Inland Merger Sub, Inc. and Inland Steel
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 12--COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Industries, Inc. (the predecessor company to Ryerson Tull, Inc.), as amended. Ispat and the Company have notified Ryerson Tull, Inc. of their intention to seek indemnification and other remedies, under the Merger Agreement and on other grounds, for any losses in connection with this matter.
In addition to the foregoing, the Company is a party to a number of legal proceedings arising in the ordinary course of its business. The Company does not believe that the adverse determination of any such pending routine litigation, either individually or in the aggregate, will have a material adverse effect on its business, financial condition, results of operations, cash flows or prospects.
NOTE 13--DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
DERIVATIVES
The Company uses futures and swap contracts to manage fluctuations in the cost of natural gas and certain nonferrous metals, primarily zinc which is used in the coating of steel. Timing of these transactions corresponds to the expected need for the underlying physical commodity and is intended as a hedge against the cost volatility of these commodities. The counterparties to these contracts are internationally recognized companies which are not considered a credit risk by the Company. Contracts generally do not extend out beyond one year. The Company had contracts for these commodities that amounted to $18.9 and $68.9 as of December 31, 1999 and 1998, respectively, the fair value of which was $19.3 and $62.5, respectively.
A portion of the floating rate debt used in connection with the financing of the Acquisition was hedged through the use of an interest collar (see Note 6).
LONG-TERM DEBT
The estimated fair value of the Company's long-term debt (including current portions thereof), using quoted market prices of Company debt securities recently traded and market-based prices of similar securities for those securities not recently traded, was $919 and $908 at December 31, 1999 and 1998, respectively, as compared with the carrying value of $964 and $982 in the balance sheet at year-end 1999 and 1998, respectively.
NOTE 14--I/N TEK AND I/N KOTE JOINT VENTURES
I/N Tek, a general partnership formed for a joint venture between the Company and Nippon Steel Corporation ("NSC"), owns and operates a cold-rolling facility. I/N Tek is 60% owned by a wholly owned subsidiary of the Company and 40% owned by an indirect wholly owned subsidiary of NSC. The Company has rights to the productive capacity of the facility, except in certain limited circumstances and, under a tolling arrangement with I/N Tek, has an obligation to use the facility for the production of cold rolled steel. Under the tolling arrangement, the Company was charged $144.3 and $68.8 for such tolling services for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998, respectively, and owed $8.4 and $3.9 to I/N Tek at year-end 1999 and 1998, respectively, related to such tolling services.
The Company and NSC also own and operate another joint venture which consists of a 400,000 ton electrogalvanizing line and a 500,000 ton hot-dip galvanizing line adjacent to the I/N Tek facility. I/N Kote, the general partnership formed for this joint venture, is owned 50% by a wholly owned subsidiary of the Company and 50% by an indirect wholly owned subsidiary of NSC. The Company and NSC each has
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 14--I/N TEK AND I/N KOTE JOINT VENTURES--(CONTINUED) guaranteed the share of long-term financing attributable to their respective subsidiary's interest in the partnership. I/N Kote had $285 outstanding under its long-term financing agreement at December 31, 1999. I/N Kote is required to buy all of its cold rolled steel from the Company, which is required to furnish such cold rolled steel at a price that results in an annual return on equity to the partners of I/N Kote, depending upon operating levels, of up to 10% after operating and financing costs; this price may be subject to an adjustment if the Company's return on sales differs from I/N Kote's return on sales. Purchases of Company cold rolled steel by I/N Kote aggregated $370.1 and $157.6 for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998, respectively. At December 31 1999 and 1998, I/N Kote owed the Company $14.3 and $16.0, respectively, related to these purchases. Prices of cold rolled steel sold by the Company to I/N Kote are determined pursuant to the terms of the joint venture agreement and are based, in part, on operating costs of the partnership. In 1999 and 1998, the Company sold cold rolled steel to I/N Kote at prices that exceeded the Company's production costs but were less than the market prices for cold rolled steel products. I/N Kote also provides tolling services to the Company for which it was charged $3.2 and $4.7 for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998, respectively. The Company sells all I/N Kote products that are distributed in North America. The Company receives a 1% sales commission on I/N Kote sales for which it received $6.0 and $2.6 for the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998, respectively.
During the development of the I/N Tek and I/N Kote joint ventures, the Company loaned money to the joint ventures. These partner loans are included in "Investments in and advance to joint ventures" in the balance sheet. The outstanding balance of the I/N Tek partner loan was $15.7 and $16.8 at year-end 1999 and 1998, respectively. The value of the I/N Kote partner loan was $36.7 and $34.9 at year-end 1999 and 1998, respectively.
Related to the I/N Tek and I/N Kote joint ventures, the Company owns common stock of NSC. At December 31, 1999 and 1998, this stock had a fair value of $5.7 and $4.4. Fair value was determined based on quoted market price. The investment is included in "Investments in and advances to joint ventures" in the balance sheet. Differences between recorded value and fair value are recorded net of tax to Other Comprehensive Income.
NOTE 15--INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
The Company's investments in unconsolidated joint ventures accounted for by the equity method consist primarily of its 60% interest in I/N Tek, 50% interest in I/N Kote, 50% interest in PCI Associates and 40% interest in the Empire Iron Mining Partnership ("Empire"). I/N Tek and I/N Kote are joint ventures with NSC (see Note 14). The Company does not exercise control over I/N Tek, as all significant management decisions of the joint venture require agreement by both of the partners. Due to this lack of control by the Company, the Company accounts for its investment in I/N Tek under the equity method. PCI Associates is a joint venture which operates a pulverized coal injection facility at the Indiana Harbor Works. Empire is an
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 15--INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES--(CONTINUED) iron ore mining and pelletizing venture owned in various percentages primarily by U.S. steel companies. Following is a summary of combined financial information of the Company's unconsolidated joint ventures:
NOTE 16--BUSINESS SEGMENTS AND CONCENTRATION OF RISKS
The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The Company and its subsidiaries operate in a single business segment, which comprises the operating companies and divisions involved in the manufacturing of basic steel products and related raw material operations.
The Company both produces and sells a wide range of steels, of which approximately 99% consists of carbon and high-strength low-alloy steel grades. For the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998, approximately 79% of the sales were to customers in five mid- American states, and 93% were to customers in 20 mid-American states. Over half the sales are to the steel service center and transportation (including automotive) markets.
Sales to Ryerson Tull, Inc. approximated 12% and 11% of consolidated net sales in the year ended December 31, 1999 and the period from July 17, 1998 through December 31, 1998, respectively. No other customer, except I/N Kote (see Note 14), accounted for more than 10% of the consolidated net sales of the Company during the noted periods.
As of December 31, 1999, approximately 77% of the active workforce was represented by the United Steelworkers of America. The existing labor contract between the USWA and the Company expires July 31, 2004.
NOTE 17--CONSOLIDATED QUARTERLY SALES AND EARNINGS (UNAUDITED)
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES (SUCCESSOR COMPANY)
SCHEDULE II--RESERVES
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM JULY 17, 1998 THROUGH DECEMBER 31, 1998 (Dollars in Millions except per share data)
- ---------------
NOTES:
(A) Workforce reduction costs.
(B) Acquisition costs.
(C) Other costs.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of INLAND STEEL COMPANY
In our opinion, the accompanying consolidated statements of operations, of cash flows and of reinvested earnings present fairly, in all material respects, the results of operations and cash flows of Inland Steel Company and Subsidiaries Companies for the period January 1, 1998 through July 16, 1998 and the year ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP Chicago, Illinois January 8,1999
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS
See Notes to Consolidated Financial Statements
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)
STATEMENT OF ACCOUNTING AND FINANCIAL POLICIES (Dollars in Millions except per share data)
The following briefly describes the Company's principal accounting and financial policies.
ACCOUNTING FOR EQUITY INVESTMENTS
The Company's investments in less than majority-owned companies, joint ventures and partnerships, and the Company's majority interest in the I/N Tek partnership, are accounted for under the equity method.
INVENTORY VALUATION
Inventories are valued at cost which is not in excess of market. Cost is determined by the last-in, first-out method except for supply inventories, which are determined by the average cost or first-in, first-out methods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is depreciated for financial reporting purposes over the estimated useful lives of the assets. Steelmaking machinery and equipment, a significant class of assets, is depreciated on a production-variable method, which adjusts straight-line depreciation to reflect production levels at the steel plant. The adjustment is limited to not more than a 25% increase or decrease from straight-line depreciation. Blast furnace relining expenditures are capitalized and amortized on a unit-of-production method over the life of the lining. All other assets are depreciated on a straight-line method.
Expenditures for normal repairs and maintenance are charged to income as incurred.
Gains or losses from significant abnormal disposals or retirements of properties are credited or charged to income. The cost of other retired assets less any sales proceeds is charged to accumulated depreciation.
CASH EQUIVALENTS
Cash equivalents reflected in the Statement of Cash Flows are highly liquid, short-term investments with maturities of three months or less. Cash management activities are performed by the Company's parent, Inland Steel Industries, Inc. ("Industries"), and periodic cash transfers are made, thereby minimizing the level of cash maintained by the Company.
STOCK BASED COMPENSATION
Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company, which participates in Industries' stock compensation plans, has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of Industries' stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost for stock appreciation rights and performance equity units is recorded annually based on the quoted market price of Industries' stock at the end of the period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to financial statements. Changes in such estimates may affect amounts reported in future periods.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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.
NOTE 2--INVENTORIES
The effect on cost of goods sold of LIFO liquidations in the year ended December 31, 1997 was not material.
NOTE 3--LONG-TERM DEBT
In July 1998, the Company defeased the remaining $26 of Series T First Mortgage Bonds, due December 1, 1998.
Interest cost incurred by the Company totaled $22.4 for the period from January 1, 1998 through July 16, 1998 and $42.3 in 1997. Included in these totals is capitalized interest of $.4 for the period from January 1, 1998 through July 16, 1998 and $1.7 in 1997.
NOTE 4--STOCK OPTION PLANS
The Company has adopted the disclosure-only provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the option plan been determined based on the fair value at the grant date for awards in 1997 consistent with the provisions of FASB Statement No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
The fair value of each option grant of Industries stock is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997: dividend yield of 1.00%; expected volatility of 32.67%; risk-free interest rate of 6.63%; and expected term of 5 years.
Company employees participate in the Industries employee stock purchase plan where employees have the opportunity to sign up twice a year to purchase stock at the end of each six month period at a price that is 90 percent of the fair market value price on the last day of the period. In 1997, Company employees received Industries stock with a total value that was approximately $.08 greater than the price paid for the stock issued.
NOTE 5--DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
DERIVATIVES
The Company has only limited involvement with derivative financial instruments, none of which are used for trading purposes. Derivatives are used to hedge exposure to fluctuations in costs caused by the price
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 5--DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED) volatility of certain metal commodities and natural gas supplies. Gains and losses associated with these hedging transactions become part of the cost of the item being hedged. At no time during 1997 were such hedging transactions material.
LONG-TERM DEBT
The estimated fair value of the Company's long-term debt (including current portions thereof), using quoted market prices of Company debt securities recently traded and market-based prices of similar securities for those securities not recently traded, was $328 at December 31, 1997 as compared with the carrying value of $308 included in the balance sheet at year-end 1997.
NOTE 6--PROVISIONS FOR RESTRUCTURING
In the fourth quarter of 1997, the Company recorded a charge of $10 relating to additional restructuring provisions for previously discontinued raw material operations primarily related to retiree health care and other benefit costs.
NOTE 7--RETIREMENT BENEFITS
PENSIONS
The Inland Steel Industries Pension Plan and Pension Trust, which covers certain employees of the Company, also covers certain employees of Industries and of certain of Industries' other subsidiaries. The plan is a non-contributory defined benefit plan with pensions based on final pay and years of service for all salaried employees and certain wage employees, and years of service and a fixed rate (in most instances based on frozen pay or on job class) for all other wage employees, including members of the United Steelworkers of America. Because the fair value of pension plan assets pertains to all participants in the plan, no separate determination of the fair value of such assets is made solely with respect to the Company.
The funded status of the Industries pension plan (excluding Ryerson Tull, Inc.) as of September 30, 1997 was as follows:
The calculation of benefit obligations was based on a discount (settlement) rate of 7.5%; a rate of compensation increase of 4.0%; and a rate of return on plan assets of 9.5%.
Pension cost for the Company for 1997 was $7.3. In 1997, the Company paid $29.3 to Industries for its share of a contribution to the Industries Pension Trust.
BENEFITS OTHER THAN PENSION
Substantially all of the Company's employees are covered under postretirement life insurance and medical benefit plans that involve deductible and co-insurance requirements. The postretirement life insurance benefit formula used in the determination of postretirement benefit cost is primarily based on applicable
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 7--RETIREMENT BENEFITS--(CONTINUED) annual earnings at retirement for salaried employees and specific amounts for hourly employees. The Company does not prefund any of these postretirement benefits. Effective January 1, 1994, a Voluntary Employee Benefit Association Trust was established for payment of health care benefits to United Steelworkers of America retirees. Funding of the Trust is made as claims are submitted for payment.
The amount of net periodic postretirement benefit cost for 1997 is composed of the following:
The following table sets forth components of the accumulated postretirement benefit obligation:
Any net gain or loss in excess of 10 percent of the accumulated postretirement benefit obligation is amortized over the remaining service period of active plan participants.
The assumptions used to determine the plan's accumulated postretirement benefit obligation are as follows:
A one percentage point increase in the assumed health care cost trend rates for each future year increases the sum of the service cost and interest cost components of the annual net periodic postretirement benefit cost and the accumulated postretirement benefit obligation as of September 30, 1997 by $9 and $106, respectively.
NOTE 8--INCOME TAXES
The Company participates in a tax-sharing agreement under which current and deferred income tax provisions are determined for each company in the Industries group on a stand-alone basis. Any current liability is paid to Industries. If the Company is unable to use all of its allocated tax attributes (net operating loss ("NOL") and tax credit carryforwards) in a given year but other companies in the consolidated group are able to utilize them, then the Company will be paid for the use of its attributes. NOL and tax credit carryforwards are allocated to each company in accordance with applicable tax regulations as if a company were to leave the consolidated group. Companies with taxable losses record current income tax credits not to
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 8--INCOME TAXES--(CONTINUED) exceed current income tax charges recorded by profitable companies. If Industries uses NOL carryforwards, the Company will use the appropriate portion of that year's carryforward previously allocated to it, if any.
A state tax sharing agreement, similar to the federal agreement, also exists with Industries for those states in which the consolidated group is charged state taxes on a unitary or combined basis.
The elements of the provisions for income taxes for each of the periods indicated below were as follows:
The components of the deferred income tax assets and liabilities arising under FASB Statement No. 109 were as follows:
For tax purposes, the Company had available, at December 31, 1997, NOL carryforwards for regular federal income tax purposes of approximately $651 which will expire as follows: $214 in 2006, $265 in 2007, $109 in 2008, $6 in 2009 and $57 in 2011. The Company also had investment tax credit and other general business credit carryforwards for tax purposes of approximately $6, which expire during the years 1998 through 2006. A valuation allowance has been established for those tax credits which are not expected to be realized. Additionally, in conjunction with the Alternative Minimum Tax ("AMT") rules, the Company had available AMT credit carryforwards for tax purposes of approximately $41, which may be used indefinitely to reduce regular federal income taxes.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 8--INCOME TAXES--(CONTINUED) The Company believes that it is more likely than not that all of the NOL carryforwards will be utilized prior to their expiration. This belief is based upon the factors discussed below.
The NOL carryforwards and existing deductible temporary differences (excluding those relating to FASB Statement No. 106) are substantially offset by existing taxable temporary differences reversing within the carryforward period. Furthermore, any such recorded tax benefits which would not be so offset are expected to be realized by continuing to achieve future profitable operations.
Subsequent to the adoption of FASB Statement No. 109, the Company adopted FASB Statement No. 106 and recognized the entire transition obligation at January 1, 1992 as a cumulative effect charge in 1992. At December 31, 1997, the deferred tax asset related to the Company's FASB Statement No. 106 obligation was $396. To the extent that future annual charges under FASB Statement No. 106 continue to exceed deductible amounts, this deferred tax asset will continue to grow. Thereafter, even if the Company should have a tax loss in any year in which the deductible amount would exceed the financial statement expense, the tax law provides for a 20-year carryforward period of that loss. Because of the extremely long period that is available to realize these future tax benefits, a valuation allowance for this deferred tax asset is not necessary.
The Industries group operates in a highly cyclical industry and consequently has had a history of generating and then fully utilizing significant amounts of NOL carryforwards. During the years 1986 through 1989, the Industries group utilized approximately $600 of NOL carry forwards and for the years 1995 and 1997 in total utilized approximately $283 of NOL carryforwards.
Total income taxes reflected in the Consolidated Statement of Operations differ from the amounts computed by applying the federal corporate tax rate as follows:
NOTE 9--I/N TEK AND I/N KOTE JOINT VENTURES
I/N Tek, a general partnership formed for a joint venture between the Company and Nippon Steel Corporation ("NSC"), owns and operates a cold-rolling facility. I/N Tek is 60% owned by a wholly owned subsidiary of the Company and 40% owned by an indirect wholly owned subsidiary of NSC. The Company has exclusive rights to the productive capacity of the facility, except in certain limited circumstances, and, under a tolling arrangement with I/N Tek, has an obligation to use the facility for the production of cold rolled steel. Under the tolling arrangement, the Company was charged $149.2 in 1997 for such tolling services. Industries and NSC each have guaranteed a portion of long-term financing of I/N Tek. At December 31, 1997, Industries' share of such guaranty amounted to $116.
The Company and NSC also own and operate another joint venture which consists of a 400,000 ton electrogalvanizing line and a 500,000 ton hot-dip galvanizing line adjacent to the I/N Tek facility. I/N Kote, the general partnership formed for this joint venture, is owned 50% by a wholly owned subsidiary of the
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 9--I/N TEK AND I/N KOTE JOINT VENTURES--(CONTINUED) Company and 50% by an indirect wholly owned subsidiary of NSC. The Company and NSC each have guaranteed the share of long-term financing attributable to their respective subsidiary's interest in the partnership. I/N Kote had $376 outstanding under its long-term financing agreement at December 31, 1997. I/N Kote is required to buy all of its cold rolled steel from the Company, which is required to furnish such cold rolled steel at a price that results in an annual return on equity to the partners of I/N Kote, depending upon operating levels, of up to 10% after operating and financing costs; this price may be subject to an adjustment if the Company's return on sales differs from I/N Kote's return on sales. Purchases of Company cold rolled steel by I/N Kote aggregated $194.5 for the period from January 1, 1998 through July 16, 1998 and $320.6 in 1997. At year-end 1997, I/N Kote owed the Company $12.8 related to these purchases. Prices of cold rolled steel sold by the Company to I/N Kote are determined pursuant to the terms of the joint venture agreement and are based, in part, on operating costs of the partnership. In 1997 and 1996, the Company sold cold rolled steel to I/N Kote at prices that exceeded the Company's production costs but were less than the market prices for cold rolled steel products. I/N Kote also provides tolling services to the Company for which it was charged $2.4 for the period from January 1, 1998 through July 16, 1998 and $22.1 in 1997. The Company sells all I/N Kote products that are distributed in North America.
NOTE 10--INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
The Company's investments in unconsolidated joint ventures accounted for by the equity method consist primarily of its 60% interest in I/N Tek, 50% interest in I/N Kote, 50% interest in PCI Associates, 40% interest in the Empire Iron Mining Partnership, 15% interest in Wabush Mines in 1996 and 1995 and 12 1/2% interest in Walbridge Electrogalvanizing Company. I/N Tek and I/N Kote are joint ventures with NSC (see Note 9). The Company does not exercise control over I/N Tek, as all significant management decisions of the joint venture require agreement by both of the partners. Due to this lack of control by the Company, the Company accounts for its investment in I/N Tek under the equity method. PCI Associates is a joint venture which operates a pulverized coal injection facility at the Indiana Harbor Works. Empire is an iron ore mining and pelletizing ventures owned in various percentages primarily by U.S. steel companies. In 1997, the Company sold its interest in Wabush Mines, resulting in a $9 pretax gain. Walbridge is a venture that coats cold-rolled steel in which Inland has the right to 25% of the productive capacity. The Company sold its interest in Walbridge on June 30, 1998 and recognized a gain on the sale of $2.7. Following is a summary of combined financial information of the Company's unconsolidated joint ventures:
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 11--COMMITMENTS AND CONTINGENCIES
At year-end 1997, the Company guaranteed $18.3 of long-term debt attributable to a subsidiary's interest in PCI Associates. 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.
The Company and its subsidiaries have various operating leases for which future minimum lease payments are estimated to total $80.1 through 2022, including approximately $16.1 in 1998, $12.6 in 1999, $10.1 in 2000, $9.1 in 2001, and $8.7 in 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 government 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 December 31, 1997, the Company's reserves for environmental liabilities totaled $25, $19 of which 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, approximated $22 at year-end 1997.
NOTE 12--RELATED PARTY TRANSACTIONS
Industries has established procedures for charging its actual administrative expenses to the operating companies owned by it. These charges are for management, financial and legal services provided to those companies. Charges from Industries for the period from January 1, 1998 through July 16, 1998 totaled $7.1, and for 1997 totaled $13.7.
There are also established procedures to charge interest on all intercompany loans within the Industries group of companies. Such loans currently bear interest at the prime rate. For the period from January 1, 1998 through July 16, 1998 and for 1997, the Company's net interest expense to companies within the Industries group totaled $10.3 and $18.4.
The Company sells to and purchases products from related companies at prevailing market prices. These transactions for the indicated years, except those with I/N Kote (see Note 9), are summarized as follows:
NOTE 13--CONCENTRATION OF CREDIT RISK
The Company produces and sells a wide range of steels, of which approximately 99% consists of carbon and high-strength low-alloy steel grades. For the period from January 1, 1998 through July 16, 1998, approximately 77% of the sales were to customers in five mid-American states, and 93% were to customers in
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)--(CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions except per share data)
NOTE 13--CONCENTRATION OF CREDIT RISK -- (CONTINUED) 20 mid-American states. Over half the sales are to the steel service center and transportation (including automotive) markets.
No customer, except I/N Kote (see Note 9), accounted for more than 10% of the consolidated net sales of the Company during the period from January 1, 1998 through July 16, 1998 and the year ended December 31, 1997.
NOTE 14--CONSOLIDATED QUARTERLY SALES AND EARNINGS (UNAUDITED)
- ---------------
* Includes $9.6 additional restructuring provisions, $6.7 after tax.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (PREDECESSOR COMPANY)
SCHEDULE II--RESERVES
FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH JULY 16, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997 (Dollars in Millions except per share data)
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NOTES:
(A) Allowances granted during year.
(B) Bad debts written off during year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ DALE E. WIERSBE By: --------------------------------------
Dale E. Wiersbe President and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
/s/ MICHAEL G. RIPPEY By: --------------------------------------
Michael G. Rippey Attorney-in-fact March 30, 2000
INDEX TO EXHIBITS