-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KUX1BPrjTgkq4TELHBUHi2FGbMeUEOZVjBNAgcVLcO51BAwIGt3Vm0pwcMaZgtJZ r3u6dLu/6us0wpRuFvJ47w== 0000830260-98-000007.txt : 19980326 0000830260-98-000007.hdr.sgml : 19980326 ACCESSION NUMBER: 0000830260-98-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW CF&I INC CENTRAL INDEX KEY: 0001008915 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES & ROLLING & FINISHING MILLS [3310] IRS NUMBER: 931086900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20781 FILM NUMBER: 98572753 BUSINESS ADDRESS: STREET 1: 1000 SW BROADWAY STE 2200 CITY: PORTLAND STATE: OR ZIP: 97205 BUSINESS PHONE: 5032239228 MAIL ADDRESS: STREET 1: 1000 SW BROADWAY SUITE 2200 CITY: PORTLAND STATE: OR ZIP: 97205 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 NEW CF&I, INC. (Exact name of registrant as specified in its charter) Delaware 02-20781 93-1086900 - ------------------------------------------------------------------------------- (State or other jurisdiction of (Commission File Number) (IRS Employer incorporation or organization) Identification Number) 1000 Broadway Building, Suite 2200, Portland, Oregon 97205 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (503) 223-9228 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) CF&I STEEL, L.P. (Exact name of registrant as specified in its charter) Delaware 02-20779 93-1103440 - ------------------------------------------------------------------------------- (State or other jurisdiction of (Commission File Number) (IRS Employer incorporation or organization) Identification Number) 1000 Broadway Building, Suite 2200, Portland, Oregon 97205 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (503) 223-9228 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of each class Name of exchange on which registered ------------------- ------------------------------------ Guarantees of 11% First New York Stock Exchange Mortgage Notes due 2003 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- State the aggregate market value of the voting stock held by non-affiliates of the registrant. Not Applicable Indicate the number of shares outstanding of each of the registrant's classes of stock as of January 31, 1998: NEW CF&I, INC. -------------- COMMON STOCK, $1 PAR VALUE 200 -------------------------- -------------------------------- (Title of Class) (Number of shares outstanding) DOCUMENTS INCORPORATED BY REFERENCE: Proxy statement for Oregon Steel Mills, Inc. Annual Meeting of Stockholders to be held April 30, 1998 is incorporated by reference into Part III of this report. NEW CF&I, INC. CF&I STEEL, L.P. TABLE OF CONTENTS PAGE ---- PART I ITEM 1. BUSINESS................................................... 1 General................................................. 1 Capital Improvement Program............................. 1 Products................................................ 2 Raw Materials .......................................... 3 Marketing and Customers................................. 3 Competition and Other Market Factors.................... 4 Environmental Matters................................... 5 Labor Dispute........................................... 6 Employees............................................... 6 ITEM 2. PROPERTIES.................................................. 7 ITEM 3. LEGAL PROCEEDINGS........................................... 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 8 Executive Officers of the Registrant.................... 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS............................. 9 ITEM 6. SELECTED FINANCIAL DATA..................................... 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 10 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK............................................. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 15 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 46 PART III ITEMS 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT and 11. AND EXECUTIVE COMPENSATION.............................. 47 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................... 49 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..................................... 50 PART I ITEM 1. BUSINESS GENERAL New CF&I, Inc. ("Company") was incorporated in the State of Delaware on May 5, 1992. On March 3, 1993, the Company acquired for $22.2 million a 95.2 percent interest in a newly formed limited partnership, CF&I Steel, L.P. ("CF&I" or "Partnership"), a Delaware limited partnership. The remaining 4.8 percent interest was owned by the Pension Benefit Guaranty Corporation ("PBGC"). In 1997, Oregon Steel Mills, Inc. ("Oregon Steel") purchased the 4.8 percent interest owned by the PBGC. The Company purchased the railroad business assets and CF&I purchased substantially all of the steelmaking, fabricating, and metals assets of CF&I Steel Corporation for $113.1 million. These assets are located in Pueblo, Colorado ("Pueblo Mill"). The Pueblo Mill is a steel minimill which produces long-length, standard and head-hardened steel rails, seamless oil country tubular goods ("seamless pipe"), wire rod, and bar products. The Pueblo Mill has melting capacity of approximately 1.2 million tons and finishing capacity of approximately 1.2 million tons. In January 1998, CF&I assumed the trade name of Rocky Mountain Steel Mills ("RMSM"). In August of 1994, the Company sold a 10 percent equity interest in the Company to a wholly-owned subsidiary of Nippon Steel Corporation ("Nippon"). In connection with that sale, Nippon agreed to license to the Company a proprietary technology for producing deep head-hardened ("DHH") rail products as well as to provide certain production equipment to produce DHH rail. The Company received a cash payment of $16.8 million in connection with that transaction. In November 1995, Oregon Steel sold a 3 percent equity interest in the Company to two companies of the Nissho Iwai Group ("Nissho Iwai"), a Japanese trading company. In connection with that sale, Nissho Iwai agreed to promote the international sale of certain steel products produced by CF&I and Oregon Steel. Oregon Steel owns the remaining 87 percent of the Company. CAPITAL IMPROVEMENT PROGRAM As part of its strategy in acquiring CF&I in March 1993, the Company anticipated making significant capital additions to the Pueblo Mill. Shortly after its acquisition in 1993, the Company began a series of major capital improvements at the Pueblo Mill designed to increase yields, improve productivity and quality and expand the Company's ability to offer specialty rod and bar products. With the installation of in-line rail head-hardening capability in 1996, all capital improvements are now complete. The primary components of the capital improvements at the Pueblo Mill are outlined below. STEELMAKING. The Company installed a ladle refining furnace and a vacuum degassing facility and upgraded both continuous casters. During 1995, the Company eliminated ingot casting and replaced it with more efficient continuous casting methods which allow the Company to cast directly into blooms. As a result, the Company estimates that it has expanded the steelmaking capacity at the Pueblo Mill to approximately 1.2 million tons of hot metal annually from approximately 900,000 tons of hot metal annually at the time of acquisition. ROD AND BAR MILL. At the time of the acquisition of CF&I, the rod and bar mills at the Pueblo Mill were relatively old and located in separate facilities which resulted in significant costs as the Company shifted production between them in response to market conditions. In the third quarter of 1995, the Company commenced operation of a new combination rod and bar mill with a new reheat furnace and a high-speed rod train capable of producing commodity and specialty grades of rod and bar products. Depending on product mix, the new combined facility has a capacity of up to 600,000 tons per year. These improvements should enable the Company to produce a wider range of high margin specialty products, such as high-carbon rod, merchant bar and other specialty bar products, and larger rod coil sizes which the Company believes are preferred by many of its customers. RAIL MANUFACTURING. At the time of the Company's acquisition of CF&I, rails were produced by ingot casting using energy-intensive processes with significant yield losses as the ingots were reheated, reduced to blooms and then rolled into rails. Continuous casting has increased rail yields and decreased rail manufacturing costs. In 1996 the Company enhanced its existing 450,000 tons of annual railmaking capacity through the addition of equipment capable of producing DHH rail. Rail produced using this 1 technology is considered by many rail customers to be more durable and higher quality rail than that produced with former techniques. As a result of these improvements, the Company believes it can provide a functionally superior, higher margin product. PRODUCTS The following chart identifies the Company's principal products and the primary markets for those products. Products Markets -------- ------- Rail Rail transportation Wire rod Durable goods Capital equipment Bar products Construction Durable goods Capital equipment Seamless pipe Oil and gas producers Gas transmission The following table sets forth for the periods indicated the tonnage shipped and the Company's total shipments by product class. TONS SHIPPED ------------------------------------- PRODUCT 1997 1996 1995 ---- ---- ---- Rail 350,200 287,700 240,700 Rod, Bar and Wire* 409,200 392,600 271,300 Seamless Pipe 120,200 151,200 116,100 Semifinished 28,000 61,700 12,100 ------- ------- ------- Total Company 907,600 893,200 640,200 ======= ======= ======= *The Company sold its wire products production facility in June 1997. RAIL. The Company produces conventional, premium and head-hardened rail at its Pueblo Mill. The Pueblo Mill is the sole manufacturer of rail west of the Mississippi River and one of only two rail manufacturers in the United States. Rails are manufactured in the five most popular rail weights (115 lb/yard through 136 lb/yard), in 39 and 80 foot lengths as well as quarter mile welded strings. The primary customers for the Pueblo Mill's rail are the major western railroads. Rail is also sold directly to rail contractors, transit districts and short-line railroads. As part of its capital improvement program, the Company improved its rail manufacturing facilities to include the production of in-line head-hardened and other premium rail. The installation of the in-line head-hardening process was completed in the third quarter of 1996. In-line head-hardened rail is produced through a proprietary finishing technology. The Company has licensed the technology (known as deep head-hardened or DHH technology) from Nippon in connection with Nippon's investment in the Company. In 1997 the Company produced approximately 53,300 tons of head-hardened product using the DHH technology. The in-line DHH technology allows the Company to produce head-hardened product up to the capacity of the rail facility. Rail produced using the improved in-line technology is considered by many rail customers to be more durable and of higher quality than rail produced with existing off-line techniques. During 1997, the Pueblo Mill began a rail dock expansion project. When completed in early 1998, the rail mill capacity will have been increased from 450,000 tons to over 500,000 tons. 2 ROD AND BAR PRODUCTS. The Company's rod and bar mill is able to produce coils of up to 6,000 pounds. The improved steel quality and finishing capabilities allow the Company to manufacture rods up to 1" in diameter, and to manufacture a variety of high-carbon rod products such as those used for spring wire, wire rope, tire bead and tire cord. The Company produces several sizes of coiled rebar in the most popular grades for the reinforcement of concrete products. SEAMLESS PIPE. Seamless pipe produced at the Pueblo Mill consists of seamless casing, coupling stock and standard and line pipe. Seamless pipe casing is used as a structural retainer for the walls of oil or gas wells. Standard and line pipe are used to transport liquids and gases both above and underground. The Company's seamless pipe mill is equipped to produce the most widely used sizes of seamless pipe (7" outside diameter through 10-3/4" outside diameter) in all standard lengths. The Company's production capability includes both carbon and high quality, high strength (heat-treated) tubular products. The Company also sells semifinished seamless pipe (known as "green tubes") for processing and finishing by others. RAW MATERIALS The Company's principal raw material for the Pueblo Mill is ferrous scrap metal derived from, among other sources, junked automobiles, railroad cars and railroad track materials and demolition scrap from obsolete structures, containers and machines. In addition, hot briquetted iron ("HBI") and pig iron (together "alternative metallics") can substitute for a limited portion of the scrap used in minimill steel production, although the sources and availability of alternative metallics are substantially more limited than those of scrap. The purchase prices for scrap and alternative metallics are subject to market forces largely beyond the control of the Company including demand by domestic and foreign steel producers, freight costs, speculation by scrap brokers and other conditions. The cost of scrap and alternative metallics to the Company can vary significantly, and the Company's product prices often cannot be adjusted, especially in the short-term, to recover the costs of increases in scrap and alternative metallics prices. The long-term demand for steel scrap and its importance to the domestic steel industry may be expected to increase as steelmakers continue to expand scrap-based electric and furnace capacity. For the foreseeable future, however, the Company believes that supplies of steel scrap will continue to be available in sufficient quantities at competitive prices. In addition, a number of technologies exist for the processing of iron ore into forms which may be substituted for steel scrap in electric arc furnace-based steelmaking. Such forms include direct-reduced iron, iron carbide, and hot-briquetted iron. While such forms may not be cost competitive with steel scrap at present, a sustained increase in the price of steel scrap could result in increased implementation of these alternative technologies. To reduce the effects of scrap price volatility and improve access to high-quality raw materials, the Company is seeking to decrease its dependence on steel scrap as an input for the production process by utilizing alternative metallics. The Company has successfully integrated alternative metallics into the production process as a low residual scrap substitute. The Company typically purchases alternative metallics on a contract basis (whereas scrap is typically purchased on the spot market), which limits the effects of price fluctuations experienced in the scrap market. To date, the Company has purchased substantially all of the HBI it has used from a single source, but it has no long-term contracts for material amounts of HBI, and there is no assurance that it will be able to obtain significant quantities of HBI in the future. Pig iron is purchased from a variety of international producers. MARKETING AND CUSTOMERS Steel products are sold by the Company principally through its own sales organization. In addition to selling to customers who consume steel products directly, the Company sells steel products to steel service centers, distributors, processors and converters. The sales force is organized by product line. The Company has separate sales people for seamless pipe, rod and bar, and rail products. Most of the Company's sales are initiated by contacts between sales representatives and customers. Accordingly, the Company does not incur substantial advertising or other promotional expenses for the sale of its products. In 1997, the Company derived 3 17.2, 12.9 and 10.8 percent of its sales from Burlington Northern Santa Fe Railway Company, Union Pacific Railroad Company, and Davis Wire Corporation, respectively. Except for contracts entered into from time to time to supply rail to significant projects and one long-term rod price agreement, the Company does not have any significant ongoing contracts with customers to purchase steel products, and orders placed with the Company generally are cancelable by the customer prior to production. The Company does not have a general policy permitting return of purchased steel products except for product defects. The Company does not routinely offer extended payment terms to its customers. The business is generally not subject to significant seasonal trends. The Company does not have material contracts with the United States Government and does not have any contracts subject to renegotiation. The primary customers for the rail are the major western railroads. Rail is also sold directly to rail distributors, transit districts and short-line railroads. The Company believes its proximity to western rail markets benefits the Company's marketing efforts. Seamless pipe is sold primarily through distributors to a large number of oil exploration and production companies. Sales of standard and line pipe are made both through distributors and directly to oil and gas transmission and production companies. The market for the Company's seamless pipe product is primarily domestic and focused in the western and southwestern United States. The demand for this product is determined in large part by the number and drilling depths of the oil and gas drilling rigs working in the United States. The Company sells its bar products (primarily reinforcing bar) to fabricators and distributors. The majority of its customers are located within Colorado and the western U.S. The Company's wire rod products are sold primarily to wire drawers ranging in location from the Midwest to the West Coast. The demand for wire rod is dependent upon a wide variety of markets, including agricultural, construction and the durable goods segments. The Company entered the high carbon rod market during 1995 as a direct result of the investment in the new rolling facility and continues to increase its participation in the higher margin, high-carbon rod market. COMPETITION AND OTHER MARKET FACTORS The steel industry is cyclical in nature, and the domestic steel industry has been adversely affected in recent years by high levels of steel imports, worldwide production overcapacity and other factors. The Company also is subject to industry trends and conditions, such as the presence or absence of sustained economic growth and construction activity, currency exchange rates and other factors. The Company is particularly sensitive to trends in the oil and gas, construction, rail transportation, and agriculture, as these industries are significant markets for the Company's products. Competition within the steel industry is intense. The Company competes primarily on the basis of product quality, price and responsiveness to customer needs. Many of the Company's competitors are larger and have substantially greater capital resources, more modern technology and lower labor and raw material costs than the Company. In addition, a new minimill in Arizona and an upgraded minimill in Oregon have commenced production of rod and bar products. The Company expects increased competition as these competitors increase production. Moreover, U.S. steel producers have historically faced significant competition from foreign producers. The highly competitive nature of the industry, combined with excess production capacity in some products, may in the future exert downward pressure on prices for certain of the Company's products. The majority of current rail requirements in the United States revolves primarily around replacement rail for existing rail lines. However, some new lines are being constructed in heavy traffic areas of the United States. Imports have been a significant factor in the domestic premium rail market in recent years. The Company's capital expenditure program at CF&I provided the rail production facilities with continuous cast steel capability and in-line head-hardening rail capabilities necessary to compete with other producers. Pennsylvania Steel Technologies is the only other domestic rail producer. 4 The Company's primary competitors in seamless pipe include a number of domestic and foreign manufacturers. The Company has the flexibility to produce relatively small volumes of specified products on short notice in response to customer requirements. Principal domestic competitors include U.S. Steel Corporation, Lone Star Steel and North Star Steel. The competition in bar products include a group of minimills that have a geographical location close to the intermountain market. The Company's market for wire rod is considered to encompass the western United States. Domestic rod competitors include GS Technologies, North Star Steel, Cascade Steel Rolling Mills, Keystone Steel and Wire and Northwestern Steel & Wire. ENVIRONMENTAL MATTERS The Company is subject to federal, state and local environmental laws and regulations concerning, among other things, waste water, air emissions, toxic use reduction and hazardous material disposal. The Pueblo Mill is classified in the same manner as other similar steel mills in the industry, as generating hazardous waste materials because the melting operation produces dust that contains heavy metals ("EAF" dust). This dust, which constitutes the largest waste stream generated at these facilities, is managed in accordance with applicable laws and regulations. At December 31, 1997, the Company had accrued a reserve of $35.0 million for environmental remediation at the Pueblo Mill. This reserve is based upon a range of estimated remediation costs of $23.1 million to $43.6 million. The Company's estimate of this environmental reserve was based on two remediation investigations conducted by independent environmental engineering consultants. The reserve includes costs for Resource Conservation and Recovery Act facility investigation, corrective measures study, remedial action, and operation and maintenance of the remedial actions taken. The State of Colorado has issued a postclosure permit for historic hazardous waste units at the Pueblo Mill. As part of the postclosure permit requirements, CF&I must conduct a corrective action program for the 82 solid waste management units at the facility and continue to address projects on the prioritized corrective action schedule which substantially reflects a straight-line rate of expenditure over 30 years. The State of Colorado has indicated that the schedule for corrective action could be accelerated if new data indicated a greater threat to the environment than is currently known to exist. The Company believes the reserve is adequate to cover the remediation costs. The Clean Air Act Amendments of 1990 imposed new responsibilities on many industrial sources of air emissions, including the plant owned by the Company. The Company cannot determine the exact financial impact of the new law because Congress is continuing to modify it. The impact will depend on a number of site-specific factors, including the quality of the air in the geographical area in which a plant is located, rules to be adopted by each state to implement the law and future Environmental Protection Agency rules specifying the content of state implementation plans. The Company anticipates that it will be required to make additional expenditures, and will be required to pay higher fees to governmental agencies as a result of the new law and future laws regulating air emissions. In addition, the monitoring and reporting requirements of the new law have subjected and will subject all air emissions to increased regulatory scrutiny. The Company submitted an application for a permit under Title V of the Clean Air Act for the Pueblo Mill in 1995. The Company has budgeted capital expenditures to comply with Title V requirements in the amount of $9.5 million over a two-year period beginning in 1997. The Company's future expenditures for installation of and improvements to environmental control facilities, remediation of environmental conditions existing at its properties and other similar matters are difficult to predict accurately. Environmental legislation and regulations and related administrative policies have changed rapidly in recent years. It is likely that the Company will be subject to increasingly stringent environmental standards in the future (including those under the Clean Air Act Amendments of 1990, the Clean Water Act Amendments of 1990 stormwater permit program and toxic use reduction programs) and will be required to make additional expenditures, which could be significant, relating to environmental matters on an ongoing basis. Furthermore, although the Company has established certain reserves for environmental remediation as described above, there is no assurance regarding the cost of remedial measures that might eventually be required by environmental authorities or that additional environmental hazards, requiring further remedial expenditures, might not be asserted by such authorities or private parties. Accordingly, the costs of remedial measures may exceed the amounts reserved. There is no assurance that expenditures or proceedings of the nature described above, or 5 other expenditures or liabilities resulting from hazardous substances located on the Company's property or used or generated in the conduct of its business, or resulting from circumstances, actions, proceedings or claims relating to environmental matters, will not have a material adverse effect on the consolidated financial condition of the Company. LABOR DISPUTE The labor contract at CF&I expired on September 30, 1997. After a brief contract extension intended to help facilitate a possible agreement, on October 3, 1997 the United Steel Workers of America ("Union"), initiated a strike for approximately 1,060 bargaining unit employees. The parties failed to reach final agreement on a new labor contract due to differences on economic issues. As a result of contingency planning, the Company was able to avoid complete suspension of operations at the Pueblo Mill by utilizing a combination of permanent replacement workers, striking employees who returned to work and salaried employees. By December 1997, the Company had sufficient permanent replacement employees necessary to reach full production capacity. At the end of December, the Pueblo Mill was operating at approximately 65% of capacity and is expected to reach full production during the first half of 1998. As a result of weathering the strike and successfully resuming operations, the Company believes it can return to full production with fewer workers than before the strike. On December 30, 1997 the Union called off the strike and made an unconditional offer to return to work. At the time of this offer, only a few vacancies existed at the Pueblo Mill. As of the end of January 1998, 30 former striking employees had returned to work as a result of their unconditional offer. Approximately 920 former striking workers remain unreinstated ("Unreinstated Employees"). As a result of the labor dispute, both the Company and the Union have filed unfair labor practice charges with the National Labor Relations Board ("NLRB"). On February 24, 1998, the Regional Director of the NLRB Denver office informed the parties that he would issue complaints against both the Company and the Union. The Union will be charged with engaging in numerous incidents of picket line violence, and threats and intimidation of replacement workers. The complaint against the Company, which was issued on February 27, 1998, alleges violations of several provisions of the National Labor Relations Act. The Company not only denies the allegations, but rather believes that both the facts and the law fully support its contention that the strike was economic in nature and that it was not obligated to displace the properly hired permanent replacement employees. Ultimate determination of the issue may well require action by an appropriate United States Court of Appeals. In the event there is an adverse determination of these issues, Unreinstated Employees could be entitled to back pay from the date of the Union's unconditional offer to return to work through the date of the adverse determination ("Backpay Liability"). The number of Unreinstated Employees entitled to back pay would probably be limited to the number of replacement workers, currently approximately 600 workers. However, the Union might assert that all Unreinstated Employees could be entitled to back pay. Back pay is generally measured by the quarterly earnings of those working less interim wages earned elsewhere by the Unreinstated Employees. In addition, each Unreinstated Employee has a duty to take reasonable steps to mitigate the Backpay Liability by seeking employment elsewhere that has comparable demands and compensation. It is not presently possible to estimate the extent to which interim earnings and failure to mitigate the Backpay Liability would affect the cost of an adverse determination. EMPLOYEES As of December 31, 1997, the Company had 984 full-time employees. Approximately 90 employees work under collective bargaining agreements with several unions, including the United Steelworkers of America. An additional 709 employees work under collective bargaining agreements with the Union which expired September 30, 1997. The Company and the Union were unable to agree on terms for a new labor agreement. See "Business-Labor Dispute". The Company has a profit participation plan for its employees which permits eligible employees to share in the pretax profits of CF&I. 6 ITEM 2. PROPERTIES The Pueblo Mill is located in Pueblo, Colorado on approximately 570 acres. The operating facilities principally consist of two electric arc furnaces for production of all raw steel, a ladle refining furnace and vacuum degassing system, two 6-strand continuous round casters for producing semifinished steel, and three finishing mills for conversion of semifinished steel to a finished steel product. These finishing mills consist of a rail mill, seamless tube mill, and a rod and bar mill. At December 31, 1997, the Company had the following nominal capacities which are affected by product mix: PRODUCTION PRODUCTION CAPACITY 1997 (TONS) (TONS) ---------- ---------- Melting..................... 1,200,000 952,200 Finishing Mill.............. 1,200,000 866,100 . Borrowing requirements for capital expenditures and other cash needs, both short-term and long-term, are provided through a loan from Oregon Steel. On June 19, 1996, Oregon Steel completed a public offering of $235 million principal amount of 11% First Mortgage Notes due 2003 ("Notes"). The Company and CF&I have guaranteed the obligations of Oregon Steel under the Notes. The Notes and guarantees are secured by a lien on substantially all of the property, plant and equipment of the Company and CF&I. (See Note 12 to the Company's Consolidated Financial Statements.) ITEM 3. LEGAL PROCEEDINGS The Company is a party to two pending OSHA proceedings. In May 1997 the Occupational Safety & Health Administration ("OSHA") issued a citation alleging violations of various provisions of applicable safety codes at the Pueblo Mill. The citation seeks total penalties of $1,115,500. On August 13, 1997, OSHA filed a complaint which initiated a proceeding on the citation before the Occupational Safety and Health Review Commission ("Commission"). In October 1997, OSHA issued a second citation to the Company and on December 26, 1997 it filed a complaint on that citation before the Commission seeking penalties of $72,500. The complaints allege that some of the violations are willful or repeat violations and that the remainder are serious. The Company has appealed the citations. Although the Company believes that the final out-come of the proceedings will not have a material adverse effect on the Company, the Company's appeal may be unsuccessful in whole or in part and it may be required to pay all or a portion of the assessed penalties. The Company is also party to various claims, disputes, legal actions and other proceedings involving contracts, employment and various other matters. In the opinion of management, the outcome of these matters should not have a material adverse effect on the consolidated financial condition of the Company. The Company maintains insurance against various risks, including certain types of product liability. The Company does not maintain insurance against liability arising out of waste disposal, other environmental matters or earthquake damage because of the high cost of such insurance. There is no assurance that insurance currently carried by the Company, including product liability insurance, will be available in the future at reasonable rates or at all. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were voted upon during the fourth quarter of 1997. EXECUTIVE OFFICERS OF THE REGISTRANT Officers are elected by the Board of Directors of the Company to serve for a period ending with the next succeeding annual meeting of the Board of Directors held immediately after the annual meeting of stockholders. The Partnership has no independent executive officers. The name of each executive officer of the Company, age as of February 1, 1998, and position(s) and office(s) and all other positions and offices held by each executive officer are as follows: ASSUMED PRESENT EXECUTIVE NAME AGE POSITIONS POSITION - ---- ---- --------- --------- Thomas B. Boklund 58 Chairman of the Board of March 1993 Directors and Chief Executive Officer Joe E. Corvin 53 President and April 1997 Chief Operating Officer L. Ray Adams 47 Vice President of Finance April 1994 and Chief Financial Officer Michael D. Buckentin 37 Vice President, General Manager April 1997 James E. Dionisio 47 Vice President of Sales November 1995 and Marketing Christopher D. Cassard 44 Corporate Controller April 1997 LaNelle F. Lee 60 Secretary April 1994 Jeff Stewart 36 Treasurer April 1997 Each of the executive officers named above has been employed by CF&I or Oregon Steel in an executive or managerial role for at least five years, except Mr. Dionisio. Mr. Dionisio joined CF&I in March 1993 as Sales Manager - Tubular Products. From 1984 to February 1993, he was Sales Manager - Tubular Products for CF&I Steel Corporation. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Neither the Company's common stock nor CF&I's partnership interests are publicly traded. At December 31, 1997, the number of the Company's stockholders of record was four. No dividends have been paid on the common stock. ITEM 6. SELECTED FINANCIAL DATA The financial data included in the table have been selected by the Company and have been derived from the consolidated financial statements for those years.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1997 1996 1995 1994 1993(1) ----- ----- ---- ----- ------- INCOME STATEMENT DATA: Sales $402,295 $393,696 $303,003 $339,474 $264,658 Cost of sales 366,641 361,465 279,099 314,966 241,381 Selling, general and administrative expenses 23,800 17,600 17,159 16,625 12,515 Profit participation 1,331 275 449 - 477 -------- -------- --------- -------- -------- Operating income 10,523 14,356 6,296 7,883 10,285 Other expense, net (23,566) (22,144) (11,436) (3,051) (4,595) Minority interests 882 607 497 6 (139) Income tax benefit (expense) 4,529 2,729 5,066 (2,125) (2,123) -------- -------- -------- -------- -------- Net income (loss) $ (7,632) $ (4,452) $ 423 $ 2,713 $ 3,428 ======== ======== ======== ======== ======== BALANCE SHEET DATA (AT DECEMBER 31): Working capital $ 14,906 $ 49,210 $ 47,504 $ 36,327 $ 28,660 Total assets 364,087 388,062 392,268 329,325 194,701 Current liabilities 70,894 57,809 74,712 75,825 69,462 Long-term debt 220,387 250,416 232,416 167,471 59,787 Total stockholders' equity 11,063 18,695 23,168 27,785 25,373 OTHER DATA: Depreciation and amortization $ 13,573 $ 12,931 $ 8,302 $ 3,723 $ 2,689 Capital expenditures $ 12,846 $ 35,060 $ 61,406 $111,634 $ 15,620 Total tonnage sold 907,600 893,200 640,200 765,600 624,700 Operating margin 2.6% 3.6% 2.1% 2.3% 3.9% Operating income per ton sold $12 $16 $10 $10 $16
(1) Represents activity from the March 3, 1993 acquisition date to December 31, 1993. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General - ------- The following information contains forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties and actual results could differ materially from those projected. Such risks and uncertainties include, but are not limited to, general business and economic conditions; competitive products and pricing, as well as fluctuations in demand; potential equipment malfunction, work stoppages, and plant construction and repair delays. CF&I purchased the Pueblo Mill and related assets in March 1993. The Pueblo Mill has melting and finishing capacity of approximately 1.2 million tons per year. In 1997, 1996 and 1995 the Pueblo Mill shipped 907,600, 893,200 and 640,200 tons, respectively, and generated revenues of $402.3 million, $393.7 million and $303.0 million, respectively. In August 1994 the Company sold a 10 percent equity interest in the Company to Nippon. In connection with that sale, Nippon agreed to license to the Company its proprietary technology for producing DHH products as well as to provide certain production equipment to produce DHH rail. In November 1995 Oregon Steel Mills, Inc. sold a 3 percent equity interest in the Company to Nissho Iwai. In connection with that sale, Nissho Iwai agreed to promote the international sale of certain steel products produced by CF&I and Oregon Steel. In addition to its ownership interest in CF&I, the Company owns Colorado & Wyoming Railway Company, a short-line railroad, serving principally the Pueblo Mill. For the years ended December 31, 1997, 1996 and 1995, sales of CF&I were 98.5 percent, 98.8 percent and 99.0 percent, respectively, of the consolidated sales of the Company. For the years ended December 31, 1997, 1996 and 1995, cost of sales of CF&I were 98.6 percent, 99.0 percent and 99.4 percent, respectively, of the consolidated cost of sales of the Company. The following table sets forth for the Company, for the periods indicated, the percentages of sales represented by selected income statement items and information regarding selected balance sheet data: YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ---- ---- ---- INCOME STATEMENT DATA: Sales 100.0% 100.0% 100.0% Cost of sales 91.2 91.8 92.1 ------ ----- ----- Gross profit 8.8 8.2 7.9 Selling, general and administrative expenses 5.9 4.5 5.7 Profit participation expense .3 .1 .1 - - - Operating income 2.6 3.6 2.1 Interest and dividend income ------ ----- ----- Interest expense (6.4) (5.8) (4.0) Other income, net .6 .2 .1 Minority interests .2 .2 .2 ------ ----- ----- Loss before income taxes (3.0) (1.8) (1.6) Income tax benefit 1.1 .7 1.7 ------ ----- ----- Net income (loss) (1.9)% (1.1)% .1% ====== ===== ===== BALANCE SHEET DATA: Current ratio 1.2:1 1.9:1 1.6:1 Long-term debt as a percentage of capitalization 95.2% 93.1% 90.9% 10 The following table sets forth for the Company, for the periods indicated, tonnage sold, sales, average price per ton sold and other data. YEARS ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ---- ---- ---- TONNAGE SOLD: Rail 350,200 287,700 240,700 Rod, Bar and Wire 409,200 392,600 271,300 Seamless Pipe 120,200 151,200 116,100 Semifinished 28,000 61,700 12,100 ------- ------- ------- Total 907,600 893,200 640,200 ======= ======= ======= Sales (in thousands) $402,295 (1) $393,696 $303,003 (3) Average price per ton sold $ 440 (2) $ 441 $ 467 (4) Operating income per ton sold $ 12 $ 16 $ 10 Operating margin 2.6% 3.6% 2.1% (1) Includes insurance proceeds of approximately $2.5 million as reimbursement of lost profits resulting from lost production during the third and fourth quarters of 1996 related to the failure of one of the power transformers servicing the Company. (2) Excludes proceeds from the insurance settlement referred to in note (1) above. (3) Includes insurance proceeds of approximately $4.0 million as reimbursement of lost profits resulting from lost production and start-up delays at CF&I's rod and bar mill caused by an explosion in the third quarter of 1994. In 1995, revenues of $26.0 million and costs of $26.7 million were capitalized during construction of the rod and bar mill at the Pueblo Mill prior to placement of the mill in service on August 1, 1995. (4) Excludes proceeds from the insurance settlement referred to in note (3) above. CF&I's labor contract expired on September 30, 1997. After a brief contract extension intended to help facilitate a possible contract, on October 3, 1997 the Union initiated a strike. See Part I "Business - Labor Dispute". The Company began to ramp its operations back up in mid-October 1997 with management and replacement workers. Fourth quarter 1997 sales, shipment levels and cost of operations were negatively impacted by reduced production levels and costs specifically related to the strike. Company sales in the fourth quarter of 1997 of $53.4 million decreased 42.9 percent from sales of $93.5 million in the fourth quarter of 1996. Company shipments decreased 38.6 percent to 123,900 tons in the fourth quarter of 1997 from 201,800 tons in the fourth quarter of 1996. The Company's sales and shipments for the nine month period ended September 30, 1997 were $348.9 million and 783,700 tons, respectively, compared to $300.2 million and 691,400 tons, respectively, for the comparable 1996 period. The Company's average selling price in the fourth quarter of 1997 was $431 per ton versus $463 per ton in the fourth quarter of 1996. The decrease in average selling price for the fourth quarter of 1997 is primarily due to a shift in product mix. The Company had reduced production and shipments of rail and seamless pipe as a result of the strike. In addition, the Company sold its wire producing assets in the second quarter of 1997. Rail, seamless pipe and wire products generally have higher selling prices per ton than other finished products sold by the Company. Gross profits as a percentage of sales for the fourth quarter of 1997 were a negative 24.0 percent compared to 0.5 percent (excluding insurance proceeds) for the fourth quarter of 1996. Gross profit margin for the nine month periods ended September 30, 1997 and September 30, 1996 were 13.3 percent (excluding insurance proceeds) and 9.1 percent, respectively. As noted above, gross profit margin for the fourth quarter of 1997 was negatively impacted by the strike. 11 At the end of December, the Pueblo Mill was operating at 65 percent of capacity and is expected to reach full production during the first half of 1998. As a result of successfully resuming operations with a replacement workforce, the Company believes it can return to full production with fewer workers than before the strike. COMPARISON OF 1997 TO 1996 SALES. Sales in 1997 of $402.3 million increased 2.2 percent from sales of $393.7 million in 1996. Shipments increased 1.6 percent to 907,600 tons in 1997 from 893,200 tons in 1996. Selling prices in 1997 were $440 per ton versus $441 per ton in 1996. Of the $8.6 million sales increase, $6.3 million was the result of volume increases and $2.5 million was the result of insurance proceeds, offset by $200,000 resulting from lower average selling prices. The increase in sales and shipments was primarily due to increased shipments of rail and rod products offset, in part, by decreased shipments of seamless pipe and semifinished products. The lower average selling price in 1997 was due to decreased shipments of seamless pipe products, and increased shipments of rod products. Rod products have a generally lower selling price per ton than other finished products sold by the Company. GROSS PROFIT. Gross profit as a percentage of sales for 1997 was 8.9 percent compared to 8.2 percent for 1996. Gross profit margins were positively impacted by increased rail shipments and higher seamless pipe prices as well as reduced semifinished shipments which have a generally lower gross margin. In spite of the labor dispute, gross profit was also positively impacted by lower costs due to increased steel production and improved operating efficiencies. Gross profit was negatively affected by the higher amount of rod shipments which have a generally lower gross margin per ton than other finished products. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for 1997 increased $6.2 million or 35.2 percent compared to 1996 and increased as a percentage of sales from 4.5 percent in 1996 to 5.9 percent in 1997. The increase was due to costs specifically related to the labor dispute with the Union. PROFIT PARTICIPATION. Profit participation plan expense was $1.3 million for 1997 compared to $275,000 for 1996. The increase in profit participation reflects the increase in profitability of the Company during the first nine months of 1997 compared to the corresponding 1996 period. INTEREST EXPENSE. Total interest cost for 1997 was $26.2 million, an increase of $1.2 million compared to 1996. The higher interest cost is the result of higher interest rates. Of the $26.2 million of interest cost in 1997, $435,000 was capitalized as part of construction in progress. INCOME TAX EXPENSE. The Company's effective income tax rate for state and federal taxes was a benefit of 37.2 percent for 1997 compared to a benefit of 38.0 percent for 1996. The effective tax rate for both periods varied from the combined state and federal statutory rate due to earned state tax credits. COMPARISON OF 1996 TO 1995 SALES. Sales in 1996 of $393.7 million increased 29.9 percent from sales of $303.0 million in 1995. Shipments increased 39.5 percent to 893,200 tons in 1996 from 640,200 tons in 1995. Average selling prices decreased $26 to $441 per ton for 1996 compared to 1995. Of the $90.7 million sales increase, $118.2 million was the result of volume increases, offset by $23.5 million from lower average selling prices and by $4.0 million of 1995 insurance proceeds not recurring in 1996. The increase in sales and shipments was primarily due to increased shipments of rail, rod and bar, seamless pipe and semifinished products in 1996. Rod and bar shipments were 332,700 tons in 1996, compared to 208,100 tons in 1995. The lower average selling price in 1996 was due to increased shipments of rod and bar and semifinished products, which have a generally lower selling price per ton than the other products sold by the Company. 12 GROSS PROFIT. Gross profit as a percentage of sales for 1996 was 8.2 percent compared to 7.9 percent for 1995. Gross profit margins were positively impacted by increased shipments of rail and seamless pipe products which have the highest gross profit margins of any of the Company's products. The gross profit improvement was partially offset by higher costs and reduced shipments due to an outage of the ladle refining furnace during June 1996 as a result of a mechanical failure and by the loss of the use of one of the two main transformers that supply electricity to the melt shop during the fourth quarter of 1996. As a result, steel production volume was significantly affected, limiting availability of steel to the finishing mills, particularly the rod and bar mill. The outages resulted in low operating efficiencies, increased costs and lost sales opportunities. The Company estimates that the transformer outage negatively affected operating income by approximately $2 million net of insurance proceeds. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for 1996 increased $441,000 or 2.6 percent compared to 1995, but decreased as a percentage of sales from 5.7 percent in 1995 to 4.5 percent in 1996. The percentage decrease was due to cost controls and increased sales in 1996. PROFIT PARTICIPATION. Profit participation plan expense was $275,000 for 1996 compared to $449,000 for 1995. The decrease reflects the decreased profitability of the Company in 1996. INTEREST EXPENSE. Total interest costs for 1996 were $25.0 million, an increase of $7.6 million compared to 1995. The higher interest cost is primarily the result of additional debt incurred to fund the capital improvement program, combined with increased interest rates. Of the $25.0 million of interest cost in 1996, $2.2 million was capitalized as part of construction in progress. INCOME TAXES. The Company's effective income tax rate for state and federal taxes was a benefit of 38.0 percent for 1996 compared to a benefit of 109.1 percent for 1995. The effective tax rate for both periods varied from the combined state and federal statutory rates due to earned state tax credits, including a 1995 net tax benefit of $2.5 million related to enterprise zone credits for eligible completed capital projects at the Pueblo Mill. LIQUIDITY AND CAPITAL RESOURCES Cash flow provided from operations was $35.6 million compared to $15.3 million cash provided in 1996. The major items affecting this $20.3 million increase was a smaller increase in deferred tax assets ($1.2 million), a decrease in accounts receivable versus an increase in 1996 ($15.7 million), an increase in accounts payable versus a decrease in 1996 ($8.9 million) and a larger increase in accrued expenses ($9.3 million). These cash increases were partially offset by a larger net loss in 1997 ($3.2 million) and a smaller decrease in inventories ($10.9 million). Since its acquisition by Oregon Steel in March 1993, CF&I has required substantial amounts of cash to fund its operations and capital expenditures. Borrowing requirements for capital expenditures and other cash needs, both short-term and long-term, are provided through a loan from Oregon Steel. As of December 31, 1997, $182.2 million of aggregate principal amount of the loan was outstanding, all of which was classified as long-term. The loan includes interest on the daily amount outstanding at the rate of 11.64 percent. The principal is due on demand or, if no demand is made, due December 31, 2002. Interest on the principal amount of the loan is payable monthly. Because the loan from Oregon Steel is due on demand, the applicable interest rate is effectively subject to renegotiation at any time, and there is no assurance the interest rate will not be materially increased in the future. In addition, Oregon Steel is not required to provide financing to the Company and, although no repayments are expected in 1998, it may in any event demand repayment of the loan at any time. If Oregon Steel were to demand repayment of the loan, it is unlikely that the Company would be able to obtain from external sources financing necessary to repay the loan or to fund its capital expenditures and other cash needs. Failure to obtain alternative financing would have a material adverse effect on the Company and CF&I. If the Company were able to obtain the necessary financing, it is likely that such financing would be at interest rates and on terms substantially less favorable to the Company than those provided by Oregon Steel. 13 Term debt of $67.5 million was incurred by CF&I as part of the purchase price of the Pueblo Mill on March 3, 1993. This debt is without stated collateral and is payable over 10 years with interest at 9.5 percent. As of December 31, 1997, the outstanding balance on the debt was $45.6 million, of which $38.2 million was classified as long-term. Oregon Steel has outstanding $235 million principal amount of 11% First Mortgage Notes due 2003. The Company and CF&I have guaranteed the obligations of Oregon Steel under the Notes, and those guarantees are secured by a lien on substantially all of the property, plant and equipment and certain other assets of the Company and CF&I. Oregon Steel maintains a $125 million credit agreement with a group of banks which is guaranteed by the Company and CF&I and collateralized, in part, by substantially all of the Company's and CF&I's inventory and accounts receivable. During 1997, the Company expended approximately $12.4 million, excluding capitalized interest, on its capital program. The Company expects that anticipated needs for working capital and capital expenditures will be met from funds generated from operations and available borrowing from Oregon Steel. YEAR 2000 ISSUES. As the year 2000 approaches, the Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures. The Company is addressing this issue to ensure the availability and integrity of its financial systems and the reliability of its operational systems. The Company has made and will continue to make certain investments in its information systems and software applications to ensure the Company is Year 2000 compliant. Such work has not had, and is not anticipated to have, a material effect on the financial position of the Company. IMPACT OF INFLATION. Inflation can be expected to have an effect on many of the Company's operating costs and expenses. Due to worldwide competition in the steel industry, the Company may not be able to pass through such increased costs to its customers. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of New CF&I, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of New CF&I, Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended, 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. PRICE WATERHOUSE LLP Portland, Oregon February 27, 1998 15 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of New CF&I, Inc: We have audited the accompanying consolidated balance sheet of New CF&I, Inc. as of December 31, 1995 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year ended December 31, 1995. In addition, we have audited the 1995 financial statement schedule of New CF&I, Inc. as listed in Item 14(a)(ii) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit 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 evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of New CF&I, Inc. as of December 31, 1995, and its consolidated results of operations and cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the 1995 financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND, L.L.P. Portland, Oregon January 19, 1996 16 NEW CF&I, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
ASSETS DECEMBER 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- Current assets: Cash and cash equivalents $ 3 $ 3 $ - Trade accounts receivable, less allowance for doubtful accounts of $1,011, $455 and $518 37,165 49,380 45,904 Inventories 41,842 50,577 70,249 Deferred tax asset 4,290 5,014 5,007 Other 2,500 2,045 1,056 --------- --------- --------- Total current assets 85,800 107,019 122,216 --------- --------- --------- Property, plant and equipment: Land and improvements 3,635 3,530 3,530 Buildings 15,710 6,043 5,867 Machinery and equipment 231,159 236,566 188,726 Construction in progress 7,302 4,011 31,586 --------- --------- --------- 257,806 250,150 229,709 Accumulated depreciation (34,485) (22,996) (11,124) --------- --------- --------- 223,321 227,154 218,585 --------- --------- --------- Cost in excess of net assets acquired, net 35,943 36,962 37,983 Other assets 19,023 16,927 13,484 --------- --------- --------- $ 364,087 $ 388,062 $ 392,268 ========= ========= ========= LIABILITIES Current liabilities: Current portion of long-term debt $ 7,373 $ 6,574 $ 4,576 Accounts payable 36,728 33,892 53,867 Accrued expenses 26,793 17,343 16,269 --------- --------- --------- Total current liabilities 70,894 57,809 74,712 Long-term debt 38,187 44,716 50,666 Long-term debt -- Oregon Steel Mills, Inc. 182,200 205,700 181,750 Environmental liability 32,941 33,243 34,157 Deferred employee benefits 6,643 6,069 5,388 --------- --------- --------- 330,865 347,537 346,673 ---------- --------- --------- Minority interests 319 (10) 587 --------- --------- --------- Redeemable common stock, 26 shares issued and outstanding (Note 7) 21,840 21,840 21,840 --------- --------- --------- Commitments and contingencies (Note 12) STOCKHOLDERS' EQUITY Common stock, par value $1 per share, 1,000 shares authorized; 174 shares issued and outstanding 1 1 1 Additional paid-in capital 16,603 16,603 16,603 Retained earnings (accumulated deficit) (5,541) 2,091 6,564 --------- --------- --------- 11,063 18,695 23,168 --------- --------- --------- $ 364,087 $ 388,062 $ 392,268 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 17 NEW CF&I, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 -------- --------- -------- Sales $402,295 $ 393,696 $303,003 -------- --------- -------- Costs and expenses: Cost of sales 366,641 361,465 279,099 Selling, general and administrative 23,800 17,600 17,159 Profit participation 1,331 275 449 -------- -------- -------- 391,772 379,340 296,707 -------- -------- -------- Operating income 10,523 14,356 6,296 Other income (expense): Interest and dividend income 57 38 48 Interest expense (25,790) (22,803) (11,923) Minority interests 882 607 497 Other, net 2,167 621 439 -------- -------- ------- Loss before income taxes (12,161) (7,181) (4,643) Income tax benefit 4,529 2,729 5,066 -------- -------- ------- Net income (loss) $ (7,632) $ (4,452) $ 423 ======== ======== ======= The accompanying notes are an integral part of the consolidated financial statements. 18 NEW CF&I, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARES)
RETAINED ADDITIONAL EARNINGS COMMON STOCK PAID-IN (ACCUMULATED -------------------- SHARES AMOUNT CAPITAL DEFICIT) TOTAL ------- -------- --------- ------------ -------- Balances, December 31, 1994 180 $ 1 $21,643 $ 6,141 $ 27,785 Net income 423 423 Sale of common stock by Oregon Steel Mills, Inc. (6) (5,040) (5,040) ------- ------- ------- -------- -------- Balances, December 31, 1995 174 1 16,603 6,564 23,168 Net loss (4,452) (4,452) Other (21) (21) ------- ------- ------- -------- -------- Balances, December 31, 1996 174 1 16,603 2,091 18,695 Net loss (7,632) (7,632) ------- ------- ------- -------- -------- Balances, December 31, 1997 174 $ 1 $16,603 $ (5,541) $ 11,063 ======= ======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 19 NEW CF&I, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ (7,632) $ (4,452) $ 423 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 12,409 11,911 7,283 Amortization 1,164 1,020 1,019 Deferred income taxes (1,352) (2,565) (4,601) Gain on sale of property, plant and equipment (3,017) (620) (438) Minority interest 329 (596) (497) Changes in current assets and liabilities: Trade accounts receivable 12,215 (3,476) (1,709) Inventories 8,735 19,672 (6,632) Accounts payable 3,517 (5,427) (1,194) Accrued expenses 10,093 842 3,060 Other (828) (1,011) (215) -------- -------- --------- NET CASH PROVIDED BY (USED IN)OPERATING ACTIVITIES 35,633 15,298 (3,501) -------- -------- --------- Cash flows from investing activities: Additions to property, plant and equipment (12,846) (35,060) (61,406) Proceeds from disposal of property, plant and equipment 6,607 654 806 Other, net (164) (887) (599) -------- -------- --------- NET CASH USED BY INVESTING ACTIVITIES (6,403) (35,293) (61,199) -------- -------- --------- Cash flows from financing activities: Borrowings from Oregon Steel Mills, Inc. 190,789 224,330 171,050 Payments to Oregon Steel Mills, Inc. (214,289) (200,380) (102,000) Payment of long-term debt (5,730) (3,952) (4,831) -------- --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (29,230) 19,998 64,219 -------- --------- --------- Net increase (decrease) in cash and cash equivalents - 3 (481) Cash and cash equivalents at beginning of year 3 - 481 -------- --------- --------- Cash and cash equivalents at end of year $ 3 $ 3 $ - ======== ========= ========= Supplemental disclosures of cash flow information: Cash paid for: Interest $ 26,583 $ 22,883 $ 16,561 Income tax paid to parent company $ - $ 448 $ -
See Note 4 for additional supplemental disclosures of cash flow information. The accompanying notes are an integral part of the consolidated financial statements. 20 NEW CF&I, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS New CF&I, Inc. and subsidiaries ("Company") manufacture various specialty and commodity steel products in Pueblo, Colorado. Principal markets are steel service centers, steel fabricators, railroads, oil and gas producers and distributors, and other industrial concerns, primarily in the United States west of the Mississippi River. The Company also markets products outside North America. New CF&I, Inc. was incorporated in the State of Delaware on May 5, 1992, as a wholly-owned subsidiary of Oregon Steel Mills, Inc. ("Oregon Steel" or "Parent Company"). On March 3, 1993, the Company (1) issued 100 shares of common stock to Oregon Steel for $22.2 million (consisting of $7.3 million of cash, $3.1 million of capitalized direct acquisition costs, 598,400 shares of Oregon Steel common stock valued at $11.2 million to be issued ten years from March 3, 1993, and by the delivery of warrants to purchase 100,000 shares of Oregon Steel's common stock at $35 per share for five years, valued at $556,000) and, (2) as the general partner, then acquired for $22.2 million a 95.2 percent interest in a newly formed limited partnership, CF&I Steel, L.P. ("Partnership"). The remaining 4.8 percent interest was acquired by the Pension Benefit Guaranty Corporation ("Limited Partner"). On October 1, 1997, Oregon Steel purchased the Limited Partner's 4.8 percent interest in the Partnership. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the 95.2 percent interest in the Partnership and the Colorado & Wyoming Railway Company, a wholly-owned subsidiary. All significant intercompany transactions and account balances have been eliminated. CASH AND CASH EQUIVALENTS Cash and cash equivalents include short-term securities which have an original maturity date of 90 days or less. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. The Company places its cash in high credit quality investments and limits the amount of credit exposure by any one financial institution. At times, temporary cash investments may be in excess of the Federal Deposit Insurance Corporation insurance limit. Management believes that risk of loss on the Company's trade receivables is reduced by ongoing credit evaluation of customer financial condition and requirements for collateral, such as letters of credit and bank guarantees. INVENTORIES Inventories are stated at the lower of average cost or market. 21 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, including interest capitalized during construction of $435,000, $2.2 million and $5.5 million in 1997, 1996 and 1995, respectively. Depreciation is determined using principally the straight-line method and the units of production method over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred and costs of improvements are capitalized. Upon disposal, cost and accumulated depreciation are removed from the accounts, and gains or losses are reflected in income. COSTS IN EXCESS OF NET ASSETS ACQUIRED The cost in excess of net assets acquired is amortized on a straight-line basis over 40 years. Accumulated amortization was $4.9 million, $3.8 million and $2.8 million in 1997, 1996 and 1995, respectively. The carrying value of costs in excess of net assets acquired will be reviewed and adjusted if the facts and circumstances suggest that they may be impaired. OTHER ASSETS Included in other assets are water rights of approximately $11.2 million. These water rights include the rights to divert and use certain amounts of water from various river systems for either industrial or agricultural use. MAJOR CUSTOMERS In 1997, the Company derived 17.2, 12.9 and 10.8 percent of its sales from three customers, respectively. In 1996, the Company derived 13.5 percent of its sales from one customer. TAXES ON INCOME Deferred income taxes reflect the differences between the financial reporting and tax bases of assets and liabilities at year end based on enacted tax laws and statutory tax rates. Tax credits are recognized as a reduction of income tax expense in the year the credit arises. Income taxes are allocated in accordance with a tax allocation agreement between Oregon Steel and the Company which provides for taxes on a separate return basis. A consolidated tax return is filed by Oregon Steel. State tax credits are accounted for using the flow-through method whereby the credits reduce income taxes currently payable and the provision for income taxes in the period earned. To the extent such credits are not currently utilized on a separate return basis, deferred tax assets are recognized. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 22 3. INVENTORIES Inventories were as follows as of December 31: 1997 1996 1995 ------- ------- ------- (in thousands) Raw materials $15,051 $16,246 $16,480 Semifinished product 13,840 16,488 25,816 Finished product 3,868 8,245 20,012 Stores and operating supplies 9,083 9,598 7,941 ------- ------- ------- Total inventory $41,842 $50,577 $70,249 ======= ======= ======= 4. SUPPLEMENTAL CASH FLOW INFORMATION During 1997, 1996 and 1995, the Company acquired property, plant and equipment for $586,000, $1.3 million and $15.8 million, respectively, which were included in accounts payable at December 31, 1997, 1996 and 1995, respectively. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable include book overdrafts of $6.4 million at December 31, 1995, and retainage from construction projects of $6.6 million at December 31 1995. Accrued expenses include accrued vacation of $3.4 million, $3.5 million and $3.6 million at December 31, 1997, 1996 and 1995, respectively. Accrued expenses also include $4.0 million of deferred revenue at December 31, 1997. 6. DEBT AND FINANCING ARRANGEMENTS Term debt of $67.5 million was incurred by CF&I as part of the purchase price of the Pueblo Mill on March 3, 1993. This debt is without stated collateral and is payable over 10 years at 9.5 percent. As of December 31, 1997, the outstanding balance on the debt was $45.6 million, of which $38.2 million was classified as long-term. Borrowing requirements for capital expenditures and working capital have been provided through a revolving loan from Oregon Steel to the Partnership. The loan includes interest on the daily amount outstanding at the rate of 11.64 percent. The principal is due on demand or, if no demand, due December 31, 2002, but is not expected to be repaid in 1998. Interest on the principal amount of the loan is paid on a monthly basis. See Note 11. As of December 31, 1997, principal payments on long-term debt are due as follows (in thousands): 1998 .................................................... $ 7,373 1999 .................................................... 7,164 2000 .................................................... 7,861 2001 .................................................... 8,626 2002 .................................................... 191,664 Thereafter................................................ 5,072 -------- $227,760 ======== 23 7. SALES OF REDEEMABLE COMMON STOCK In June 1994, the Board of Directors approved an increase in the Company's authorized $1 par value common stock from 100 to 1,000 shares and declared an 80 percent stock dividend increasing Oregon Steel's holding of the Company's common stock to 180 shares. In August 1994, the Company sold additional common stock (10 percent equity interest) to Nippon Steel Corporation ("Nippon"). In connection with the sale, the Company and Oregon Steel entered into a stockholders' agreement with Nippon pursuant to which Nippon was granted a right to sell, in certain circumstances, all, but not less than all, of its 10 percent equity interest in the Company back to the Company at the then fair market value. Those circumstances include, among other things, a change of control, as defined, in the Company and certain changes involving the composition of the board of directors of the Company, and the occurrence of certain other events which are within the control of the Company and Oregon Steel. Oregon Steel also agreed not to transfer voting control of the Company to a non-affiliate except in circumstances where Nippon is offered the opportunity to sell its interest of the Company to the transferee at the same per share price obtained by Oregon Steel. The Company has also retained a right of first refusal in the event that Nippon desires to transfer its interest in the Company to a non-affiliate. During the fourth quarter of 1995, Oregon Steel sold a 3 percent equity interest in the Company to the Nissho Iwai Group ("Nissho Iwai") under substantially the same terms and conditions of the Nippon transaction. The sale to Nissho Iwai has been reflected as an increase in redeemable common stock and a decrease to additional paid-in capital. The Company believes that it is not probable that the conditions which would permit a stock redemption will occur. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of the Company's financial instruments at December 31 is as follows:
1997 1996 1995 ---------------------------- ------------------------- --------------------------- Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value --------------- ------------ ------------- ----------- ------------- ------------- (in thousands) Cash and cash equivalents $ 3 $ 3 $ 3 $ 3 $ - $ - Long-term debt, including current portion 45,560 42,677 51,290 46,227 55,442 52,594 Long-term debt - Oregon Steel Mills, Inc. 182,200 180,763 205,700 198,802 181,750 181,750
The carrying amount of cash and cash equivalents approximates fair value due to their short maturity. The fair value of Long-term debt, including current portion, and Long-term debt - Oregon Steel Mills, Inc. are estimated by discounting future cash flows based on the Company's incremental borrowing rate for similar types of borrowing arrangements. 24 9. INCOME TAXES The income tax benefit consists of the following: 1997 1996 1995 --------- ------- -------- (IN THOUSANDS) Current: Federal $(1,149) $ 851 $ 524 State (34) (50) (59) ------- ------- -------- (1,183) 801 465 ------- ------- -------- Deferred: Federal 5,667 1,326 1,508 State 45 602 3,093 ------- ------- -------- 5,712 1,928 4,601 ------- ------- -------- Income tax benefit $ 4,529 $ 2,729 $ 5,066 ======= ======= ======== A reconciliation of the statutory tax rate to the effective tax rate on income before income taxes is as follows: 1997 1996 1995 ------ ------ ------ Federal 35.0% 35.0% 35.0% State 3.4 8.1 68.6 Other (1.2) (5.1) 5.5 ----- ----- ----- 37.2% 38.0% 109.1% ===== ===== ===== The components of the net deferred tax assets and liabilities as of December 31 are as follows: 1997 1996 1995 ------- -------- -------- (IN THOUSANDS) Net current deferred tax asset: Assets: Inventories $ 1,704 $ 997 $ 2,473 Accrued expenses 2,266 3,937 2,449 Accounts receivable 320 80 85 ------- ------- ------- Net current deferred tax asset $ 4,290 $ 5,014 $ 5,007 ======= ======= ======= Noncurrent deferred tax asset and liability: Assets: Environmental liability $12,829 $12,915 $12,341 Net operating loss carryforward 33,512 22,203 12,147 State tax credits 4,891 5,019 4,780 Alternative minimum tax 991 991 991 Other 2,507 2,643 7,072 ------- ------- ------- 54,730 43,771 37,331 ------- ------- ------- Liabilities: Property, plant and equipment 36,230 28,008 17,566 Costs in excess of net assets acquired 11,642 11,695 13,015 Other 1,057 343 5,583 ------- ------- ------- 48,929 40,046 36,164 ------- ------- ------- Net noncurrent deferred tax asset $ 5,801 $ 3,725 $ 1,167 ======= ======= ======= 25 At December 31, 1997, the Company had state tax credits of $4.9 million related to enterprise zone credits for eligible completed capital projects, expiring 2001 through 2009, which are available to reduce future income taxes payable. At December 31, 1997, the Company has $83.4 million in federal net operating loss carryforwards expiring in 2011 and 2013. In addition, the Company has $83.0 million in state net operating loss carryforwards expiring in 2011 and 2013. At December 31, 1997, 1996 and 1995, the Company included in accounts payable amounts due to Oregon Steel of $914,000, $286,000 and $152,000, respectively, related to income taxes. No valuation allowance has been established for deferred tax assets as management believes it is more likely than not that future taxable income will be sufficient to realize the benefit of net operating loss and state tax credit carryforwards. 10. EMPLOYEE BENEFIT PLANS PENSION PLANS The Company has noncontributory defined benefit retirement plans covering all of the eligible employees of the Company. The plans provide benefits based on participants' years of service and compensation. The Company funds at least the minimum annual contribution required by ERISA. Pension cost included the following components: 1997 1996 1995 ------- ------ ------- (IN THOUSANDS) Service cost - benefits earned during the year $ 2,224 $2,897 $ 2,754 Interest cost on projected benefit obligations 997 698 438 Actual return on plan assets (2,072) (976) (955) Net amortization and deferral 1,018 328 577 ------- ------ ------- Net pension cost $ 2,167 $2,947 $ 2,814 ======= ====== ======= The following table sets forth the funded status of the plans and the amount recognized in the Company's consolidated balance sheet as of December 31: 1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Accumulated benefit obligations, including vested benefits of $13,218, $10,961 and $7,834 $13,512 $11,444 $ 8,239 ======= ======= ======= Projected benefit obligations $15,631 $12,826 $ 9,336 Plan assets at fair value 13,643 10,449 6,729 ------- ------- ------- Projected benefit obligation in excess of plan assets (1,988) (2,377) (2,607) Unrecognized net (gain) loss (230) 612 822 ------- -------- ------- Pension liability recognized in consolidated balance sheet $(2,218) $(1,765) $(1,785) ======= ======= ======= Plan assets are invested in common stock and bond funds (56%), marketable fixed income securities (41%) and insurance company contracts (3%) at December 31, 1997. 26 The following table sets forth the significant actuarial assumptions for the Company's pension plans: 1997 1996 1995 ---- ---- ---- Discount rate 7.0% 7.5% 7.5% Rate of increase in future compensation levels 4.0% 4.0% 4.0% Expected long-term rate of return on plan assets 8.8% 8.8% 8.8% POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The Company provides certain health care and life insurance benefits for substantially all of the retired employees. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of service. The benefit plans are unfunded. The following table sets forth the status of the plans as of December 31: 1997 1996 1995 ---- ---- ---- (IN THOUSANDS) Net periodic postretirement benefit costs include: Service cost $ 116 $ 158 $ 215 Interest cost 577 584 561 Amortization of unrecognized net losses 84 142 142 ------- ------- ------- Net periodic postretirement benefit cost $ 777 $ 884 $ 918 ======= ======= ======= Accumulated postretirement benefit obligation: Retirees $ 3,637 $ 2,001 $ 1,014 Fully eligible plan participants 3,063 3,410 3,869 Other active plan participants 603 2,967 3,008 ------- ------ ------- $ 7,303 $ 8,378 $ 7,891 ======= ======= ======= Accumulated postretirement benefit obligation in excess of plan assets $(7,303) $(8,378) $(7,891) Unrecognized net loss 559 2,208 2,422 ------- ------- ------- Postretirement liability recognized in consolidated balance sheet $(6,744) $(6,170) $(5,469) ======= ======= ======= The obligations and costs for the retiree medical plan are not dependent on changes in the cost of medical care. Retirees are covered under plans providing fixed dollar benefits. The discount rate used in determining the accumulated postretirement benefit obligation was 7.0 percent, 7.5 percent and 7.5 percent in 1997, 1996 and 1995, respectively. 27 PROFIT PARTICIPATION PLAN The Company has a profit participation plan under which it distributes quarterly to eligible employees 12 percent of its pretax income after adjustments for certain nonoperating items. Each eligible employee receives a share of the distribution based upon the level of the eligible employee's base compensation compared with the total base compensation of all eligible employees of the Company. Expense under the plan was $1.3 million in 1997, $275,000 in 1996, and $449,000 in 1995. THRIFT PLANS The Company has qualified thrift (401(k)) plans for eligible employees under which the Company matches 25 percent of the first 4 percent of the participant's deferred compensation. Company contribution expense in 1997, 1996 and 1995 was $269,000, $417,000 and $387,000, respectively. 11. RELATED PARTY TRANSACTIONS OREGON STEEL MILLS, INC. The Company pays administrative fees to Oregon Steel for services it provides based on an allocation from Oregon Steel and reimburses Oregon Steel for costs incurred on behalf of the Company. 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Oregon Steel administrative fees $ 4,196 $ 3,139 $ 3,620 Interest expense on notes payable to Oregon Steel 21,691 19,922 11,895 Notes payable to Oregon Steel at December 31 182,200 205,700 181,750 Accounts payable to Oregon Steel at December 31 7,676 4,992 4,454 NIPPON STEEL CORPORATION In 1994 the Partnership entered into an equipment supply agreement for purchase of deep head-hardened ("DHH") rail equipment from Nippon. Additionally, the Partnership pays royalties to Nippon based on sales of DHH rail. The Partnership has made payments on the DHH rail equipment and paid certain license and technical fees, and royalties. 1997 1996 1995 ------- ------ ------- (IN THOUSANDS) Payments to Nippon for the year ended December 31 $ 659 $2,914 $15,394 Accounts payable to Nippon at December 31 346 - 2,252 28 12. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL All material environmental remediation liabilities which are probable and estimable are recorded in the financial statements based on current technologies and current environmental standards. Adjustments are made when additional information is available that may require different remediation methods or periods, and ultimately affect the total cost. The best estimate of the probable loss within a range is recorded. If there is no best estimate, the low end of the range is recorded, and the range is disclosed. In connection with the 1993 formation of the Partnership and the acquisition of the Partnership interest by the Company, the Company accrued a liability of $36.7 million for environmental remediation at the Pueblo, Colorado steel mill. The Company believed $36.7 million was the best estimate from a range of $23.1 million to $43.6 million. The Company's estimate of this liability was based on two remediation investigations conducted by independent environmental engineering consultants. The accrual includes costs for the Resource Conservation and Recovery Act facility investigation, a corrective measures study, remedial action, and operation and maintenance associated with the proposed remedial actions. In October 1995, the Partnership and the Colorado Department of Public Health and Environment finalized a ten-year postclosure permit. The permit contains a prioritized schedule for corrective actions to be completed which is substantially reflective of a straight-line rate of expenditure over 30 years. The State of Colorado stated that the schedule for corrective action could be accelerated if new data indicated a greater threat to the environment than is currently known to exist. At December 31, 1997, the accrued liability was $35.0 million, of which $32.9 million was classified as noncurrent in the consolidated balance sheet. GUARANTEES Oregon Steel has outstanding $235 million principal amount of 11% First Mortgage Notes ("Notes") due 2003. The Company has guaranteed the obligations of Oregon Steel under the Notes, and those guarantees are secured by a lien on substantially all the property, plant and equipment and certain other assets of the Company, excluding accounts receivable and inventory. In addition, Oregon Steel maintains a $125 million credit agreement with a group of banks which is collateralized, in part, by the accounts receivable and inventory of the Company, and also guaranteed by the Company. LABOR DISPUTE The labor contract of CF&I expired on September 30, 1997. After a brief contract extension intended to help facilitate a possible agreement, on October 3, 1997 the United Steel Workers of America ("Union"), initiated a strike for approximately 1,060 bargaining unit employees. The parties failed to reach final agreement on a new labor contract due to differences on economic issues. As a result of contingency planning, the Company was able to avoid complete suspension of operations at the Pueblo Mill by utilizing a combination of permanent replacement workers, striking employees who returned to work and salaried employees. By December 1997, the Company had sufficient permanent replacement employees necessary to reach full production capacity. At the end of December, the Pueblo Mill was operating at approximately 65% of capacity and is expected to reach full production during the first half of 1998. As a result of weathering the strike and successfully resuming operations, the Company believes it can return to full production with fewer workers than before the strike. On December 30, 1997 the Union called off the strike and made an unconditional offer to return to work. At the time of this offer, only a few vacancies existed at the Pueblo Mill. As of the end of January 29 1998, 30 former striking employees had returned to work as a result of their unconditional offer. Approximately 920 former striking workers remain unreinstated ("Unreinstated Employees"). As a result of the labor dispute, both the Company and the Union have filed unfair labor practice charges with the National Labor Relations Board ("NLRB"). On February 24, 1998 the Regional Director of the NLRB Denver office informed the parties that he would issue complaints against both the Company and the Union. The Union will be charged with engaging in numerous incidents of picket line violence, and threats and intimidation of replacement workers. The complaint against the Company, which was issued on February 27, 1998, alleges violations of several provisions of the National Labor Relations Act. The Company not only denies the allegations, but rather believes that both the facts and the law fully support its contention that the strike was economic in nature and that it was not obligated to displace the properly hired permanent replacement employees. Ultimate determination of the issue may well require action by an appropriate United States Court of Appeals. In the event there is an adverse determination of these issues, Unreinstated Employees could be entitled to back pay from the date of the Union's unconditional offer to return to work through the date of the adverse determination ("Backpay Liability"). The number of Unreinstated Employees entitled to back pay would probably be limited to the number of replacement workers, currently approximately 600 workers. However, the Union might assert that all Unreinstated Employees could be entitled to back pay. Back pay is generally measured by the quarterly earnings of those working less interim wages earned elsewhere by the Unreinstated Employees. In addition, each Unreinstated Employee has a duty to take reasonable steps to mitigate the Backpay Liability by seeking employment elsewhere that has comparable demands and compensation. It is not presently possible to estimate the extent to which interim earnings and failure to mitigate the Backpay Liability would affect the cost of an adverse determination. OTHER CONTINGENCIES The Company is also party to various claims, disputes, legal actions and other proceedings involving contracts, employment and various other matters. In the opinion of management, the outcome of these matters should not have a material adverse effect on the consolidated financial condition of the Company. 13. UNUSUAL AND NONRECURRING ITEMS PROCEEDS FROM INSURANCE SETTLEMENT Sales for 1997 include approximately $2.5 million of insurance proceeds as reimbursement of lost profits resulting from lost production during the third and fourth quarters of 1996 related to the failure of one of the power transformers servicing the Company. In total, the Company received $7 million in insurance proceeds from this claim of which $4.5 million was recorded in 1996. Sales for 1995 include approximately $4 million of insurance proceeds received as reimbursement of lost profits resulting from lost production and delays at the Company's new rod and bar mill caused by an explosion that occurred during the third quarter of 1994. 30 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of CF&I Steel, L.P. In our opinion, the accompanying balance sheets and the related statements of operations, of changes in partners' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of CF&I Steel, L.P. at December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership'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 audits 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. PRICE WATERHOUSE LLP Portland, Oregon February 27, 1998 31 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of CF&I Steel, L.P. We have audited the accompanying balance sheet of CF&I Steel, L.P. (Partnership) as of December 31, 1995 and the related statements of operations, changes in Partners' equity (deficit) and cash flows for the year ended December 31, 1995. In addition, we have audited the 1995 financial statement schedule of CF&I Steel, L.P. as listed in Item 14(a)(ii) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit 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 evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CF&I Steel, L.P. as of December 31, 1995, and its results of operations and its cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the 1995 financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND, L.L.P. Portland, Oregon January 19, 1996 32 CF&I STEEL, L.P. BALANCE SHEETS (IN THOUSANDS) ASSETS
DECEMBER 31, ---------------------------------- 1997 1996 1995 -------- --------- -------- Current assets: Cash and cash equivalents $ -- $ -- $ -- Trade accounts receivable, less allowance for doubtful accounts of $1,011, $455 and $518 36,652 48,918 45,533 Inventories 41,666 50,414 70,087 Other 2,350 1,610 971 -------- --------- -------- Total current assets 80,668 100,942 116,591 -------- --------- -------- Property, plant and equipment: Land and improvements 3,629 3,525 3,525 Buildings 15,604 5,936 5,760 Machinery and equipment 228,656 234,441 186,626 Construction in progress 7,302 4,011 31,586 -------- --------- -------- 255,191 247,913 227,497 Accumulated depreciation (33,488) (22,225) (10,569) -------- --------- -------- 221,703 225,688 216,928 -------- --------- -------- Cost in excess of net assets acquired, net 35,943 36,963 37,983 Other assets 13,223 13,202 12,317 -------- --------- -------- $351,537 $ 376,795 $383,819 ======== ========= ======== LIABILITIES Current liabilities: Current portion of long-term debt $ 7,373 $ 6,574 $ 4,576 Accounts payable 41,489 37,193 55,601 Accrued expenses 25,973 16,647 15,652 -------- -------- -------- Total current liabilities 74,835 60,414 75,829 Long-term debt 38,187 44,716 50,666 Long-term debt - Oregon Steel Mills, Inc. 182,200 205,700 181,750 Long-term debt - New CF&I, Inc. 21,756 17,400 16,800 Environmental liability 32,941 33,243 34,157 Deferred employee benefits 6,643 6,069 5,388 -------- -------- -------- 356,562 367,542 364,590 -------- -------- -------- Commitments and contingencies (Note 10) PARTNERS' EQUITY (DEFICIT) Limited partner 319 (10) 587 General partner (5,344) 9,263 18,642 Total partners' equity (deficit) (5,025) 9,253 19,229 -------- -------- -------- $351,537 $376,795 $383,819 ======== ======== ========
The accompanying notes are an integral part of the financial statements. 33 CF&I STEEL, L.P. STATEMENTS OF OPERATIONS (IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 -------- -------- -------- Sales $396,400 $388,990 $300,060 -------- -------- -------- Costs and expenses: Cost of sales 361,650 357,914 277,452 Selling, general and administrative 23,257 17,069 16,681 Profit participation 1,331 275 449 -------- --------- -------- 386,238 375,258 294,582 -------- --------- -------- Operating income 10,162 13,732 5,478 Interest and dividend income 56 38 35 Interest expense (27,875) (24,356) (13,518) Other, net 2,168 621 441 -------- --------- --------- Net loss $(15,489) $ (9,965) $ (7,564) ======== ========= ========= The accompanying notes are an integral part of the financial statements. 34 CF&I STEEL, L.P. STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS) GENERAL LIMITED PARTNER PARTNER TOTAL ------- -------- ------- Balances, December 31, 1994 $25,709 $ 1,084 $26,793 Net loss (7,067) (497) (7,564) ------- ------- ------- Balances, December 31, 1995 18,642 587 19,229 Net loss (9,358) (607) (9,965) Other (21) 10 (11) ------- ------- ------- Balances, December 31, 1996 9,263 (10) 9,253 Net loss (14,607) (882) (15,489) Limited Partner purchase adjustment - 1,211 1,211 ------- ------- ------- Balances, December 31, 1997 $(5,344) $ 319 $(5,025) ======= ======= ======= The accompanying notes are an integral part of the financial statements. 35 CF&I STEEL, L.P. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1996 1995 -------- -------- ---------- Cash flows from operating activities: Net loss $(15,489) $ (9,965) $ (7,564) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 12,181 11,694 6,999 Amortization 1,165 1,020 1,019 Gain on sale of property, plant and equipment (3,017) (1,539) (440) Changes in current assets and liabilities: Trade accounts receivable 12,266 (3,385) (1,670) Inventories 8,748 19,673 (6,647) Accounts payable 4,978 (3,861) 2,261 Accrued expenses 9,325 996 2,961 Other (468) (638) (178) -------- -------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 29,689 13,995 (3,259) -------- -------- --------- Cash flows from investing activities: Additions to property, plant and equipment (11,258) (35,035) (61,472) Proceeds from disposal of property, plant and equipment 6,607 654 510 Other, net (164) (212) (479) -------- -------- --------- NET CASH USED BY INVESTING ACTIVITIES (4,815) (34,593) (61,441) -------- -------- --------- Cash flows from financing activities: Borrowings from related parties 195,145 224,930 171,050 Payments to related parties (214,289) (200,380) (102,000) Payment of long-term debt (5,730) (3,952) (4,831) -------- -------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (24,874) 20,598 64,219 -------- -------- --------- Net decrease in cash and cash equivalents -- -- (481) Cash and cash equivalents at beginning of year -- -- 481 -------- -------- --------- Cash and cash equivalents at end of year $ -- $ -- $ -- ======== ======== ========= Supplemental disclosures of cash flow information: Cash paid for interest $ 26,584 $ 22,882 $ 16,561 ======== ======== ==========
See Note 4 for additional supplemental disclosures of cash flow information. The accompanying notes are an integral part of the financial statements. 36 CF&I STEEL, L.P. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS CF&I Steel, L.P. ("Partnership") manufactures various specialty and commodity steel products in Pueblo, Colorado. Principal markets are steel service centers, steel fabricators, railroads, oil and gas producers and distributors, and other industrial concerns, primarily in the United States west of the Mississippi River. The Partnership also markets products outside North America. On March 3, 1993, the inception date of the Partnership's operations, New CF&I, Inc. ("General Partner" or "Company"), a then wholly-owned subsidiary of Oregon Steel Mills, Inc. ("Oregon Steel"), (1) issued 100 shares of common stock to Oregon Steel for $22.2 million (consisting of $7.3 million of cash, $3.1 million of capitalized direct acquisition costs, 598,400 shares of Oregon Steel common stock valued at $11.2 million to be issued ten years from March 3, 1993, and by the delivery of warrants to purchase 100,000 shares of Oregon Steel's common stock at $35 per share for five years, valued at $556,000) and (2) as the general partner, then acquired for $22.2 million a 95.2 percent interest in the Partnership. The remaining 4.8 percent interest was acquired by the Pension Benefit Guaranty Corporation ("Limited Partner") with a capital contribution of an asset valued at $1.2 million. On October 1, 1997, Oregon Steel purchased the Limited Partner's 4.8 percent interest in the Partnership. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS Cash and cash equivalents include short-term securities which have an original maturity date of 90 days or less. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Partnership to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. The Partnership places its cash in high credit quality investments and limits the amount of credit exposure by any one financial institution. At times, temporary cash investments may be in excess of the Federal Deposit Insurance Corporation insurance limit. Management believes that risk of loss on the Partnership's trade receivables is reduced by ongoing credit evaluation of customer financial condition and requirements for collateral, such as letters of credit and bank guarantees. INVENTORIES Inventories are stated at the lower of average cost or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, including interest capitalized during construction of $435,000, $2.2 million and $5.5 million in 1997, 1996 and 1995, respectively. Depreciation is determined using principally the straight-line method and the units of production method over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred and costs of 37 improvement are capitalized. Upon disposal, cost and accumulated depreciation are removed from the accounts, and gains or losses are reflected in income. COSTS IN EXCESS OF NET ASSETS ACQUIRED The cost in excess of net assets acquired is amortized on a straight-line basis over 40 years. Accumulated amortization was $4.9 million, $3.8 million and $2.8 million in 1997, 1996 and 1995, respectively. The carrying value of costs in excess of net assets acquired will be reviewed if the facts and circumstances suggest that it may be impaired. OTHER ASSETS Included in other assets are water rights of approximately $11.2 million. These water rights include the rights to divert and use certain amounts of water from various river systems for either industrial or agricultural use. MAJOR CUSTOMERS In 1997, the Partnership derived 17.5, 13.1 and 11.0 percent of its sales from three customers, respectively. In 1996, the Partnership derived 13.7 percent of its sales from one customer. TAXES ON INCOME The financial statements reflect no provision or liability for federal or state income taxes. Taxable income or loss of the Partnership is allocated to the partners. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 3. INVENTORIES Inventories were as follows as of December 31: 1997 1996 1995 ------- ------- ------- (in thousands) Raw materials $15,051 $16,246 $16,480 Semifinished product 13,840 16,488 25,816 Finished product 3,868 8,245 20,012 Stores and operating supplies 8,907 9,435 7,779 ------- ------- ------- Total inventory $41,666 $50,414 $70,087 ======= ======= ======= 38 4. SUPPLEMENTAL CASH FLOW INFORMATION During 1997, 1996 and 1995, the Partnership acquired property, plant and equipment for $435,000, $1.3 million and $15.8 million, respectively, which were included in accounts payable at December 31, 1997, 1996 and 1995, respectively. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable include book overdrafts of $6.2 million at December 31, 1995, and retainage from construction projects of $6.6 million at December 31, 1995. Accrued expenses include accrued vacation of $3.1 million, $3.3 million and $3.3 million at December 31, 1997, 1996 and 1995, respectively. Accrued expenses also include $4.0 million of deferred revenue at December 31, 1997. 6. DEBT AND FINANCING ARRANGEMENTS Term debt of $67.5 million was incurred by CF&I as part of the purchase price of the Pueblo Mill on March 3, 1993. This debt is without stated collateral and is payable over 10 years with interest at 9.5 percent. As of December 31, 1997, the outstanding balance on the debt was $45.6 million, of which $38.2 million was classified as long-term. Borrowing requirements for capital expenditures and working capital have been provided through revolving loans from Oregon Steel and the General Partner. The loan from Oregon Steel includes interest on the daily amount outstanding at the rate of 11.64 percent. The principal is due on demand or, if no demand, due on December 31, 2002. The loan from the General Partner includes interest on the daily amount outstanding at the rate of 8.25 percent. The principal is due on demand or, if no demand, due on December 31, 2004. The loans are not expected to be repaid in 1998. Interest on the loans is paid on a monthly basis. See Note 9. As of December 31, 1997, principal payments on long-term debt are due as follows (in thousands): 1998 $ 7,373 1999 7,164 2000 7,861 2001 8,626 2002 191,664 Thereafter 26,828 --------- $ 249,516 ========= 39 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of the Partnership's financial instruments at December 31 is as follows:
1997 1996 1995 ------------------------- -------------------------- ----------------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE -------------- ---------- ------------ ----------- ----------- -------------- (in thousands) Long-term debt, including current portion $ 45,560 $ 42,677 $ 51,290 $ 46,227 $ 55,242 $ 52,594 Long-term debt - Oregon Steel Mills, Inc. 182,200 180,676 205,700 198,802 181,750 181,750 Long-term debt - New CF&I, Inc. 21,756 17,064 17,400 11,939 16,800 16,800
The fair value of Long-term debt, including current portion, Long-term debt - Oregon Steel Mills, Inc. and Long-term debt - New CF&I, Inc. is estimated by discounting future cash flows based on the Partnership's incremental borrowing rate for similar types of borrowing arrangements. 8. EMPLOYEE BENEFIT PLANS PENSION PLANS The Partnership has noncontributory defined benefit plans covering all of the eligible employees. The plans provide benefits based on participants' years of service and compensation. The Partnership funds at least the minimum annual contribution required by ERISA. Pension cost included the following components: 1997 1996 1995 ------- ------ ------- (IN THOUSANDS) Service cost - benefits earned during the year $ 2,224 $2,897 $ 2,754 Interest cost on projected benefit obligations 997 698 438 Actual return on plan assets (2,072) (976) (955) Net amortization and deferral 1,018 328 577 ------- ------ ------- Net pension cost $ 2,167 $2,947 $ 2,814 ======= ====== ======= 40 The following table sets forth the funded status of the plans and the amount recognized in the Partnership's balance sheet as of December 31: 1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Accumulated benefit obligations, including vested benefits of $13,218, $10,961, and $7,834 $13,512 $11,444 $ 8,239 ======= ======= ======= Projected benefit obligations $15,631 $12,826 $ 9,336 Plan assets at fair value 13,643 10,449 6,729 ------- ------- ------- Projected benefit obligation in excess of plan assets (1,988) (2,377) (2,607) Unrecognized net (gain) loss (230) 612 822 ------- ------- ------- Pension liability recognized in balance sheet $(2,218) $(1,765) $(1,785) ======= ======= ======= Plan assets are invested in common stock and bond funds (56%), marketable fixed income securities (41%) and insurance company contracts (3%) at December 31, 1997. The following table sets forth the significant actuarial assumptions for the Partnership's pension plans: 1997 1996 1995 ---- ---- ---- Discount rate 7.0% 7.5% 7.5% Rate of increase in future compensation levels 4.0% 4.0% 4.0% Expected long-term rate of return on plan assets 8.8% 8.8% 8.8% POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The Partnership provides certain health care and life insurance benefits for substantially all of the retired employees. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of service. The benefit plans are unfunded. The following table sets forth the status of the plans as of December 31:
1997 1996 1995 -------- -------- -------- (IN THOUSANDS) Net periodic postretirement benefit costs include: Service cost $ 116 $ 158 $ 215 Interest cost 577 584 561 Amortization of unrecognized net losses 84 142 142 ------- ------- ------- Net periodic postretirement benefit cost $ 777 $ 884 $ 918 ======= ======= ======= Accumulated postretirement benefit obligation: Retirees $ 3,637 $ 2,001 $ 1,014 Fully eligible plan participants 3,063 3,410 3,869 Other active plan participants 603 2,967 3,008 ------- ------- ------- $ 7,303 $ 8,378 $ 7,891 ======= ======= ======= Accumulated postretirement benefit obligation in excess of plan assets $(7,303) $(8,378) $(7,891) Unrecognized net loss 559 2,208 2,422 ------- ------- ------- Postretirement liability recognized in the balance sheets $(6,744) $(6,170) $(5,469) ======= ======= =======
41 The obligations and costs for the retiree medical plan are not dependent on changes in the cost of medical care. Retirees are covered under plans providing fixed dollar benefits. The discount rate used in determining the accumulated postretirement benefit obligation was 7.0 percent, 7.5 percent and 7.5 percent in 1997, 1996 and 1995, respectively. PROFIT PARTICIPATION PLAN The Partnership has a profit participation plan under which it distributes quarterly to eligible employees 12 percent of its operating income after adjustments for certain nonoperating items. Each eligible employee receives a share of the distribution based upon the level of the eligible employee's base compensation compared with the total base compensation of all eligible employees of the Partnership. Expense under the plan was $1.3 million in 1997, $275,000 in 1996 and $449,000 in 1995. THRIFT PLANS The Partnership has qualified thrift (401(k)) plans for eligible employees under which the Partnership matches 25 percent of the first 4 percent of the participant's deferred compensation. Partnership contribution expense in 1997, 1996 and 1995 was $269,000, $417,000 and $387,000, respectively. 9. RELATED PARTY TRANSACTIONS OREGON STEEL MILLS, INC. The Partnership pays administrative fees to Oregon Steel for services it provides based on an allocation from Oregon Steel and reimburses Oregon Steel for costs incurred on behalf of the Partnership. 1997 1996 1995 --------- -------- --------- (IN THOUSANDS) Oregon Steel administrative fees $ 4,103 $ 3,046 $ 3,548 Interest expense on notes payable to Oregon Steel 21,891 21,476 11,895 Debt payable to Oregon Steel at December 31 182,200 205,700 181,750 Accounts payable to Oregon Steel at December 31 7,676 5,667 4,454 NEW CF&I, INC. The Partnership includes in costs of sales amounts related to transportation services provided by a subsidiary of the General Partner. 1997 1996 1995 ------- -------- ------- (IN THOUSANDS) Services from subsidiary of General Partner $ 4,191 $ 4,416 $ 5,002 Interest expense on notes payable to General Partner 1,964 1,553 1,503 Debt payable to General Partner at December 31 21,756 17,400 16,800 Accounts payable to General Partner at December 31 2,657 3,133 617 Interest payable on the debt at December 31 5,034 3,260 1,830 42 NIPPON STEEL CORPORATION In 1994 the Partnership entered into an equipment supply agreement for purchase of deep head-hardened ("DHH") rail equipment from Nippon Steel Corporation ("Nippon"). Additionally, the Partnership pays royalties to Nippon based on DHH rail sales. The Partnership has made payments on the DHH rail equipment and paid certain license and technical fees, and royalties. 1997 1996 1995 -------- ------ ------- (IN THOUSANDS) Payments to Nippon for the year ended December 31 $ 659 $2,914 $15,394 Accounts payable to Nippon at December 31 346 - 2,252 10. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL All material environmental remediation liabilities which are probable and estimable are recorded in the financial statements based on current technologies and current environmental standards. Adjustments are made when additional information is available that may require different remediation methods or periods, and ultimately affect the total cost. The best estimate of the probable loss within a range is recorded. If there is no best estimate, the low end of the range is recorded, and the range is disclosed. In connection with the 1993 formation of the Partnership and the acquisition of the Partnership interest by the General Partner, the Partnership accrued a liability of $36.7 million for environmental remediation at the Pueblo, Colorado, steel mill. The Partnership believed $36.7 million was the best estimate from a range of $23.1 million to $43.6 million. The estimate of this liability was based on two separate remediation investigations conducted by independent environmental engineering consultants. The accrual includes costs for the Resource Conservation and Recovery Act facility investigation, a corrective measures study, remedial action, and operation and maintenance associated with the proposed remedial actions. In October 1995, the Partnership and the Colorado Department of Public Health and Environment finalized a postclosure permit. The permit contains a prioritized schedule for corrective actions to be completed which is substantially reflective of a straight-line rate of expenditure over 30 years. The State of Colorado stated that the schedule for corrective action could be accelerated if new data indicated a greater threat to the environment than is currently known to exist. At December 31, 1997, the accrued liability was $35.0 million, of which $32.9 million was classified as noncurrent in the balance sheet. GUARANTEES Oregon Steel has outstanding $235 million principal amount of 11% First Mortgage Notes ("Notes") due 2003. The Partnership has guaranteed the obligations of Oregon Steel under the Notes, and those guarantees are secured by substantially all the property, plant and equipment and certain other assets of the Partnership, excluding accounts receivable and inventory. In addition, Oregon Steel maintains a $125 million credit agreement with a group of banks which is collateralized, in part, by the accounts receivable and inventory of the Partnership, and also guaranteed by the Partnership. 43 LABOR DISPUTE The Partnership's labor contract expired on September 30, 1997. After a brief contract extension intended to help facilitate a possible agreement, on October 3, 1997 the United Steel Workers of America ("Union"), initiated a strike for approximately 1,060 bargaining unit employees. The parties failed to reach final agreement on a new labor contract due to differences on economic issues. As a result of contingency planning, the Partnership was able to avoid complete suspension of operations at the Pueblo Mill by utilizing a combination of permanent replacement workers, striking employees who returned to work and salaried employees. By December 1997, the Partnership had sufficient permanent replacement employees necessary to reach full production capacity. At the end of December, the Pueblo Mill was operating at approximately 65% of capacity and is expected to reach full production during the first half of 1998. As a result of weathering the strike and successfully resuming operations, the Partnership believes it can return to full production with fewer workers than before the strike. On December 30, 1997 the Union called off the strike and made an unconditional offer to return to work. At the time of this offer, only a few vacancies existed at the Pueblo Mill. As of the end of January 1998, 30 former striking employees had returned to work as a result of their unconditional offer. Approximately 920 former striking workers remain unreinstated ("Unreinstated Employees"). As a result of the labor dispute, both the Partnership and the Union have filed unfair labor practice charges with the National Labor Relations Board ("NLRB"). On February 24, 1998, the Regional Director of the NLRB Denver office informed the parties that he would issue complaints against both the Partnership and the Union. The Union will be charged with engaging in numerous incidents of picket line violence, and threats and intimidation of replacement workers. The complaint against the Partnership, which was issued on February 27, 1998, alleges violations of several provisions of the National Labor Relations Act. The Partnership not only denies the allegations, but rather believes that both the facts and the law fully support its contention that the strike was economic in nature and that it was not obligated to displace the properly hired permanent replacement employees. Ultimate determination of the issue may well require action by an appropriate United States Court of Appeals. In the event there is an adverse determination of these issues, Unreinstated Employees could be entitled to back pay from the date of the Union's unconditional offer to return to work through the date of the adverse determination ("Backpay Liability"). The number of Unreinstated Employees entitled to back pay would probably be limited to the number of replacement workers, currently approximately 600 workers. However, the Union might assert that all Unreinstated Employees could be entitled to back pay. Back pay is generally measured by the quarterly earnings of those working less interim wages earned elsewhere by the Unreinstated Employees. In addition, each Unreinstated Employee has a duty to take reasonable steps to mitigate the Backpay Liability by seeking employment elsewhere that has comparable demands and compensation. It is not presently possible to estimate the extent to which interim earnings and failure to mitigate the Backpay Liability would affect the cost of an adverse determination. OTHER CONTINGENCIES The Partnership is also party to various claims, disputes, legal actions and other proceedings involving contracts, employment and various other matters. In the opinion of management, the outcome of these matters should not have a material adverse effect on the financial condition of the Partnership. 44 11. UNUSUAL AND NONRECURRING ITEMS PROCEEDS FROM INSURANCE SETTLEMENT Sales for 1997 include approximately $2.5 million of insurance proceeds as reimbursement of lost profits resulting from lost production during the third and fourth quarters of 1996 related to the failure of one of the power transformers servicing the Partnership. In total, the Partnership received $7 million of insurance proceeds from this claim of which $4.5 million was recorded in 1996. Sales for 1995 include approximately $4 million of insurance proceeds received as reimbursement of lost profits resulting from lost production and start-up delays at the Partnership's new rod and bar mill caused by an explosion that occurred during the third quarter 1994. 45 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On July 25, 1996, the Company dismissed its prior independent accountants, Coopers & Lybrand L.L.P. ("C&L") and engaged Price Waterhouse LLP ("PW") as the independent accountants. The reports of C&L on the financial statements of the Company for the two fiscal years preceding the dismissal contained no adverse opinion or disclaimers of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. The decision to dismiss C&L and engage PW was approved by Oregon Steel's Audit Committee and ratified by the entire Oregon Steel Board of Directors. During the two most recent fiscal years and the subsequent interim periods preceding the dismissal, there were no disagreements with C&L on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of C&L would have caused them to make reference thereto in their report on the financial statements for such years. During the two most recent fiscal years and subsequent interim periods, there were no reportable events (as such term is defined in Item 304 (a)(1)(v) of Regulation S-K). 46 PART III ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND EXECUTIVE COMPENSATION The following table sets forth information with respect to each director of New CF&I, Inc. including their names and ages as of February 15, 1998, business experience during the past five years and directorships in other corporations. Directors are elected each year at the annual stockholders meeting.
PRINCIPAL OCCUPATION AND DIRECTOR NAME CERTAIN OTHER DIRECTORSHIPS AGE SINCE ---- --------------------------- --- -------- Thomas B. Boklund Mr. Boklund is the Chairman of the Board of Directors and 58 1993 Chief Executive Officer of the Company. He is also the Chairman of the Board of Directors and Chief Executive Officer of Oregon Steel. He was Chief Operating Officer of Oregon Steel from May 1982 to July 1985, became Chief Executive Officer in August 1985, and Chairman of the Board of Directors in February 1992. He also served as President of Oregon Steel from May 1982 to February 1992, and was reappointed as President from April 1994 to December 1996. He has been a director of Paragon Trade Brands, Inc., a manufacturer of private label infant disposable diapers, since April 1993, and a director of Oregon Metallurgical Corporation, an integrated manufacturer of titanium products, since April 1996. L. Ray Adams Mr. Adams is the Vice President of Finance and Chief 47 1993 Financial Officer of the Company. He served as a Director of Colorado & Wyoming Railroad from March 1993 through March 1994. He is also the Vice President of Finance and Chief Financial Officer of Oregon Steel. He assumed this position with Oregon Steel in April 1991. Joe E. Corvin Mr. Corvin is the President and Chief Operating Officer of 52 1993 the Company. He served as Senior Vice President of Manufacturing and Chief Operating Officer of the Company from March 1993 to August 1996. He is the President and Chief Operating Officer of Oregon Steel. He was Vice President and General Manager of Oregon Steel's Portland Steel Works from February 1992 to March 1994, served as Senior Vice President of Oregon Steel from July 1996 to December 1996, and became President and Chief Operating Officer of Oregon Steel in December 1996. Keiichiro Shimakawa Mr. Shimakawa became the Executive Vice President, General 49 1996 Manager of Nippon Steel USA, Inc., Chicago Branch, in July 1996. He served as Executive Vice President of Nippon Steel USA, Inc. from July 1994 to July 1996. He also served as the Manager of Tin Plate Sales for the Sheet Sales Department at Nippon Steel's head office in Tokyo, Japan, from 1990 to July 1994. 47
The following table sets forth the compensation paid to or accrued by the Company and its subsidiaries for the Chief Executive Officer and each of the four most highly paid executive officers of the Company and its subsidiaries as of December 31, 1997, and other individuals fitting such description, but not employed as such as of December 31, 1997. The Chief Executive Officer and certain other executive officers were paid by Oregon Steel. The compensation information relating to the named executive officers of the Company who are also named executives of Oregon Steel and Section 16 reporting compliance information as set forth under the captions "Executive Compensation," "Defined Benefit Retirement Plans," "Employment Contracts and Termination of Employment and Change in Control Arrangements," "Compensation Committee Interlocks and Insider Participation," "Board Compensation Committee Report on Executive Compensation" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Oregon Steel Mills, Inc. Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated herein by reference. Executive officers of the Company are listed on page 8 of this Form 10-K.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION(3) ALL OTHER COMPENSATION(3) ---------------------------------- ----------------------------- NAME AND THRIFT PLAN PRINCIPAL POSITION YEAR SALARY BONUS(1) CONTRIBUTION(2) OTHER ------------------ ---- ------ -------- --------------- ----- Thomas B. Boklund CEO Joe E. Corvin President and Chief Operating Officer L. Ray Adams Vice President of Finance and Chief Financial Officer Michael D. Buckentin 1997 169,526 5,919 1,600 1,409 Vice President and General Manager James E. Dionisio 1997 123,719 4,448 1,302 Vice President of 1996 93,840 596 944 Sales and Marketing 1995 81,957 804 821
- --------------- (1) Amounts earned pursuant to the Company's Profit Participation Plan. (2) Matching contributions made by the Company on behalf of the named executive to the Company's Thrift Plan. (3) Pension benefits accrued in 1997 are not included in this Summary Compensation Table. 48 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The equity of New CF&I, Inc. is held 87 percent by Oregon Steel, 10 percent by Nippon and 3 percent by Nissho Iwai. New CF&I, Inc., as general partner, has a 95.2 percent partnership interest in CF&I Steel L.P. Oregon Steel has a 4.8 percent partnership interest in CF&I Steel, L.P. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For related party transactions, see Note 11 to the Company's consolidated financial statements and Note 9 to CF&I's financial statements. 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K PAGE ---- (A) (i) FINANCIAL STATEMENTS: NEW CF&I, INC. Report of Independent Accountants - 1997 and 1996............ 15 Report of Independent Accountants - 1995 .................... 16 Consolidated Balance Sheets at December 31, 1997, 1996 and 1995............................................ 17 Consolidated Statements of Income for each of the three years in the period ended December 31, 1997........ 18 Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1997.................................. 19 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997........................................ 20 Notes to Consolidated Financial Statements.................. 21 CF&I STEEL, L.P. Report of Independent Accountants - 1997 and 1996............ 31 Report of Independent Accountants - 1995..................... 32 Balance Sheets at December 31, 1997, 1996 and 1995........... 33 Statements of Operations for each of the three years in the period ended December 31, 1997................... 34 Statements of Changes in Partners' Equity (Deficit) for each of the three years in the period ended December 31, 1997...................................... 35 Statements of Cash Flows for each of the three years in the period ended December 31, 1997.................. 36 Notes to Financial Statements............................... 37 (ii) Financial Statement Schedules for each of the three years in the period ended December 31, 1997: Schedule II - Valuation and Qualifying Accounts............. 51 Report of Independent Accountants on Financial Statement Schedule ...................................... 52 (iii) Exhibits: Reference is made to the list on page 53 of the exhibits filed with this report. (B) No reports on Form 8-K were required to be filed by the Registrant during the fourth quarter of the year ended December 31, 1997. 50 NEW CF&I, INC. CF&I STEEL, L.P. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31 (IN THOUSANDS)
COLUMN C ------------------------- COLUMN B ADDITIONS COLUMN E ---------- ---------- BALANCE AT CHARGED TO CHARGED BALANCE AT COLUMN A BEGINNING COSTS AND TO OTHER COLUMN D END OF - -------- --------- CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - -------------- ---------- ---------- -------- ---------- ---------- 1997 ---- Allowance for doubtful accounts $455 $820 - $(264) $1,011 1996 ---- Allowance for doubtful accounts $518 - - $ (63) $ 455 1995 ---- Allowance for doubtful accounts $592 - - $ (74) $ 518
51 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of New CF&I, Inc. and the Partners of CF&I Steel, L.P. Our audits of the consolidated financial statements referred to in our reports dated February 27, 1998 appearing on pages 15 and 31 of this Annual Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a)(ii) of this Form 10-K for the years ended December 31, 1997 and 1996. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Portland, Oregon February 27, 1998 52 LIST OF EXHIBITS 3.1 Certificate of Incorporation of New CF&I, Inc. (Filed as exhibit 3.1 to Form S-1 Registration Statement 333-02355 and incorporated by reference herein.) 3.2 Amended and Restated Agreement of Limited Partnership of CF&I Steel, L.P. dated as of March 3, 1993, by and between New CF&I, Inc. and the Pension Benefit Guaranty Corporation. (Filed as exhibit 28.1 to the Current Report on Form 8-K of Oregon Steel Mills, Inc. dated March 3, 1993, and incorporated by reference herein.) 3.3 Bylaws of New CF&I, Inc. (Filed as exhibit 3.3 to Form S-1 Registration Statement 333-02355 and incorporated by reference herein.) 4.1 Indenture dated as of June 1, 1996 among Oregon Steel Mills, Inc., as issuer; Chemical Bank, as trustee, and New CF&I, Inc. and CF&I Steel, L.P., as Guarantors, with respect to 11% First Mortgage Notes due 2003. (Filed as exhibit 4.1 to Form 10-Q dated June 30, 1996, and incorporated by reference herein.) 4.2 Form of Deed of Trust, Assignment of Rents and Leases and Security Agreement. (Filed as exhibit 4.2 to Amendment #1 to Form S-1 Registration Statement 333-02355 and incorporated by reference herein.) 4.3 Form of Security Agreement. (Filed as exhibit 4.3 to Amendment #1 to Form S-1 Registration Statement 333-02355 and incorporated by reference herein.) 4.4 Form of Intercreditor Agreement. (Filed as exhibit 4.4 to Amendment #1 to Form S-1 Registration Statement 333-02355 and incorporated by reference herein.) 4.5 Form of Guarantee of First Mortgage Notes due 2003 (Filed as exhibit 4.1 to Form 8-A of New CF&I, Inc. and CF&I Steel, L.P., filed on May 31, 1996, and incorporated by reference herein.) 4.6 Form of Promissory Note. (Filed as exhibit 4.2 to Form 8-A of CF&I Steel, L.P. filed on May 31, 1996 and incorporated by reference herein.) 10.1 Asset Purchase Agreement dated as of March 3, 1993 among CF&I Steel Corporation, Denver Metals Company, Albuquerque Metals Company, CF&I Fabricators of Colorado, Inc., CF&I Fabricators of Utah, Inc., Pueblo Railroad Service Company, Pueblo Metals Company, Colorado & Utah Land Company, The Colorado and Wyoming Railway Company, William J. Westmark as trustee for the estate of The Colorado and Wyoming Railway Company, CF&I Steel, L.P., New CF&I, Inc. and Oregon Steel Mills, Inc. (Filed as exhibit 2.1 to the Current Report on Form 8-K of Oregon Steel Mills, Inc. dated March 3, 1993, and incorporated by reference herein.) 27.1 Financial Data Schedule of New CF&I, Inc. 27.2 Financial Data Schedule of CF&I Steel, L.P. 99.1 Amended and Restated Credit Agreement among Oregon Steel Mills, Inc. as the Borrower, Certain Commercial Lending Institutions as the Lenders, First Interstate Bank of Oregon, N.A. as the Administrative Agent for the Lenders, The Bank of Nova Scotia as the Syndication Agent for the Lenders and First Interstate Bank of Oregon, N.A. and The Bank of Nova Scotia as the Managing Agents for the Lenders. (Filed as exhibit 10.0 to Form 10-Q dated June 30, 1996, and incorporated by reference herein.) 99.2 Second Amendment dated as of December 11, 1997 to the Credit Agreement dated June 12, 1996, among Oregon Steel Mills, Inc., as Borrower, certain Commercial Lending Institutions as the Lenders, Wells Fargo Bank National Association, formerly known as First Interstate Bank of Oregon, N.A., as the Administrative Agent for the Lenders; the Bank of Nova Scotia, as the Syndication Agent for the Lenders, and Wells Fargo Bank National Association and the Bank of Nova Scotia, as the Managing Agents for the Lenders. 99.3 Third Amendment dated February 17, 1998 to the Credit Agreement dated June 12, 1996, among Oregon Steel Mills, Inc., as Borrower, certain Commercial Lending Institutions as the Lenders, Wells Fargo Bank National Association, formerly known as First Interstate Bank of Oregon, N.A., as the Administrative Agent for the Lenders; the Bank of Nova Scotia, as the Syndication Agent for the Lenders, and Wells Fargo Bank National Association and the Bank of Nova Scotia, as the Managing Agents for the Lenders. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. NEW CF&I, INC. BY /S/ THOMAS B. BOKLUND ----------------------------------- CHAIRMAN AND CHIEF EXECUTIVE OFFICER CF&I STEEL, L.P. BY: NEW CF&I, INC. GENERAL PARTNER BY /S/ THOMAS B. BOKLUND ------------------------------------ CHAIRMAN AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of New CF&I, Inc. and CF&I Steel, L.P. in the following capacities on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Thomas B. Boklund Chairman of the Board, March 1, 1998 - ---------------------------- Chief Executive Officer and (Thomas B. Boklund) Director of New CF&I, Inc. (Principal Executive Officer) /s/ Joe E. Corvin President, Chief Operating March 1, 1998 - ----------------------- (Joe E. Corvin) Officer and Director of New CF&I, Inc. /s/ L. Ray Adams Vice President of Finance, March 1, 1998 - ---------------------------- (L. Ray Adams) Chief Financial Officer and Director of New CF&I, Inc. (Principal Financial Officer) /s/ Christopher D. Cassard Corporate Controller March 1, 1998 - ---------------------------- (Christopher D. Cassard) of New CF&I, Inc. (Principal Accounting Officer) /s/ Keiichiro Shimakawa Director of New CF&I, Inc. March 1, 1998 - --------------------------- (Keiichiro Shimakawa) 54 EX-27.1 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1000 12-MOS DEC-31-1997 DEC-31-1997 3 0 38176 1011 41842 85800 257806 34485 364087 70894 0 0 0 1 11062 364087 402295 402295 366641 366641 0 0 25790 (12161) (4529) (7632) 0 0 0 (7632) 0 0
EX-27.2 3
5 1000 12-MOS DEC-31-1997 DEC-31-1997 0 0 37663 1011 41666 80668 255191 33488 351537 74835 0 0 0 0 (5025) 351537 396400 396400 361650 361650 0 0 27875 (15489) 0 (15489) 0 0 0 (15489) 0 0
EX-99.2 4 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment"), ---------------- dated as of December 11, 1997, among OREGON STEEL MILLS, INC., a Delaware corporation (the "Borrower"), the various financial institutions as are or may -------- become parties hereto (collectively, the "Lenders"), WELLS FARGO BANK NATIONAL ------- ASSOCIATION, formerly known as FIRST INTERSTATE BANK OF OREGON, N.A. ("Wells ----- Fargo"), as administrative agent (the "Administrative Agent"), for the Lenders, - ----- -------------------- THE BANK OF NOVA SCOTIA ("Scotiabank"), as syndication agent for the Lenders ---------- (the "Syndication Agent") and Wells Fargo and Scotiabank as managing agents (the ----------------- "Managing Agents"; the Managing Agents, the Administrative Agent and the --------------- Syndication Agent are collectively referred to as the "Agents") for the Lenders. ------ W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower, the Lenders and the Agents are parties to the Amended and Restated Credit Agreement, dated as of June 12, 1996, as the same has been amended by that certain First Amendment to Credit Agreement dated as of May 30, 1997 (as so amended, hereinafter referred to as the "Existing Credit --------------- Agreement"); and - --------- WHEREAS, the Borrower has requested that certain amendments be made to the Existing Credit Agreement; and WHEREAS, the Lenders and Agents are willing to make certain amendments to the Existing Credit Agreement on the terms and conditions hereinafter provided; NOW, THEREFORE, in consideration of the agreements herein contained, the parties hereto hereby agree as follows: ARTICLE I. DEFINITIONS ----------- SECTION 1.1. Certain Definitions. The following terms (whether or not ------------------- underscored) when used in this Second Amendment shall have the following meanings: -1- "Amended Credit Agreement" shall mean the Existing Credit Agreement as ------------------------ amended by this Second Amendment. "Second Amendment Effective Date" shall have the meaning provided in ------------------------------- Section 4.1. - ----------- SECTION 1.2. Other Definitions. Unless otherwise defined or the ----------------- context otherwise requires, terms used herein have the meanings provided for in the Existing Credit Agreement. ARTICLE II. AMENDMENTS TO ------------- EXISTING CREDIT AGREEMENT ------------------------- Effective on the Second Amendment Effective Date, the Existing Credit Agreement is amended in accordance with the terms of this Article II; except as ---------- so amended, the Existing Credit Agreement shall continue to remain in all respects in full force and effect. SECTION 2.1. Amendments to Section 1.1 ------------------------- Section 2.1.1. Section 1.1 of the Existing Credit Agreement is hereby amended by adding thereto the following definitions in appropriate alphabetical sequence: "Adjusted Borrowing Base" means, as of any date of ----------------------- determination thereof, an amount equal to the lesser of (i) the sum of (x) 80% of the value of all Eligible Accounts outstanding at such date, plus (y) 65% of the value of all Eligible Inventory at such date and ---- (ii) the amount of the Standard Borrowing Base plus $15,000,000. ---- "Standard Borrowing Base" means, as of any date of ----------------------- determination thereof, an amount equal to the sum of (x) 80% of the value of all Eligible Accounts outstanding at such date, plus (y) 50% ---- of the value of all Eligible Inventory at such date. Section 2.1.2. The definition of the term "Borrowing Base" in Section 1.1 of the Existing Credit Agreement is hereby amended and restated in its entirety to read as follows: "Borrowing Base" means during the period from December 1, 1997 -------------- through January 30, 1998, the Adjusted Borrowing Base, and at all other times, the Standard Borrowing Base. Section 2.1.3. The definition of the term "Eligible Inventory" appearing in Section 1.1 of the Existing Credit -2- Agreement is hereby amended by deleting the period at the end thereof and substituting therefor the following: "provided, however, in no event shall the -------- ------- value of all Eligible Inventory as of December 31, 1997 exceed $75,000,000." Section 2.1.4. The definition of the term "Applicable Margin" in Section 1.1 of the Existing Credit Agreement is hereby amended by adding the following sentence immediately prior to the end thereof: "Notwithstanding the foregoing, if at any time the aggregate principal amount of Obligations outstanding hereunder shall exceed the Standard Borrowing Base, the Borrower's Reserve Adjusted LIBO Margin and Base Rate Margin will be 2.25% and 1.25%, respectively, on the amount of such excess. SECTION 2.2. Amendment to Section 7.1.1. -------------------------- Section 7.1.1 of the Existing Credit Agreement is hereby amended by deleting the period at the end of clause (k) thereof, replacing such period with a semicolon and adding the following clause immediately thereafter: "(l) as soon as possible and in any event within 20 days after December 31, 1997, a consolidated financial forecast for the Fiscal Year ending December 31, 1998, and as soon as possible and in any event within 15 days after December 31, 1997, (i) preliminary, unaudited consolidated and consolidating balance sheets, income statements and statements of cash flow for the Fiscal Year ending December 31, 1997 and (ii) a preliminary Compliance Certificate, based on the unaudited consolidated financial statements prepared for the Fiscal Year ending December 31, 1997 described in clause (i) above." SECTION 2.3. Amendment to Section 2.1.3. -------------------------- Clause (ii) of the second sentence of Section 2.1.3 of the Existing Credit Agreement is hereby amended and restated to read in its entirety as follows: "(ii) The sum of (x) the aggregate outstanding principal amount of all Revolving Loans of all Lenders plus (y) the aggregate ---- outstanding Swingline Loans would exceed the Standard Borrowing Base, or" SECTION 2.4. Amendment to Section 7.2.4(b). ----------------------------- Section 7.2.4(b) of the Existing Credit Agreement is hereby amended by deleting the ratio of "2.00 to 1.00" opposite the date December 31, 1997 and replacing it with the ratio of "1.50 to 1.0". -3- ARTICLE III. REPRESENTATIONS AND WARRANTIES ------------------------------ In order to induce the Lenders to make the amendments provided for in Article II, the Borrower hereby (a) represents and warrants, that, immediately after giving effect to the provisions of this Second Amendment, each of the representations and warranties contained in the Existing Credit Agreement and in the other Loan Documents is true and correct as of the date hereof as if made on the date hereof (except, if any such representation and warranty relates to an earlier date, such representation and warranty shall be true and correct in all material respects as of such earlier date) and no Default has occurred and is continuing and (b) agrees that the incorrectness in any material respect of any representation and warranty contained in the preceding clause (a) shall ---------- constitute an immediate Event of Default. ARTICLE IV. CONDITIONS TO EFFECTIVENESS --------------------------- SECTION 4.1. Effective Date. This Second Amendment shall become -------------- effective on the date (herein called the "Second Amendment Effective Date") when ------------------------------- the conditions set forth in this Section 4.1 have been satisfied. ----------- Section 4.1.1. Execution of Counterparts. The Administrative Agent ------------------------- shall have received counterparts of this Second Amendment duly executed and delivered on behalf of the Borrower, the Required Lenders and the Agents. Section 4.1.2. Resolutions and Legal Opinion. The Administrative Agent ----------------------------- shall have received (a) resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of Second Amendment and (b) a satisfactory legal opinion from Schwabe Williamson & Wyatt (or other counsel satisfactory to the Agents) as to (i) the due authorization, execution, and delivery of this Second Amendment by, and good standing of, the Borrower and the Guarantors, (ii) the enforceability of this Second Amendment against the Borrower and the Guarantors and (iii) the absence of any conflict between the terms of the Second Amendment and the Existing Credit Agreement as amended hereby, on the one hand, and any material agreements of the Borrower and the Guarantors, on the other hand. Section 4.1.3. Amendment Fee. The Borrower shall have made payment to ------------- each Lender of an amendment fee in an amount equal to .16% of such Lender's Revolving Loan Commitment. -4- Section 4.1.4. Legal Details, etc. All documents executed or submitted ------------- pursuant hereto, and all legal matters incident thereto, shall be satisfactory in form and substance to the Managing Agents and their counsel. SECTION 4.2. Expiration. If all of the conditions set forth in Section ---------- ------- 4.1 hereof shall not have been satisfied on or prior to December 31, 1997, the - --- agreements of the parties contained in this Second Amendment shall, unless otherwise agreed by the Lenders, terminate effective immediately on such date and without further action. ARTICLE V. MISCELLANEOUS ------------- SECTION 5.1. Loan Document Pursuant to Existing Credit Agreement. This --------------------------------------------------- Second Amendment is a Loan Document executed pursuant to the Existing Credit Agreement. Except as expressly amended or waived hereby, all of the representations, warranties, terms, covenants and conditions contained in the Existing Credit Agreement and each other Loan Document shall remain unamended and in full force and effect. The amendments set forth herein shall be limited precisely as provided for herein and shall not be deemed to be a waiver of, amendment of, consent to or modification of any other term or provision of the Existing Credit Agreement or of any term or provision of any other Loan Document or of any transaction or further or future action on the part of the Borrower or any of its Subsidiaries or which would require the consent of any of the Lenders under the Existing Credit Agreement or any other Loan Document. SECTION 5.2. Counterparts, etc. This Second Amendment may be executed ----------------- by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SECTION 5.3. GOVERNING LAW; ENTIRE AGREEMENT. THIS SECOND AMENDMENT ------------------------------- SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. -5- IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed by their respective officers hereunto duly authorized as of the day and year first above written. OREGON STEEL MILLS, INC. By: /s/ L. Ray Adams ------------------------------- Title: Chief Financial Officer ------------------------ WELLS FARGO BANK NATIONAL ASSOCIATION, as Administrative Agent and Managing Agent By: /s/ Dave Goode ------------------------------- Title: Vice President ------------------------ THE BANK OF NOVA SCOTIA, as Syndication Agent and Managing Agent By: /s/ Daryl K. Hogge ------------------------------ Title: Officer ----------------------- LENDERS ------- WELLS FARGO BANK NATIONAL ASSOCIATION By: /s/ Dave Goode ------------------------------ Title: Vice President ----------------------- THE BANK OF NOVA SCOTIA By: /s/ Daryl K. Hogge ------------------------------- Title: Officer ----------------------- -6- UNITED STATES NATIONAL BANK OF OREGON By: /s/ Dale Parshall ------------------------------- Title: Vice President ------------------------ KEYBANK, NATIONAL ASSOCIATION By: /s/ J. T. Taylor ------------------------------- Title: Assistant Vice President ------------------------ THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Mark A. Isley ------------------------------- Title: First Vice President ------------------------ THE BANK OF TOKYO-MITSUBISHI, LTD., PORTLAND BRANCH By: /s/ Hiroki Nakazawa ------------------------------- Title: Vice President ------------------------ PNC BANK, NATIONAL ASSOCIATION By: /s/ Lynn Koncz ------------------------------- Title: Vice President ------------------------ NATIONSBANK OF TEXAS, N.A. By: /s/ Charles F. Lilygren ------------------------------- Title: Vice President ------------------------ UNION BANK OF CALIFORNIA, N.A. By: /s/ David L. Chicca ------------------------------- Title: Vice President ------------------------ -7- EX-99.3 5 THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Third Amendment"), --------------- dated as of February 17, 1998, among OREGON STEEL MILLS, INC., a Delaware corporation (the "Borrower"), the various financial institutions as are or may -------- become parties hereto (collectively, the "Lenders"), WELLS FARGO BANK NATIONAL ------- ASSOCIATION, formerly known as FIRST INTERSTATE BANK OF OREGON, N.A. ("Wells ----- Fargo"), as administrative agent (the "Administrative Agent"), for the Lenders, - ----- -------------------- THE BANK OF NOVA SCOTIA ("Scotiabank"), as syndication agent for the Lenders ---------- (the "Syndication Agent") and Wells Fargo and Scotiabank as managing agents (the ----------------- "Managing Agents"; the Managing Agents, the Administrative Agent and the --------------- Syndication Agent are collectively referred to as the "Agents") for the Lenders. ------ W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower, the Lenders and the Agents are parties to the Amended and Restated Credit Agreement, dated as of June 12, 1996, as the same has been amended by that certain First Amendment to Credit Agreement dated as of May 30, 1997 and that certain Second Amendment to Credit Agreement dated as of December 11, 1997(as so amended, hereinafter referred to as the "Existing Credit -------------- Agreement"); and - --------- WHEREAS, the Borrower has requested that certain amendments be made to the Existing Credit Agreement; and WHEREAS, the Lenders and Agents are willing to make certain amendments to the Existing Credit Agreement on the terms and conditions hereinafter provided; NOW, THEREFORE, in consideration of the agreements herein contained, the parties hereto hereby agree as follows: ARTICLE I. DEFINITIONS ----------- SECTION 1.1. Certain Definitions. The following terms (whether or not ------------------- underscored) when used in this Third Amendment shall have the following meanings: "Amended Credit Agreement" shall mean the Existing Credit Agreement as ------------------------ amended by this Third Amendment. "Third Amendment Effective Date" shall have the meaning provided in ------------------------------ Section 4.1. - ----------- SECTION 1.2. Other Definitions. Unless otherwise defined or the ----------------- context otherwise requires, terms used herein have the meanings provided for in the Existing Credit Agreement. ARTICLE II. AMENDMENTS TO ------------- EXISTING CREDIT AGREEMENT ------------------------- Effective on the Third Amendment Effective Date, the Existing Credit Agreement is amended in accordance with the terms of this Article II; except as ---------- so amended, the Existing Credit Agreement shall continue to remain in all respects in full force and effect. SECTION 2.1. Amendment to Section 1.1. ------------------------- The definition of the term "EBITDA" in Section 1.1 of the Existing Credit Agreement is hereby amended and restated in its entirety to read as follows: "EBITDA" means, for any period of four Fiscal Quarters, the ------ Borrower and its Subsidiaries' earnings before interest expense, taxes, depreciation and amortization and before any non-cash, non-recurring charges, calculated on a rolling four Fiscal Quarter basis. SECTION 2.2. Amendment to Section 7.2.4 (b). ------------------------------ Section 7.2.4(b) of the Existing Credit Agreement is hereby amended by deleting the ratio of "2.25 to 1.00" opposite the date March 31, 1998 and replacing it with the ratio of "1.45 to 1.0," and by deleting "June 30, 1998 and thereafter 2.50 to 1.00" and replacing it with the following: June 30, 1998 1.75 to 1.00 September 30, 1998 2.15 to 1.00 December 31, 1998 and thereafter 2.50 to 1.00 -2- ARTICLE III. REPRESENTATIONS AND WARRANTIES ------------------------------ In order to induce the Lenders to make the amendments provided for in Article II, the Borrower hereby (a) represents and warrants, that, immediately after giving effect to the provisions of this Third Amendment, each of the representations and warranties contained in the Existing Credit Agreement and in the other Loan Documents is true and correct as of the date hereof as if made on the date hereof (except, if any such representation and warranty relates to an earlier date, such representation and warranty shall be true and correct in all material respects as of such earlier date) and no Default has occurred and is continuing and (b) agrees that the incorrectness in any material respect of any representation and warranty contained in the preceding clause (a) shall ---------- constitute an immediate Event of Default. ARTICLE IV. CONDITIONS TO EFFECTIVENESS --------------------------- SECTION 4.1. Effective Date. This Third Amendment shall become -------------- effective on the date (herein called the "Third Amendment Effective Date") when ------------------------------ the conditions set forth in this Section 4.1 have been satisfied. ----------- Section 4.1.1. Execution of Counterparts. The Administrative Agent ------------------------- shall have received counterparts of this Third Amendment duly executed and delivered on behalf of the Borrower, the Required Lenders and the Agents. Section 4.1.2. Legal Details, etc. All documents executed or submitted ------------------- pursuant hereto, and all legal matters incident thereto, shall be satisfactory in form and substance to the Managing Agents and their counsel. SECTION 4.2. Expiration. If all of the conditions set forth in Section ---------- ------- 4.1 hereof shall not have been satisfied on or prior to February 28, 1998, the - --- agreements of the parties contained in this Third Amendment shall, unless otherwise agreed by the Lenders, terminate effective immediately on such date and without further action. ARTICLE V. MISCELLANEOUS ------------- -3- SECTION 5.1. Loan Document Pursuant to Existing Credit Agreement. This --------------------------------------------------- Third Amendment is a Loan Document executed pursuant to the Existing Credit Agreement. Except as expressly amended or waived hereby, all of the representations, warranties, terms, covenants and conditions contained in the Existing Credit Agreement and each other Loan Document shall remain unamended and in full force and effect. The amendments set forth herein shall be limited precisely as provided for herein and shall not be deemed to be a waiver of, amendment of, consent to or modification of any other term or provision of the Existing Credit Agreement or of any term or provision of any other Loan Document or of any transaction or further or future action on the part of the Borrower or any of its Subsidiaries or which would require the consent of any of the Lenders under the Existing Credit Agreement or any other Loan Document. SECTION 5.2. Counterparts, etc. This Third Amendment may be executed by ----------------- the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SECTION 5.3. GOVERNING LAW; ENTIRE AGREEMENT. THIS THIRD AMENDMENT ------------------------------- SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed by their respective officers hereunto duly authorized as of the day and year first above written. OREGON STEEL MILLS, INC. By: /s/ L. Ray Adams ------------------------------ Title: Chief Financial Officer WELLS FARGO BANK NATIONAL ASSOCIATION, as Administrative Agent and Managing Agent By: /s/ David Goode ------------------------------ Title: Vice President -4- THE BANK OF NOVA SCOTIA, as Syndication Agent and Managing Agent By: /s/ Daryl K. Hogge ------------------------------ Title: Officer LENDERS ------- WELLS FARGO BANK NATIONAL ASSOCIATION By: /s/ David Goode ------------------------------ Title: Vice President THE BANK OF NOVA SCOTIA By: /s/ Daryl K. Hogge ------------------------------ Title: Officer UNITED STATES NATIONAL BANK OF OREGON By: /s/ Dale Parshall ------------------------------ Title: Vice President KEYBANK, NATIONAL ASSOCIATION By: /s/ Mary Young ------------------------------ Title: Commercial Banking Officer THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Mark A. Isley ------------------------------ Title: First Vice President -5- THE BANK OF TOKYO-MITSUBISHI, LTD., PORTLAND BRANCH By: /s/ H. Nakazawa ------------------------------ Title: Vice President PNC BANK, NATIONAL ASSOCIATION By: /s/ Troy Brown ------------------------------ Title: Corporate Banking Officer NATIONSBANK OF TEXAS, N.A. By: /s/ Charles F. Lilygren ------------------------------ Title: Sr. Vice President UNION BANK OF CALIFORNIA, N.A. By: /s/ David E. Taylor ------------------------------ Title: Vice President -6- -----END PRIVACY-ENHANCED MESSAGE-----