-----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, NX54ZmFX+UKzjDxjeaAHOt0R1TsdypDpa/OzVyLJTQTw8MWYkoQH+IY1aPdq1VOP /dQRIGi29lyfQtylaCUoNA== 0000830260-99-000002.txt : 19990319 0000830260-99-000002.hdr.sgml : 19990319 ACCESSION NUMBER: 0000830260-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OREGON STEEL MILLS INC CENTRAL INDEX KEY: 0000830260 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 940506370 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09887 FILM NUMBER: 99567877 BUSINESS ADDRESS: STREET 1: 1000 BROADWAY BLDG STREET 2: 1000 S W BROADWAY, STE 2200 CITY: PORTLAND STATE: OR ZIP: 97205 BUSINESS PHONE: 5032239228 MAIL ADDRESS: STREET 1: 1000 SW BROADWAY STREET 2: PO BOX 5368 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, 1998 COMMISSION FILE NUMBER 1-9887 OREGON STEEL MILLS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-0506370 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 1000 BROADWAY BUILDING SUITE 2200 1000 S.W. BROADWAY PORTLAND, OREGON 97205 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 223-9228 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Name of each exchange on Title of each class which registered ------------------- --------------------------- Common Stock, $.01 par value per share New York Stock Exchange 11% First Mortgage Notes due 2003 New York Stock Exchange 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 nonaffiliates of the registrant. BASED ON LAST SALE, JANUARY 29, 1999: $309,321,648 Indicate the number of shares outstanding of each of the registrant's classes of stock as of January 31, 1999: COMMON STOCK, $.01 PAR VALUE 25,776,804 ---------------------------- ----------------------------- (TITLE OF CLASS) (NUMBER OF SHARES OUTSTANDING) DOCUMENTS INCORPORATED BY REFERENCE: Proxy statement for the Registrant's Annual Meeting of Stockholders to be held April 29, 1999 is incorporated by reference into Part III of this report. OREGON STEEL MILLS, INC. TABLE OF CONTENTS PAGE PART I ITEM 1. BUSINESS................................................... 1 General.............................................. 1 Products............................................. 3 Raw Materials and Semifinished Slabs ................ 5 Marketing and Customers.............................. 6 Competition and Other Market Factors................. 7 Environmental Matters................................ 9 Labor Dispute....................................... 10 Employees............................................11 2. PROPERTIES.................................................11 3. LEGAL PROCEEDINGS..........................................12 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........12 Executive Officers of the Registrant................ 13 PART II 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS..........................14 6. SELECTED FINANCIAL DATA................................... 14 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........15 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................... 22 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................23 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..............39 PART III 10 and 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND EXECUTIVE COMPENSATION...........................40 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................40 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............40 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................. 41 PART I ITEM 1. BUSINESS GENERAL Oregon Steel Mills, Inc. ("Company" or "Registrant") was founded in 1926 by William G. Gilmore and was incorporated in California in 1928. The Company reincorporated in Delaware in 1974. The Company changed its name in December 1987 from Gilmore Steel Corporation to Oregon Steel Mills, Inc. During 1998, the Company operated two steel minimills and four finishing facilities in the western United States and Canada. The Company manufactures and markets one of the broadest lines of specialty and commodity steel products of any domestic minimill company. The Company emphasizes the cost efficient production of higher margin specialty steel products targeted at a diverse customer base located primarily west of the Mississippi River, western Canada and the Pacific Rim. The Company's manufacturing flexibility allows it to manage actively its product mix in response to changes in customer demand and individual product cycles. In 1993, the Company organized into two business units known as the Oregon Steel Division and the CF&I Steel Division. In January 1998 the CF&I Steel Division was renamed the Rocky Mountain Steel Mills ("RMSM") Division. The Oregon Steel Division is centered on the Company's steel plate minimill in Portland, Oregon ("Portland Mill"), which supplies steel for the Company's steel plate and large diameter pipe finishing facilities. The Oregon Steel Division's steel pipe mill in Napa, California ("Napa Pipe Mill") is a large diameter steel pipe mill and fabrication facility. The Oregon Steel Division also produces large diameter pipe and electric resistance welded ("ERW") pipe at its 60 percent owned pipe mill in Camrose, Alberta, Canada ("Camrose Pipe Mill"). The RMSM Division consists of steelmaking and finishing facilities of CF&I Steel, L.P. ("CF&I") (dba Rocky Mountain Steel Mills) located in Pueblo, Colorado ("Pueblo Mill"). The Company owns 87 percent of New CF&I, Inc. ("New CF&I") which owns a 95.2 percent general partnership interest in CF&I. In addition, the Company owns 4.3 percent of the remaining limited partnership interest in CF&I. The Pueblo Mill is a steel minimill which produces long-length and standard steel rails, seamless tubular products ("seamless pipe"), wire rod and bar products. In total, the Company produces eight steel products which include most standard grades of steel plate, a wide range of higher margin specialty steel plate, coiled plate, large diameter steel pipe, ERW pipe, long-length and standard rails, seamless pipe, wire rod and bar products. The steel industry, including the steel products manufactured by the Company, has been highly cyclical and is generally characterized by overcapacity, both domestically and internationally. On June 19, 1996, the Company completed public offerings of an additional 6,000,000 shares of common stock at $12.75 per share and $235 million principal amount of 11% First Mortgage Notes ("Notes") due 2003. On July 9, 1996, the Company issued an additional 271,857 shares of common stock at $12.75 per share pursuant to an underwriter's over-allotment option. The proceeds from these offerings were $302.3 million, net of expenses and underwriting discounts. The Notes are guaranteed by New CF&I and CF&I ("Guarantors"). The Notes and guarantees are secured by a lien on substantially all the property, plant and equipment and certain other assets of the Company and the Guarantors. The proceeds from the common stock and debt offerings were used to repay in full borrowing under the Company's bank credit agreement. The remaining proceeds were used for capital expenditures and general corporate purposes. OREGON STEEL DIVISION The Portland Mill is the only hot-rolled steel plate minimill in the eleven western states and one of only two steel plate production facilities operating in that region. The Portland Mill produces slab thicknesses of 6", 7" and 8" and finished steel plate in widths up to 138". During 1997 the Company completed the construction and start-up of a Steckel Combination Mill ("Combination Mill") at its Portland Mill. The project included installation of a new reheat furnace, a 4-high rolling mill with coiling furnaces, a vertical edger, a down coiler, on-line accelerated cooling, hot leveling and shearing equipment, extended roll lines, and a fully automated hydraulic -1- gauge control system. The annual rolling capacity of the Combination Mill, depending on product mix, is up to 1.2 million tons. The Combination Mill gives the Company the ability to produce wider steel plate than any similar mill in the world, increase its manufacturing flexibility and, as production increases, supply substantially all the Company's plate requirements for large diameter line pipe as well as coiled plate for applications such as the smaller diameter ERW pipe manufactured at the Camrose Pipe Mill. The Combination Mill produces discrete steel plate in widths from 48" to 138" and in thicknesses from 3/16" to 8". Coiled plate can be produced in widths of 48" to 120", and in thicknesses that range from 0.09" to .75". With the Combination Mill, the Company is in a position to produce all grades of discrete steel plate and coiled plate for all of the Company's commodity and specialty markets, including heat treated applications. The Napa Pipe Mill produces large diameter steel pipe of a quality suitable for use in high pressure oil and gas transmission pipelines. The Napa Pipe Mill can produce pipe with an outside diameter ranging from 16" to 42", with wall thicknesses of up to 1-1/16" and in lengths of up to 80 feet, and can process two different sizes of pipe simultaneously in its two finishing sections. Depending on product mix, the Napa Pipe Mill has an annual capacity in excess of 400,000 tons of pipe. The Portland Mill can supply substantially all of the Napa Pipe Mill's requirements for specialty steel plate which is fabricated into steel pipe. Depending on market conditions and other factors, the Napa Pipe Mill may also buy plate from others. The Company acquired a 60 percent interest in the Camrose Pipe Mill in June 1992 from Stelco, Inc. ("Stelco"), a large Canadian steel producer. The Camrose Pipe Mill has two pipe manufacturing mills. One is a large diameter pipe mill similar to the Napa Pipe Mill, and the other is an ERW pipe mill which produces steel pipe used by the oil and gas industry for drilling and distribution. The large diameter pipe mill produces pipe in lengths of up to 80 feet with a diameter ranging from 20" to 42" with maximum wall thickness limited to about 70 percent of the thickness of the pipe produced by the Napa Pipe Mill. Depending upon the product mix, the annual capacity for large diameter pipe is up to 184,000 tons. The ERW mill produces pipe in sizes ranging from 4.5" to 16" in diameter and has an annual nominal capacity of up to 141,000 tons, depending upon product mix. RMSM DIVISION On March 3, 1993, New CF&I, a then wholly-owned subsidiary of the Company, acquired a 95.2 percent interest in a newly formed limited partnership, CF&I. The remaining 4.8 percent interest was owned by the Pension Benefit Guaranty Corporation ("PBGC"). CF&I then purchased substantially all of the steelmaking, fabricating, metals and railroad business assets of CF&I Steel Corporation. The Pueblo Mill has melting capacity of approximately 1.2 million tons and a finished ton capacity of approximately 1.2 million tons. In August of 1994, New CF&I sold a 10 percent equity interest in New CF&I to subsidiaries 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. In November 1995, the Company sold a 3 percent equity interest in New CF&I to two companies of the Nissho Iwai Group ("Nissho Iwai"), a large Japanese trading company. In 1997, the Company purchased the 4.8 percent interest in CF&I owned by the PBGC. In 1998, the Company sold a 0.5 percent interest to a subsidiary of Nippon. As part of its strategy in acquiring the Pueblo Mill, the Company anticipated making significant capital additions. 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 rail, rod and bar products. 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 the acquisition. -2- ROD AND BAR MILL. At the time of its acquisition, 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 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 the Pueblo Mill, 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 railmaking capacity through the addition of equipment capable of producing in-line DHH rail. Rail produced using this technology is considered by many rail customers to be more durable and higher quality rail than that produced with existing techniques. As a result of these improvements, the Company believes it is able to provide a functionally superior, higher margin product. PRODUCTS OVERVIEW The Company manufactures and markets one of the broadest lines of specialty and commodity steel products of any domestic minimill company. Through acquisitions and capital improvements, the Company has expanded its range of finished products from discrete plate and large diameter welded pipe in 1991 to eight products currently by adding ERW pipe, rail, rod, bar, seamless pipe and coiled plate. It has also expanded its primary selling region from the western United States to national and international markets. The following chart identifies the Company's principal products and the primary markets for those products.
PRODUCTS MARKETS -------- ------- OREGON STEEL DIVISION Commodity and specialty steel plate Service centers Railcar and barge manufacturers Heavy equipment manufacturers Construction Large diameter steel pipe Oil and gas transmission pipelines Coiled plate Welded pipe products Service centers Electric resistance welded pipe Oil and natural gas line pipe RMSM DIVISION Rail Rail transportation Wire rod Durable goods Capital equipment Bar products Construction Durable goods Capital equipment Seamless pipe Oil and gas producers Gas transmission
-3- The following table sets forth for the periods indicated the tonnage shipped and the Company's total shipments by product class. TONS SHIPPED -------------------------------------- PRODUCT 1998 1997 1996 ------- --------- ------- ------- Oregon Steel Division: Commodity Steel Plate 177,400 56,800 131,700 Specialty Steel Plate 163,900 135,600 147,900 Plate in Coiled Form 11,400 - - Large Diameter Steel Pipe 400,000 216,600 249,300 ERW Pipe 56,100 134,600 75,400 Semifinished - 23,400 3,300 --------- --------- --------- Total Oregon Steel Division 808,800 567,000 607,600 --------- --------- --------- RMSM Division: Rail 401,400 350,200 287,700 Rod, Bar and Wire* 354,500 409,200 392,600 Seamless Pipe 68,900 120,200 151,200 Semifinished 36,900 28,000 61,700 --------- --------- --------- Total RMSM Division 861,700 907,600 893,200 --------- --------- --------- Total Company 1,670,500 1,474,600 1,500,800 ========= ========= ========= *The Company sold its wire products production facility in June, 1997. OREGON STEEL DIVISION COMMODITY STEEL PLATE. The Company's commodity steel plate is produced at the Portland Mill. Historically, commodity steel plate consists of hot-rolled carbon plate, in cut lengths, varying in widths from 48" to 102". The majority of commodity steel plate is commonly produced and consumed in standard widths and lengths, such as 96" x 240". The completion of the Combination Mill allows for the production of discrete plate widths up to 138" and plate coils up to 120" wide. Plate coils are the feed-stock for the manufacture of ERW pipe, welded tubing, spiral welded pipe, and for conversion into cut-to-length plate. Commodity steel plate is used in a variety of applications such as the manufacture of storage tanks, machinery parts, ships and barges, and general load bearing structures. SPECIALTY STEEL PLATE. The Company's specialty grade steel plate is produced at the Portland Mill on the Combination Mill in discrete plate widths up to 138" and coiled plate up to 120". Specialty steel plate consists of hot-rolled carbon, high-strength-low-alloy, alloy, and heat treated steel plate. Specialty steel plate has superior strength and performance characteristics and is typically made to order for customers seeking specific properties, such as improved formability, hardness or abrasion resistance, impact resistance or toughness, higher strength and ability to be more easily machined and welded. These improved properties are achieved by chemically refining the steel by either adding or removing specific elements, and by accurate temperature control while hot rolling or heat treating the plate. Specialty steel plate is used to manufacture railroad cars, mobile equipment, bridges and buildings, pressure vessels and machinery components. In 1994 the Company completed expansion of the heat treated plate production capacity at its Portland Mill by approximately 50 percent to 90,000 tons annually. The heat treating process of quenching and tempering improves the strength, toughness, and hardness of the steel. Quenched and tempered steel is used extensively in the mining industry, the manufacture of heavy transportation equipment, construction and logging equipment, and armored vehicles for the military. In early 1994, the Company installed a hot leveler at the heat treat facility which flattens the steel plate following heat treatment and ensures that the steel plate will retain its desired shape after cooling. These additions enable the Company to manufacture a superior hardened plate product. LARGE DIAMETER STEEL PIPE. The Company manufactures large diameter, double submerged arc-welded ("DSAW") steel pipe at its Napa and Camrose Pipe Mills. Large diameter pipe is manufactured to demanding specifications and is produced in sizes ranging from 16" to 42" in outside diameter with wall thickness of up to 1 1/16" and in lengths of up to 80 feet. At the Napa Pipe Mill the -4- Company also offers customers several options, which include internal linings, external coatings, double end pipe joining and full body ultrasonic inspection. This process allows inspection of the ends, long seam welds and the entire pipe body for steelmaking or pipemaking defects and records the results for a permanent record. The Company's large diameter pipe is used primarily in pressurized underground or underwater oil and gas transmission pipelines where quality is critical. The Company's ability to produce high-quality large diameter pipe was enhanced by the installation of the vacuum degassing facility at the Portland Mill in 1993. The vacuum degassing process reduces the hydrogen content of the final product, which increases its resistance to hydrogen-induced cracking. The vacuum degassing facility enables the Company to produce some of the highest quality steel plate and line pipe steels and has been key to the Company's ability to produce large diameter steel pipe for the international pipe market. ELECTRIC RESISTANCE WELDED PIPE. The Company produces smaller diameter ERW pipe at the Camrose Pipe Mill. ERW pipe is produced in sizes ranging from approximately 4 1/2" to 16" outside diameter. The pipe is manufactured using coiled steel formed on a high frequency electric resistance weld mill. The principal customers for this product are oil and gas companies that use it for gathering lines to supply product to feed larger pipeline systems. RMSM DIVISION 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. 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 at the Pueblo Mill, the Company improved its rail manufacturing facilities to include the production of in-line head-hardened 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 New CF&I. In 1998 the Company produced approximately 124,000 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 1998 the Pueblo Mill completed a rail dock expansion project which increased rail mill annual shipping capacity from 450,000 tons to over 500,000 tons. ROD AND BAR PRODUCTS. The Company's rod and bar mill located at the Pueblo 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 gasses 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 AND SEMIFINISHED SLABS The Company's principal raw material for the Portland and Pueblo Mills 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- -5- briquetted iron ("HBI") and pig iron (together "alternate metallics") can substitute for a limited portion of the scrap used in minimill steel production, although the sources and availability of alternate metallics are substantially more limited than those of scrap. The purchase prices for scrap and alternate 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 alternate 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 alternate metallics prices. The long-term demand for steel scrap and its importance to the domestic steel industry may be expected to increase as steel makers continue to expand scrap-based electric arc 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 HBI. 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 alternate metallics. The Company has successfully integrated alternate metallics into the production process as a low residual scrap substitute. The Company typically purchases alternate 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. As the production of finished plate from the Combination Mill increased during 1998, the Company's plate finishing has equaled and exceeded the steel manufacturing of the Portland Mill. Accordingly, in 1998 the Company began purchasing significant quantities of semifinished steel slab from various international suppliers. This is expected to continue and increase at least through 1999, depending on production levels and market conditions. Such purchases are typically made at spot prices, and are dependent upon slab availability. Although current international sources of slabs are plentiful and prices are favorable, the slab market and pricing has varied substantially in recent years with steel industry market conditions worldwide. There is expected to be continued volatility in the future, and there is no assurance of slab availability at reasonable prices. Over the long-term, the Company expects to adjust steelmaking production levels and its purchases of slabs in response to market conditions. MARKETING AND CUSTOMERS Steel products are sold by the Company principally through its own sales organizations, which have sales offices at various locations in the United States and Canada and, as appropriate, through foreign sales agents. In addition to selling to customers who consume steel products directly, the Company also sells to steel service centers, distributors, processors and converters. The sales force is organized both geographically and by product line. The Company has separate sales people for plate, coiled plate, DSAW and ERW pipe, and for seamless pipe, rod, 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 1998 the Company did not derive more than 10 percent of its sales from any single customer. Except for contracts entered into from time to time to supply rail and large diameter DSAW pipe to significant projects, see Part II "Management's Discussion and Analysis of Financial Conditions and Results of Operation", the Company does not have any significant ongoing contracts with customers 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. -6- Except for rail products, 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 major supply contracts subject to renegotiation. OREGON STEEL DIVISION Most of the customers for the Company's commodity steel plate are located in the western United States, primarily in the Pacific Northwest. The Company's commodity steel plate is typically sold to steel service centers, fabricators and equipment manufacturers. Service centers typically resell to other users with or without additional processing such as cutting to a specific shape. Frequent end uses of commodity grade steel plate include the manufacture of rail cars, storage tanks, machinery parts, bridges, barges and ships. Customers for specialty steel are located throughout the United States, but the Company is most competitive west of the Mississippi River, where transportation costs are less of a factor. Typical customers include steel service centers and equipment manufacturers. Typical uses include pressure vessels, construction and mining equipment, machine parts and military armor. Large diameter steel pipe is marketed on a global basis, and sales generally consist of a small number of large orders from natural gas pipeline companies, public utilities and oil and gas producing companies. In 1993 the Company began to market large diameter pipe internationally. The Company believes that the quality of its pipe enables it to compete effectively in international as well as domestic markets. Domestically, the Company has historically been most competitive in the steel pipe market west of the Mississippi River. The Camrose Pipe Mill is most competitive in western Canada. Sales of large diameter pipe generally involve the Company responding to requests to submit bids. The principal customers for ERW pipe produced at the Camrose Pipe Mill are in the provinces of Alberta and British Columbia, where most of Canada's natural gas and oil reserves are located. The Company believes its proximity to these gas fields gives the Company a competitive advantage. Demand for ERW pipe produced at the Camrose Pipe Mill is largely dependent on the level of exploration and drilling activity in the gas fields of western Canada. RMSM DIVISION The primary customers for the Pueblo Mill's 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 is primarily domestic and is 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 these customers are located within 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, capital equipment 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 over the long term expects 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 high levels of steel imports, worldwide production overcapacity and other factors have adversely affected the domestic steel industry in recent years. 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, gas transmission, construction, capital equipment, rail transportation and durable goods segments, because these industries are significant markets for the Company's products. -7- 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. 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, are exerting downward pressure on prices for certain of the Company's products. OREGON STEEL DIVISION The principal domestic competitor in the commodity steel plate market is Geneva Steel, which is the only integrated steel producer west of the Mississippi River. Geneva Steel has made significant investments to increase its capacity with specific focus on the commodity plate market throughout the entire United States. Other North American competitors include IPSCO, which is currently operating a steckel mill in Saskatchewan, and has recently completed construction and is operating a green field steckel mill in Iowa; Bethlehem Steel in Indiana; and to a limited degree several other U.S. producers. In 1998, Bethlehem Steel acquired Lukens Steel and formed Bethlehem Lukens Plate. Bethlehem Lukens Plate is the now largest plate producer in North America, with five plate mills located in Indiana, Pennsylvania, and Maryland. Principal competitors in the market for specialty steel plate include, Bethlehem Lukens Plate, U.S. Steel Corporation, and Algoma Steel Inc. The domestic commodity steel plate market continued to suffer from unprecedented import tonnage levels combined with severe downward price pressure from foreign countries such as; Korea, Japan, Brazil, Canada, Russia, former Soviet countries, and others. 1998 marked a record year for commodity steel plate imports, with imported tonnage representing a substantial percentage of apparent domestic consumption. Foreign competition also exists for specialty grades with imports from Sweden, European Economic Community, Brazil, Canada, Australia, and former Soviet countries. At the end of 1997 the U.S. International Trade Commission (USITC), under petition from two U.S. commodity plate producers, determined that the U.S. plate Industry was "threatened with material injury by reason of imports from China, Russia, South Africa, and/or Ukraine of cut-to-length carbon steel plate found by the U.S. Department of Commerce to be sold in the United States at less than fair market value." In addition to this decision, suspension agreements have been signed allowing the named countries to export certain maximum amounts of cut-to-length plate to the United States at minimum prices. Despite the USITC decision on carbon cut-to-length plate, significant imports continue to flow through into the United States, both in commodity and specialty plate products, and continue to have an impact on the Company's participation in the western plate market. In October 1998 the USITC, under a petition filed by a dozen domestic steel producers, commenced an anti-dumping investigation covering certain hot rolled steel flat products including coiled plate. The Company believes that competition in the market for large diameter steel pipe is based primarily on quality, price and responsiveness to customer needs. Principal domestic competitors in the large diameter steel pipe market at this time are Berg Steel Pipe Corporation, located in Florida, Bethlehem Steel Corporation, located in Pennsylvania and SAW Pipe, located in Texas. International competitors consist primarily of Japanese and European pipe producers. The principal Canadian competitor is IPSCO, located in Saskatchewan. Demand for the Company's pipe in recent years is primarily a function of new construction of oil and gas transportation pipelines and to a lesser extent maintenance and replacement of existing pipelines. Construction of new pipelines domestically depends to some degree on the level of oil and gas exploration and drilling activity. The competition in the market for ERW pipe is based on price, product quality and responsiveness to customers. The need for this product has a direct correlation to the drilling rig count in the United States and Canada. Principal competitors in the ERW product in western Canada are IPSCO located in Saskatchewan and Prudential Steel Ltd. located in Alberta. RMSM DIVISION The majority of current rail requirements in the United States are replacement rails 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 the Pueblo Mill provided the rail production -8- facilities with continuous cast steel capability and in-line head-hardening rail capabilities necessary to compete with other producers. Pennsylvania Steel Technologies located in Pennsylvania is the only other domestic rail producer. 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 encompasses 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, wastewater, air emissions, toxic use reduction and hazardous materials disposal. The Portland and Pueblo Mills are 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, must be managed in accordance with applicable laws and regulations. PORTLAND MILL. Certain refractory solid waste materials from the steelmaking process in prior years have been collected on-site at the Portland Mill. The Company is currently evaluating various alternatives for reusing this material but so far has not identified a method that is commercially viable. The ultimate success of these alternatives is not known. Other disposal means are available, although typically at an increased cost, including both on-site and off-site land fills. The eventual financial impact is not determinable at this time, but such reuse or disposal is not expected to have a significant effect on the consolidated financial condition of the Company. The Company has entered the second phase of a compliance schedule with the State of Oregon to address fugitive emissions from the steelmaking process. Selection among corrective designs, engineering and construction is expected to be completed by 2001. The financial impact of this improvement will not be known until remedial alternatives are selected and initial engineering is completed. PUEBLO MILL. In connection with the 1993 acquisition of CF&I, the Company accrued a liability of $36.7 million for environmental remediation at Pueblo, Colorado steel mill. The Company believed $36.7 million was the best estimate from a range of $23.1 to $43.6 million. The Company 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, CF&I and the Colorado Department of Public Health and Environment finalized 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 a prioritized corrective action schedule which is substantially reflective of a straight-line rate of expenditure over 30 years. As of December 31, 1998, 11 solid waste management units have closed with no further action needed. 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, 1998, the accrued liability was $33.3 million, of which $30.9 million was classified as noncurrent in the consolidated balance sheet. The Clean Air Act Amendments of 1990 imposed responsibilities on many industrial sources of air emissions, including plants 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 EPA 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 -9- result of the law and future laws regulating air emissions. In addition, the monitoring and reporting requirements of the law have subjected and will subject all air emissions to increased regulatory scrutiny. The Company submitted applications for permits under Title V of the Clean Air Act for the Portland and Pueblo Mills in 1995. The Company has budgeted capital expenditures to comply with Title V requirements in the amount of $1.5 million over a three-year period beginning in 1999. 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 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 the RMSM Division 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 at the RMSM for approximately 1,000 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. 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 December 1998, 90 former striking employees had returned to work as a result of their unconditional offer. Approximately 720 former striking workers remain unreinstated ("Unreinstated Employees"). On February 27, 1998 the Regional Director of the National Labor Relations Board ("NLRB") Denver office issued a complaint against RMSM, alleging 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. On August 17, 1998, a hearing on these allegations commenced before an Administrative Law Judge. Testimony and other evidence was presented on various hearing dates in the latter part of 1998 and early 1999. The hearing concluded on February 25, 1999. The Administrative Law Judge will render a decision which is automatically appealable by either party to the NLRB in Washington, D.C. 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 470 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 -10- 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. In addition, during the strike by the union, certain bargaining unit employees of the Colorado & Wyoming Railway Company ("C&W"), a wholly-owned subsidiary of New CF&I which provides rail service to the Pueblo mill, refused to report to work for an extended period of time. The bargaining unit employees of C&W were not on strike. C&W considered these employees to have quit their employment and accordingly, C&W declined to return those individuals to work. The unions representing these individuals have filed lawsuits or claims against C&W claiming its members had refused to cross the picket line because they were honoring the picket line of another organization or because of safety concerns stemming from those picket lines. The Company believes it has substantial defenses against these claims. However, it is possible that one or more of them will proceed to arbitration before the National Railroad Adjustment Board or otherwise. The outcome of such proceedings is inherently uncertain, and it is not possible to estimate any potential settlement amount which would result from an adverse legal or arbitration decision. EMPLOYEES As of December 31, 1998, the Company had 2,426 full-time employees. A union does not represent the Company's employees at the Portland Mill, Napa Pipe Mill and corporate headquarters. At the Pueblo Mill, 757 employees work under collective bargaining agreements with several unions, including the United Steelworkers of America. The Company and the Union were unable to agree on terms for a new labor agreement. See "Business-Labor Dispute." At the Camrose Pipe Mill, one hundred sixty-eight employees are members of the Canadian Autoworkers Union. The current contract expires on January 31, 2000. The domestic employees of the Oregon Steel Division participate in the Employee Stock Ownership Plan ("ESOP"). As of December 31, 1998 the ESOP owned approximately 7 percent of the Company's outstanding common stock. Common stock is contributed to the ESOP as decided annually by the Board of Directors. The Company also has a profit participation plan for its domestic employees of both the Oregon Steel Division and the RMSM Division and the non-bargaining unit employees of Camrose which permits eligible employees to share in the pretax profits of their division. ITEM 2. PROPERTIES OREGON STEEL DIVISION The Portland Mill is located on approximately 143 acres owned by the Company in the Rivergate Industrial Park in Portland, Oregon, near the confluence of the Columbia and Willamette rivers. The operating facilities principally consist of an electric arc furnace, ladle metallurgy station, vacuum degasser, slab casting equipment and the Combination Mill. The Company's 24,500 square-foot office building and its steel mill facilities occupy approximately 86 acres of the site. The remaining 57 acres consist of two waterfront sites. The Company's heat treating facilities are located near its principal facilities on a 5-acre site owned by the Company. The Company owns approximately 152 acres in Napa, California. The Company's large diameter pipe mill occupies approximately 92 of these acres. The Company also owns a steel fabricating facility located adjacent to the pipe mill on this site. The fabricating facility is not currently used by the Company and consists of approximately 325,000 square feet of industrial buildings containing equipment for the production and assembly of large steel products or components and is periodically leased on a short-term basis. Camrose Pipe Mill is located on approximately 67 acres in Camrose, Alberta, Canada. The large diameter pipe mill occupies approximately 4 acres and the ERW pipe mill occupies approximately 3 acres of the site. In addition, there is a 3,600 square foot office building on the site. The sales staff is located in Calgary, Alberta in leased space. The Camrose Pipe Mill is owned by Camrose Pipe Company ("Camrose") which is 60% owned by the Company. The assets of Camrose, including all property, plant and equipment are collateral for the Camrose $15 million (Canadian dollars) revolving credit facility (see Note 7 to the Consolidated Financial Statements). -11- RMSM DIVISION 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, 1998, the Company had the following nominal capacities, which are affected by product mix: PRODUCTION PRODUCTION CAPACITY 1998 (TONS) (TONS) ---------- ---------- Portland Mill: Melting 840,000 602,000 Finishing 1,200,000 630,500 Napa Pipe Mill: Steel pipe 400,000 296,800 Camrose Pipe Mill: Steel pipe 325,000 186,900 Pueblo Mill: Melting 1,200,000 858,600 Finishing mills 1,200,000 838,400 The Notes and guarantees are secured by a lien on substantially all of the property, plant and equipment of the Company and the Guarantors, exclusive of Camrose. (See Note 7 to the Consolidated Financial Statements.) ITEM 3. LEGAL PROCEEDINGS See Part I, "Business - Labor Dispute", for the status of the labor dispute at RMSM. The Company is 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 products liability insurance, will be available in the future at reasonable rates or at all. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were voted upon during the fourth quarter of 1998. -12- 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 name of each executive officer of the Company, age as of February 1, 1999 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 59 Chairman of the July 1985 Board of Directors and Chief Executive Officer Joe E. Corvin 54 President and December 1996 Chief Operating Officer L. Ray Adams 48 Vice President of Finance March 1991 and Chief Financial Officer Christopher D. Cassard 45 Corporate Controller February 1996 Richard J. Kasten 54 Vice President of February 1992 International Sales LaNelle F. Lee 61 Vice President of April 1996 Administration and Secretary Steven M. Rowan 53 Vice President of February 1992 Materials and Transportation Jeff S. Stewart 37 Treasurer February 1996 Each of the executive officers named above has been employed by the Company in an executive or managerial role for at least five years. -13- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange. At December 31, 1998, the number of common stockholders of record was 753. Information on quarterly dividends and common stock prices is shown on page 23 and incorporated herein by reference. The indenture under which the Company's 11% First Mortgage Notes due 2003 were issued contains restrictions on the payment of common stock dividends. (See Note 7 to the Consolidated Financial Statements and "Liquidity and Capital Resource" under Item 7.) At December 31, 1998, $10.3 million was available for the payment of common stock dividends under these restrictions. ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE, TON AND PER TON AMOUNTS) INCOME STATEMENT DATA: Sales $ 892,583 $ 768,558 $ 772,815 $ 710,971 $ 838,268 Cost of sales 781,789 681,398 670,819 638,413 761,335 Settlement of litigation (7,037) - - - - - - Gain on sale of assets (4,746) (2,228) - - - Provision for rolling mill closures - - - 22,134 - Selling, general and administrative expenses 56,189 51,749 44,857 43,121 50,052 Profit participation and ESOP contribution 2,890 7,157 7,844 5,418 3,074 ---------- ---------- ---------- ---------- ---------- Operating income 63,498 30,482 49,295 24,019 1,673 Other expense, net (38,969) (5,967) (12,937) (8,685) (1,579) Minority interests (4,213) (5,898) (1,204) 862 (3,373) Income tax benefit (expense) (8,387) (6,662) (11,407) (3,762) 2,941 ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 11,929 $ 11,955 $ 23,747 $ 12,434 $ (338) ========== ========== ========== ========== ========== COMMON STOCK INFORMATION: Basic and diluted net income (loss) per share $.45 $.45 $1.02 $.62 $(.02) Cash dividends declared per share $.56 $.56 $.56 $.56 $.56 Weighted average common shares and common equivalents outstanding 26,368 26,292 23,333 20,016 19,973 BALANCE SHEET DATA (AT DECEMBER 31): Working capital $ 40,249 $ 115,322 $ 120,996 $ 115,453 $ 141,480 Total assets 993,970 986,620 913,355 805,266 665,733 Current liabilities 252,516 147,496 114,729 121,327 117,986 Long-term debt 270,440 367,473 330,993 312,679 187,935 Total stockholders' equity 345,117 349,007 353,041 266,790 263,477 OTHER DATA: Depreciation and amortization $ 42,909 $ 28,642 $ 29,025 $ 24,964 $ 22,012 Capital expenditures $ 25,993 $ 81,670 $ 156,538 $ 176,885 $ 128,237 Total tonnage sold: Oregon Steel Division 808,800 567,000 607,600 763,500 920,700 RMSM Division 861,700 907,600 893,200 640,200 765,600 ---------- ---------- ---------- ---------- ---------- Total tonnage sold 1,670,500 1,474,600 1,500,800 1,403,700 1,686,300 ========== ========== ========== ========== ========= Operating margin (1) 6.6% 3.7% 6.4% 3.4% 2.8% Operating income per ton sold (1) $35 $19 $33 $17 $14
- ------------------ (1) Excluding provision for rolling mill closures in 1994 and gain on sale of assets in 1997 and 1998. -14- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. The following table sets forth 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, ---------------------------- 1998 1997 1996 ------- ------- ------- INCOME STATEMENT DATA: Sales 100.0% 100.0% 100.0% Cost of Sales 87.6 88.7 86.8 Settlement of litigation (.8) - - Gain on sale of assets (.5) (.3) - Selling, general and administrative expenses 6.3 6.7 5.8 ESOP and profit participation contribution .3 .9 1.0 ------ ------ ------ Operating income 7.1 4.0 6.4 Interest and dividend income - - .1 Interest expense (4.3) (1.3) (1.6) Other net (.1) .5 - Loss on termination of interest rate swap Agreements - - (.2) Minority interests (.5) (.8) (.1) ------ ------ ------ Pretax income 2.2 2.4 4.6 Income tax expense (.9) (.8) (1.5) ------ ------ ------ Net income 1.3% 1.6% 3.1% ====== ====== ====== BALANCE SHEET DATA (AT DECEMBER 31): Current ratio 1.2:1 1.8:1 2.1:1 Total debt as a percent of capitalization 51.8% 51.8% 48.9% Net book value per share $13.39 $13.58 $13.74 -15- The following table sets forth by division, for the periods indicated, tonnage sold, revenues and average selling price per ton: YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 ---------- ---------- ---------- TOTAL TONNAGE SOLD: Oregon Steel Division: Plate 352,700 192,400 279,600 Welded Pipe 456,100 351,200 324,700 Semifinished - 23,400 3,300 ---------- ---------- ---------- Total Oregon Steel Division 808,800 567,000 607,600 ---------- ---------- ---------- RMSM Division: Rail 401,400 350,200 287,700 Rod, Bar and Wire 354,500 409,200 392,600 Seamless Pipe 68,900 120,200 151,200 Semifinished 36,900 28,000 61,700 ---------- ---------- ---------- Total RMSM Division 861,700 907,600 893,200 ---------- ---------- ---------- Total Company 1,670,500 1,474,600 1,500,800 ========== ========== ========== REVENUES (IN THOUSANDS): Oregon Steel Division $ 536,947 $ 366,263 $ 379,119 RMSM Division 355,636 402,295(1) 393,696 ---------- ---------- ---------- Total $ 892,583 $ 768,558(1) $ 772,815 ========== ========== ========== AVERAGE SELLING PRICE PER TON: Oregon Steel Division $664 $646 $624 RMSM Division $413 $440(2) $441 Company Average $534 $520(2) $515 - ------------------- (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 RMSM. (2) Excludes insurance proceeds referred to in Note (1) above. The Company's long range strategic plan emphasizes providing stability for its operations through expanding its product offerings to minimize the impact of individual product cycles on the Company's overall performance and by entering into long-term strategic alliances. In pursuing these goals, the Company has sought alternatives to its reliance in 1991 and 1992 on the domestic market for large diameter pipe, the demand for which has declined significantly from levels experienced in those years. In an effort to decrease the Company's reliance on the domestic large diameter pipe market and provide additional end use for its steel plate, the Company acquired a 60 percent interest in the Camrose Pipe Mill in June 1992 from Stelco, a large Canadian steel producer, which owns the remaining 40 percent interest in the Camrose Pipe Mill. In 1996, 1997 and 1998, Camrose shipped 114,300, 188,600, and 233,800 tons, respectively, of steel pipe and generated revenues of $78.5 million, $132.6 million, and $183.3 million, respectively. During those years Stelco was a major supplier of steel plate and coil for the Camrose Pipe Mill. To expand the Company's steel product lines and enter new geographic areas, CF&I purchased the Pueblo Mill and related assets in March 1993. In 1996, 1997 and 1998 the Pueblo Mill shipped 893,200, 907,600 and 861,700 tons, respectively, and generated revenues of $393.7 million, $402.3 million and $355.6 million, respectively. In August 1994 New CF&I sold a 10 percent equity interest in New CF&I to a subsidiary of Nippon. In connection with that sale, Nippon agreed to license to the Company its proprietary technology for producing DHH rail under a separate equipment supply agreement. In November 1995 the Company sold a 3 percent equity interest in New CF&I to two companies of Nissho Iwai, a large Japanese trading company. The labor contract at the RMSM Division 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 at the RMSM Division. See Part I "Business Labor Dispute." The RMSM Division began to ramp its operations back up in mid-October 1997 with management and replacement workers. Shipment levels and cost of operations were negatively impacted by reduced production levels and -16- costs specifically related to the strike. Fourth quarter 1997 shipments at the RMSM Division were 123,900 tons compared to shipments of 201,800 tons in the fourth quarter of 1996. Company sales in the fourth quarter of 1998 of $184.8 million increased 28.4 percent from sales of $143.9 million in the fourth quarter of 1997. Company shipments increased 39.6 percent to 377,800 tons in the fourth quarter of 1998 from 270,700 tons in the fourth quarter of 1997. The Company's average selling price in the fourth quarter of 1998 was $489 per ton versus $532 per ton in the fourth quarter of 1997. The increase in sales and shipments for the fourth quarter of 1998 was primarily due to recovery from the fourth quarter 1997 strike at the RMSM Division and the start-up of the Combination Mill at the Oregon Steel division. The lower average selling price in the fourth quarter of 1998 is primarily due to reduced average pricing for rod, seamless pipe and commodity plate products. The Oregon Steel Division shipped 377,800 tons with an average selling price of $610 per ton during the fourth quarter of 1998, compared to 270,700 tons with an average selling price per ton of $616 during the fourth quarter of 1997. Increased fourth quarter 1998 shipment levels are the result of increased plate production compared to the fourth quarter of 1997 in which production was negatively impacted by the start-up of the Combination Mill. The Company shut down its old plate rolling mill in September 1997 and shifted all plate production to the Combination Mill. The Combination Mill experienced delays and an outage during the fourth quarter of 1997 which significantly reduced the Portland Mill's production and increased production costs. The reduced average selling price is primarily due to substantially lower market prices for steel plate during the fourth quarter of 1998 compared to the corresponding 1997 period. During the fourth quarter of 1998, the RMSM Division shipped 192,500 tons with an average selling price of $373 per ton compared to 123,900 tons with an average selling price of $431 per ton during the fourth quarter of 1997. Increased fourth quarter 1998 shipment levels are the result of increased rail and rod shipments compared to the fourth quarter of 1997 in which production was negatively impacted by the strike mentioned above. Rail and rod shipments were 97,000 tons and 87,300 tons, respectively, in the fourth quarter of 1998 compared to 50,300 tons of rail and 54,000 tons of rod in the fourth quarter of 1997. The reduced average selling price compared to 1997 is the result of adverse market conditions in the seamless pipe and rod markets as described in the annual comparison below. Gross profits as a percentage of sales for the fourth quarter of 1998 were 10.3 percent compared to a negative 4.3 for the fourth quarter of 1997. Gross profit for the fourth quarter of 1997 was negatively impacted by costs specifically related to the strike and lower production resulting from both the strike and the start-up of the Combination Mill. The Company expects results of operations to be negatively impacted by adverse market conditions for its seamless pipe, rod and commodity plate products during the first half of 1999 and quite possibly for the entire 1999 period. The negative impact of these markets will be partially offset by strong welded pipe shipments from the Company's Napa and Camrose Pipe Mills and expected good rail markets in 1999. The Company expects to ship approximately 2 million tons of product during 1999. The Oregon Steel Division anticipates that it will ship 500,000 tons of welded pipe shipments and over 500,000 tons of plate and coil products during 1999. In November 1998, the Napa Pipe Mill began production of welded pipe for the Alliance Pipeline. During the fourth quarter of 1998, Napa Pipe shipped over 45,000 tons of the Alliance order of which 20,700 tons remained intransit at year-end. During 1999, the Company expects to ship over 200,000 tons of the Alliance order from its Napa and Camrose Pipe Mills. The RMSM Division anticipates that it will ship over 400,000 tons of rail, and 500,000 tons of rod, bar, seamless pipe and semifinished products. These results are subject to risks and uncertainties, and actual results could differ materially. COMPARISON OF 1998 TO 1997 SALES. Sales in 1998 of $892.6 million increased 16.1 percent from sales of $768.6 million in 1997. Shipments increased 13.2 percent to 1.7 million tons in 1998 from 1.5 million tons in 1997. The average selling price in 1998 was $534 per ton versus $520 per ton in 1997. Of the $124.0 million sales increase, $101.8 million was the result of volume increases and $24.7 million resulted from higher average selling prices offset by $2.5 million of 1997 insurance proceeds. -17- The increase in sales and shipments was primarily due to increased shipments of plate, coil and welded pipe products by the Oregon Steel Division and increased shipments of rail products by the RMSM Division, offset in part by decreased shipments of seamless pipe and rod and bar products by the RMSM Division. The increased shipments include a 30 percent increase in welded pipe shipments, 456,100 in 1998 compared to 351,200 tons in 1997 and increased plate and coil shipments due to increased production from the Combination Mill. The increased average selling price for 1998 is due to increased shipments of welded pipe products as a percent of total products shipped, partially offset by reduced pricing for seamless pipe, rod and commodity plate products. The markets for the Company's plate products were negatively affected by high levels of imports. The Company's commodity plate pricing declined approximately $80 a ton since the beginning of 1998 as a result of import activity. Reduced seamless pipe prices are due to the low level of oil prices which have reached a 20-year low and reduced U.S. rig counts which have fallen near all-time lows. Rod product is being severely impacted by the high level of imported rod shipments entering the United States. Average rod pricing has declined over $60 a ton since the beginning of 1998. GROSS PROFITS. Gross profits as a percentage of sales for 1998 were 12.4 percent compared to 11.3 percent for 1997. Gross profit margins were positively impacted by increased margins on shipments of welded pipe and rail, offset by lower margins on rod and seamless pipe resulting from the adverse market conditions described above. Also, 1997 production costs and gross margins were negatively impacted by the startup of the Combination Mill and by the labor dispute at the RMSM Division as discussed above. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative ("SG&A") expenses for 1998 increased $4.4 million or 8.6 percent compared to 1997 and decreased as a percent of revenues from 6.7 percent in 1997 to 6.3 percent in 1998. The dollar amount increase was primarily due to increased shipping costs due to increased tons shipped in 1998 compared to 1997 and costs specifically related to the labor dispute with the Union at RMSM. CONTRIBUTION TO ESOP AND PROFIT PARTICIPATION. There was a $1.5 million contribution to the ESOP in 1997 compared to no contribution in 1998. Profit participation plan expense (which is paid on a quarterly basis) was $2.9 million in 1998 compared to $5.7 million in 1997. The decrease in 1998 profit participation reflects the decreased profitability in the first three quarters of 1998 compared to those quarters of 1997. INTEREST EXPENSE. Total interest cost for 1998 was $39.7 million, an increase of $1.7 million compared to 1997. The higher interest cost is primarily the result of higher average debt during 1998 versus 1997. Of the $39.7 million of interest cost in 1998, $1.2 million was capitalized as part of construction in progress versus $27.8 million capitalized in 1997. INCOME TAX EXPENSE. The Company's effective income tax rate for state and federal taxes was 41.3 percent for 1998 compared to 35.8 percent for 1997. The effective income tax rate for 1998 varied from the combined state and federal statutory rate due to the expiration of certain state tax credits and an establishment of a $3.1 million valuation allowance for state tax credit carryforwards. COMPARISON OF 1997 TO 1996 SALES. Sales in 1997 of $768.6 million decreased 0.6 percent from sales of $772.8 million in 1996. Shipments decreased 1.7 percent to 1.47 million tons in 1997 from 1.50 million tons in 1996. The average selling price in 1997 was $520 per ton versus $515 per ton in 1996. Of the $4.3 million sales decrease, $13.5 million was the result of volume decrease offset by $6.7 million resulting from higher average selling prices and $2.5 million of 1997 insurance proceeds. The decrease in sales and shipments was primarily due to decreased shipments of plate product by the Oregon Steel Division and decreased shipments of seamless pipe and semifinished products by the RMSM Division, offset in part by increased shipments of rail and rod products by the RMSM Division. Plate shipments declined primarily due to the start-up of the Combination Mill at the Portland Mill. Shipments at the RMSM Division were negatively impacted by the labor dispute during the fourth quarter of 1997. The higher average selling price in 1997 was due to increased shipments of welded pipe and higher selling prices for all pipe products, partially offset by increased shipments of rod, which have a generally lower selling price per ton than the other finished products sold by the Company. -18- GROSS PROFITS. Gross profits as a percentage of sales for 1997 were 11.3 percent compared to 13.2 percent for 1996. Gross profit margins were negatively impacted by reduced shipments of plate products and increased manufacturing costs at the Portland Mill due to the start-up of the Combination Mill. Gross profit was positively impacted by increased rail shipments and higher seamless pipe prices at the RMSM Division. In spite of the labor dispute, gross profit was also positively impacted by lower costs at the RMSM Division due to increased steel production and improved operating efficiencies. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative ("SG&A") expenses for 1997 increased $6.9 million or 15.4 percent compared to 1996 and increased as a percent of revenues from 5.8 percent in 1996 to 6.7 percent in 1997. The increase was primarily due to increased costs associated with the labor dispute at RMSM. CONTRIBUTION TO ESOP AND PROFIT PARTICIPATION. There was a $1.5 million contribution to the ESOP in 1997 compared to no contribution in 1996. Profit participation plan expense was $5.7 million in 1997 compared to $7.8 million in 1996. The decrease in 1997 profit participation reflects the decreased profitability compared to 1996 of the Oregon Steel Division. INTEREST EXPENSE. Total interest cost for 1997 was $38.0 million, an increase of $4.8 million compared to 1996. The higher interest cost is primarily the result of additional debt incurred to fund the capital improvement program, combined with higher interest rates. Of the $38.0 million of interest cost, $27.8 million was capitalized as part of construction in progress. INCOME TAX EXPENSE. The Company's effective income tax rate for state and federal taxes was 35.8 percent for 1997 compared to a 32.4 percent for 1996. The effective income tax rate for both periods varied from the combined state and federal statutory rate due to earned state tax credits and deductible dividends paid on stock held by the ESOP and paid to ESOP participants. LIQUIDITY AND CAPITAL RESOURCES Cash flow from 1998 operations was $51.9 million compared to $52.1 million in 1997. The major items affecting the $0.2 million decrease were a larger increase in inventories ($20.6 million), a lower increase in deferred income taxes ($5.8 million), and a larger decrease in accounts payable and accrued expenses ($11.0 million). These cash decreases were partially offset by higher depreciation and amortization ($14.3 million), a larger increase in accounts receivable ($7.4 million), and an increase in other current assets versus a decrease in 1997 ($14.1 million). Net working capital at December 31, 1998 decreased $75.1 million compared to December 31, 1997 reflecting a $29.9 million increase in current assets and a $105.0 million increase in current liabilities. Short-term debt increased from none at the end of 1997 to $93.7 million at the end of 1998. The increase represents the Company's bank borrowing balance (which becomes due in 1999) being classified as current at the end of 1998 versus non-current at the end of 1997. The Company has outstanding $235 million principal amount of 11% First Mortgage Notes due 2003. New CF&I and CF&I guarantee the Notes. The Notes and the guarantees are secured by a lien on substantially all the property, plant and equipment and certain other assets of the Company (exclusive of Camrose) and the Guarantors. The collateral for the Notes and the guarantees does not include, among other things, inventory and accounts receivable. The indenture under which the Notes were issued contains potential restrictions on new indebtedness and various types of disbursements, including dividends, based on the Company's net income in relation to its fixed charges, as defined. The Company maintains a $125 million revolving bank credit facility ("Amended Credit Agreement"), which expires June 11, 1999, and may be drawn upon based on the Company's accounts receivable and inventory balances, except those of Camrose. At December 31, 1998, $93.7 million was outstanding under the Amended Credit Agreement. At the Company's election, interest on the Amended Credit Agreement is based on (1) the London Interbank Offering Rate ("LIBOR"), (2) the prime rate or (3) the federal funds rate, plus a margin determined by the Company's leverage ratio. The annual commitment fees are .5 percent of the unused portion of the Amended Credit Agreement. The Amended Credit Agreement is collateralized by substantially all of the Company's consolidated inventory and accounts receivable, except those of Camrose. The Guarantors guarantee amounts outstanding under the Amended Credit Agreement. The Amended Credit Agreement contains various restrictive covenants including a minimum tangible net worth, minimum interest coverage ratio, and a maximum debt to total capitalization ratio. The Amended Credit Agreement has been amended to, -19- among other things, modify the interest coverage ratio due to lower than anticipated earnings and higher than anticipated borrowings. CF&I Steel, L.P. incurred term debt of $67.5 million as part of the purchase price of the Pueblo Mill on March 3, 1993. This debt is without stated collateral and is payable over ten years with interest at 9.5 percent. As of December 31, 1998, the outstanding balance on the debt was $38.2 million, of which $31.0 million was classified as long-term. Camrose maintains a $15 million (Canadian dollars) revolving credit facility with a bank, the proceeds of which may be used for working capital and general corporate purposes. The facility is collateralized by substantially all of the assets of Camrose and borrowings under this facility are limited to an amount equal to specified percentages of Camrose's eligible trade accounts receivable and inventories. The facility expires on December 30, 1999. Depending on Camrose's election at the time of borrowing, interest is payable based on (1) the bank's Canadian dollar prime rate, (2) the bank's U.S. dollar prime rate or (3) LIBOR. Annual commitment fees are .25 percent of the unused portion of this facility. As of December 31, 1998, Camrose had $4.4 million outstanding under the facility. The Company has uncollateralized and uncommitted revolving lines of credit with two banks which may be used to support issuance of letters of credit, foreign exchange contracts and interest rate hedges. At December 31, 1998, $9.0 million was restricted under outstanding letters of credit. During 1998 the Company expended approximately $6.0 million (exclusive of capitalized interest) on the capital projects at the Pueblo Mill, and $18.8 million exclusive of capitalized interest on capital projects at the Oregon Steel Division. The Company has budgeted approximately $21.6 million for capital expenditures in 1999 at its manufacturing facilities for upgrade projects to the present facilities and equipment. The Company believes that its anticipated needs for working capital and capital expenditures through 1999 will be met from funds generated by operations and borrowings pursuant to the Company's Amended Credit Agreement. There is no assurance, however, that the amounts available from these sources will be sufficient for such purposes. In that event, or for other reasons, the Company may be required to seek additional financing, which may include additional bank financing. There is no assurance that such source of funding will be available if required or, if available, will be on terms satisfactory to the Company. Failure to obtain required funds would delay or prevent some planned capital expenditure projects from being initiated or completed, which could have a material adverse effect on the Company. In addition, the Company's level of indebtedness presents other risks to investors, including the possibility that the Company and its subsidiaries may be unable to generate cash sufficient to pay the principal of and interest on their indebtedness when due. In the event of a default under the Amended Credit Agreement or the Notes, or if the Company or its subsidiaries are unable to comply with covenants contained in other debt instruments or to pay their indebtedness when due, the holders of such indebtedness generally will be able to declare all indebtedness owing to them to be due and payable immediately and, in the case of collateralized indebtedness, to proceed against their collateral, which would likely have a material adverse effect on the Company. 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's approach to the year 2000 issue is discussed below. The Company necessarily makes certain forward looking statements. There can be no assurance that actual results will not differ materially from the projections contained in the forward looking statements. Factors which may cause actual results to differ materially include, but are not limited to: failure of Company personnel and outside consultants to properly assess and address the Company's year 2000 issues; inaccurate or incomplete responses to questionnaires sent to third parties or inaccurate disclosure to third parties regarding the year 2000 issue; failure to address the year 2000 issue with all vendors, including utility vendors; infrastructure failures such as disruptions in the supply of electricity, gas, water or communications services, or major institutions, such as the government and banking systems; and failure of the Company to accurately predict the costs to address the year 2000 issue or the lost revenues related to interruption in the Company's or its customers' businesses. The Company has identified risks from, among other causes, failure of internally-developed or purchased software and hardware in its information technology ("IT") systems, failure of process logic controller ("PLC") components of manufacturing equipment, and business or service interruptions of -20- certain key customers and suppliers. In mid-1997, the Company began to inventory critical systems, assess the exposure to year 2000 failures, and replace or remediate IT and PLC systems as necessary. As of December 31, 1998, the inventory and assessment of IT and PLC systems was substantially complete, and investments had been made to replace or remediate critical IT systems and PLCs where there was an apparent risk of failure at the year 2000. The remaining remediation effort and testing is expected to continue through the third quarter of 1999. The most critical business systems have been recently functionally upgraded, or are in process of upgrade, and concurrently are becoming year 2000 compliant. The Company is soliciting written confirmations from key suppliers confirming that they are addressing their year 2000 issues. Although the potential effects of IT and PLC systems failures due to the year 2000 change are not predictable or quantifiable with any certainty, the Company expects that if a PLC failure occurred, the Company would still be able to continue its core production processes, although at a reduced rate and possibly at a substantially increased cost. Similarly, it is anticipated that any affected IT business systems which failed could be supplemented with manual and other procedures sufficient to continue operations, although at a reduced efficiency. In general, the Company's customers and sources of supply are sufficiently diverse to mitigate the effect on the Company of a supplier or customer experiencing year 2000 related failures. However, there would be a material adverse impact on the Company if any of its utility providers were significantly interrupted. The total cost of preparation for the year 2000 is expected to be approximately $2 million, of which less than half has been spent to date. No reserve has been established. The Company's preparations have not included a specific contingency plan in the event of systems or supplier failures; however, it is anticipated that by mid 1999 all critical systems will be remediated and under test internally or by independent outside verification. 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. -21- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has entered into certain market-risk sensitive financial instruments for other than trading purposes, principally short-term debt and long-term debt. The following discussion of market risks necessarily makes forward looking statements. There can be no assurance that actual changes in market conditions and rates and fair values will not differ materially from those used in the sensitivity and fair value calculations discussed. Factors which may cause actual results to differ materially include, but are not limited to: greater than 10 percent changes in interest rates or foreign currency exchange rates, changes in income or cash flows requiring significant changes in the use of debt instruments or the cash flows associated with them, or changes in commodity market conditions affecting availability of materials in ways not predicted by the Company. INTEREST RATE RISK Sensitivity analysis was used to determine the potential impact that market risk exposure may have on the fair values of the Company's financial instruments, including debt and cash equivalents. The Company has assessed the potential risk of loss in fair values from hypothetical changes in interest rates by determining the effect on the present value of the future cash flows related to those market sensitive instruments. The discount rates used for such present value computations were selected based on market interest rates in effect at December 31, 1998, plus or minus 10 percent. A 10 percent decrease in interest rates with all other variables held constant would result in a increase in the fair value of the Company's financial instruments by $9.1 million. A 10 percent increase in interest rates with all other variables held constant would result in a decrease in the fair value of the Company's financial instruments by $8.8 million. There would be no material effect on consolidated net income or cash flows from those changes alone. FOREIGN CURRENCY RISK In general, the Company uses a single functional currency for all receipts, payments and other settlements at its facilities. Occasionally, transactions will be denominated in another currency and a foreign currency forward exchange contract used to hedge currency gains and losses. At December 31, 1998, the Company had (USD) $4.0 million notional amount of such contracts, which related to transactions of Camrose. Increases or decreases in the year-end exchange rate of 10 percent would not have a material financial effect on consolidated net income, cash flows or fair values. -22- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA QUARTERLY FINANCIAL DATA - UNAUDITED
1998 1997 ------------------------------------------------ ----------------------------------------------- 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST ---------- ------- ------- -------- -------- ---------- -------- -------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Sales $184.8 $255.2 $229.6 $223.0 $143.9 $213.6 $204.4 $206.7 Operating income (loss) 4.2 27.8 17.9 13.6 (21.9) 20.0 16.6 15.8 Net income (loss) (4.5) 10.0 4.7 1.8 (13.7) 10.4 8.2 7.1 Basic and diluted net income (loss) per share $(.17) $.38 $.18 $.07 $ (.53) $.40 $.31 $.27 Dividends declared per common share $ .14 $.14 $.14 $.14 $ .14 $.14 $.14 $.14 Common stock price range: High $15-1/8 $19-1/4 $26-1/2 $24-3/8 $29-1/4 $28-15/16 $22-1/2 $18-7/8 Low $10-13/16 $9-7/16 $18-1/4 $18-1/8 $17 $19-1/2 $15-3/4 $15-1/8 Average shares and equivalent outstanding 26.4 26.4 26.4 26.3 26.3 26.3 26.3 26.3
-23- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Oregon Steel Mills, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(i) and (ii) on page 41 present fairly, in all material respects, the financial position of Oregon Steel Mills, Inc. and its subsidiaries at December 31, 1998, 1997, and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Portland, Oregon January 22, 1999 -24- OREGON STEEL MILLS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) ASSETS
DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Current assets: Cash and cash equivalents $ 9,044 $ 570 $ 739 Trade accounts receivable, less allowance for doubtful accounts of $1,148 $1,374 and $2,735 67,254 83,219 91,480 Inventories 196,279 148,548 120,636 Deferred tax asset 13,593 17,262 17,084 Other 6,595 13,219 5,786 --------- --------- --------- Total current assets 292,765 262,818 235,725 --------- --------- --------- Property, plant and equipment: Land and improvements 28,811 28,782 29,577 Buildings 49,387 46,805 37,617 Machinery and equipment 749,597 422,179 426,912 Construction in progress 16,329 329,198 255,558 --------- --------- --------- 844,124 826,964 749,664 Accumulated depreciation (205,515) (166,485) (145,096) --------- --------- --------- 638,609 660,479 604,568 --------- --------- --------- Cost in excess of net assets acquired, net 35,508 36,590 37,398 Other assets 27,088 26,733 35,664 --------- --------- --------- $ 993,970 $ 986,620 $ 913,355 ========= ========= ========= LIABILITIES Current liabilities: Current portion of long-term debt $ 7,164 $ 7,373 $ 6,574 Short-term debt 93,700 -- -- Accounts payable 106,084 97,860 75,428 Accrued expenses 45,568 42,263 32,727 --------- --------- --------- Total current liabilities 252,516 147,496 114,729 Long-term debt 270,440 367,473 330,993 Deferred employee benefits 20,427 21,018 18,262 Environmental liability 32,765 34,801 35,103 Deferred income taxes 36,415 31,641 24,365 --------- --------- --------- 612,563 602,429 523,452 --------- --------- --------- Minority interests 36,290 35,184 36,862 --------- --------- --------- Contingencies (Note 12) STOCKHOLDERS' EQUITY Capital stock: Preferred stock, par value $.01 per share; 1,000 shares authorized; none issued Common stock, par value $.01 per share; 30,000 shares authorized; 25,777, 25,693, and 25,693 shares issued and outstanding 258 257 257 Additional paid-in capital 227,584 226,085 226,085 Retained earnings 125,479 127,984 130,417 Accumulated other comprehensive income: Cumulative foreign currency translation adjustment (8,204) (5,319) (3,718) --------- --------- --------- 345,117 349,007 353,041 --------- --------- --------- $ 993,970 $ 986,620 $913,355 ========= ========= ========
The accompanying notes are an integral part of the consolidated financial statements. -25- OREGON STEEL MILLS, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Sales $ 892,583 $ 768,558 $ 772,815 --------- --------- --------- Costs and expenses: Cost of sales 781,789 681,398 670,819 Settlement of litigation (7,037) -- -- Gain on sale of assets (4,746) (2,228) -- Selling, general and administrative 56,189 51,749 44,857 Contributions to employee stock ownership plan -- 1,501 -- Profit participation 2,890 5,656 7,844 --------- --------- --------- 829,085 738,076 723,520 --------- --------- --------- Operating income 63,498 30,482 49,295 Other income (expense): Interest and dividend income 361 406 520 Interest expense (38,485) (10,216) (12,479) Loss on termination of interest rate swap agreements -- -- (1,232) Minority interests (4,213) (5,898) (1,204) Other, net (845) 3,843 254 --------- --------- --------- Income before income taxes 20,316 18,617 35,154 Income tax expense (8,387) (6,662) (11,407) --------- --------- --------- Net income $ 11,929 $ 11,955 $ 23,747 ========= ========= ========= Basic and diluted net income per share $.45 $.45 $1.02 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. -26- OREGON STEEL MILLS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ACCUMULATED ADDITIONAL OTHER COMMON STOCK PAID-IN RETAINED COMPREHENSIVE -------------------- SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL ------- --------- --------- --------- ------------- -------- Balances, December 31, 1995 19,422 $194 $150,826 $119,302 $(3,532) $266,790 Net income 23,747 23,747 Foreign currency translation adjustment (186) (186) -------- Comprehensive income 23,561 Issuance of common stock 6,271 63 75,259 75,322 Dividends paid ($.56 per share) (12,632) (12,632) --------- ---- ------- -------- ------- -------- Balances, December 31, 1996 25,693 257 226,085 130,417 (3,718) 353,041 Net income 11,955 11,955 Foreign currency translation adjustment (1,601) (1,601) -------- Comprehensive income 10,354 Dividends paid ($.56 per share) (14,388) (14,388) --------- ---- -------- -------- ------- -------- Balances, December 31, 1997 25,693 $257 $226,085 127,984 (5,319) 349,007 -------- Net income 11,929 11,929 Foreign currency translation adjustment (2,885) (2,885) -------- Comprehensive income 9,044 Issuance to employee stock ownership plan 84 1 1,499 1,500 Dividends paid ($.56 per share) (14,434) (14,434) --------- ---- -------- -------- ------- -------- Balances, December 31, 1998 25,777 $258 $227,584 $125,479 $(8,204) $345,117 ========= ==== ======== ======== ======= ========
The accompanying notes are anintegral part of the consolidated financial statements. -27- OREGON STEEL MILLS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net income $ 11,929 $ 11,955 $ 23,747 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 42,909 28,642 29,025 Deferred income taxes 4,774 7,276 9,030 Accruals for contribution of common stock to employee stock ownership plan -- 1,501 -- Gain on sale of assets and investments (3,344) (7,833) (551) Minority interests' share of income 4,213 5,898 1,204 Other, net 1,486 8,480 6,864 Changes in current assets and liabilities: Trade accounts receivable 14,821 7,404 (11,030) Inventories (49,362) (28,723) 20,597 Deferred tax asset 3,669 (177) (7,623) Accounts payable and accrued expenses 14,243 25,234 6,599 Other 6,569 (7,553) 2,996 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 51,907 52,104 80,858 --------- --------- --------- Cash flows from investing activities: Additions to property, plant and equipment (25,993) (81,670) (156,538) Proceeds from disposal of property, plant and equipment 5,022 14,913 666 Other, net (1,068) (1,065) 162 --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (22,039) (67,822) (155,710) --------- --------- --------- Cash flows from financing activities: Net borrowings under Canadian bank revolving loan facility (707) (291) (911) Proceeds from bank debt 408,500 424,877 264,300 Payments on bank and long-term debt (410,973) (387,307) (478,052) Net proceeds from issuance of 11% First Mortgage Notes -- -- 226,942 Net proceeds from issuance of common stock -- -- 75,322 Dividends paid (14,435) (14,388) (12,632) Minority share of subsidiary's distribution (3,107) (7,187) - --------- --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (20,722) 15,704 74,969 --------- --------- --------- Effects of foreign currency exchange rate changes on cash (672) (155) (22) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 8,474 (169) 95 Cash and cash equivalents at beginning of year 570 739 644 --------- --------- --------- Cash and cash equivalents at end of year $ 9,044 $ 570 $ 739 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid for: Interest $ 37,905 $ 35,399 $ 32,347 Income taxes $ 1,303 $ 7,237 $ 8,659
See Note 5 for additional supplemental cash flow disclosures The accompanying notes are an integral part of the consolidated financial statements. -28- OREGON STEEL MILLS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Oregon Steel Mills, Inc. and subsidiaries ("Company") manufactures various specialty and commodity steel products with operations in the United States and Canada. The principal markets for the Company's products are steel service centers, steel fabricators, railroads, oil and gas producers and distributors and other industrial concerns. The Company's products are primarily marketed in the United States west of the Mississippi River and western Canada. The Company also markets products outside North America. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all wholly-owned and majority-owned subsidiaries. Affiliates which are 20 percent to 50 percent owned are accounted for using the equity method. Material wholly-owned and majority-owned subsidiaries of the Company are Camrose Pipe Corporation ("CPC") which owns a 60 percent interest in Camrose Pipe Company ("Camrose"), and 87 percent owned New CF&I, Inc. ("New CF&I") which owns a 95.2 percent interest in CF&I Steel, L.P. ("CF&I") (dba Rocky Mountain Steel Mills). The Company owns 4.3 percent of the remaining interest in CF&I not owned by New CF&I. 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, cash balances 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. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, including capitalized interest during construction of $1.2 million, $27.8 million and $20.7 million in 1998, 1997 and 1996, 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 costs in excess of net assets acquired by CF&I and Camrose are being amortized on a straight-line basis over 40 years. Accumulated amortization was $5.9 million, $4.9 million and $3.9 million in 1998, 1997 and 1996, 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. 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. -29- FINANCIAL INSTRUMENTS The Company uses foreign currency forward exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. Gains and losses on these contracts are deferred and recognized in income as part of the related transaction. FOREIGN CURRENCY TRANSLATION Assets and liabilities subject to foreign currency fluctuations are translated at the period-end rate of exchange with related unrealized gains or losses on the balance sheet date reflected in stockholders' equity. Income and expenses are translated at the average exchange rate for the period. NET INCOME PER SHARE Basic and diluted net income per share was as follows at December 31: 1998 1997 1996 -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Weighted average number of common shares outstanding 25,770 25,694 22,735 Shares of common stock to be issued March 2003 598 598 598 ------- ------- ------- 26,368 26,292 23,333 ======= ======= ======= Net income $11,929 $11,955 $23,747 ======= ======= ======= Basic and diluted net income per share $.45 $.45 $1.02 ======= ======= ======= SEGMENT REPORTING In 1998, the Company adopted Statement of Financial Accounting Standards (FAS) 131, "Disclosures about Segments of an Enterprise and Related Information". In accordance with the criteria of FAS 131, the Company operates in a single segment. 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, disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made in prior years to conform to the current year presentation. Such reclassifications do not affect results of operations as previously reported. NEW ACCOUNTING STANDARD The adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133) issued by the Financial Accounting Standards Board (FASB) on June 15, 1998, is expected to have no significant effect on the Company's results of operations or its financial position. See disclosures above and in Note 8. 3. GEOGRAPHIC INFORMATION The Company operates in one reportable business segment. Geographical information is as follows: 1998 1997 1996 -------- -------- -------- (IN THOUSANDS) REVENUES FROM EXTERNAL CUSTOMERS United States $709,239 $635,989 $694,364 Canada 183,344 132,569 78,451 -------- -------- -------- $892,583 $768,558 $772,815 ======== ======== ======== ASSETS United States $935,873 $927,430 $863,773 Canada 58,097 59,190 49,582 -------- -------- -------- $993,970 $986,620 $913,355 ======== ======== ======== Revenue attributed to Canada are from Camrose which is domiciled there. Revenues attributed to other countries are insignificant. -30- 4. INVENTORIES Inventories were as follows at December 31: 1998 1997 1996 --------- --------- -------- (IN THOUSANDS) Raw materials $ 16,842 $ 25,197 $ 24,916 Semifinished product 93,747 65,545 45,767 Finished product 60,290 31,105 25,046 Stores and operating supplies 25,400 26,701 24,907 -------- -------- -------- Total inventory $196,279 $148,548 $120,636 ======== ======== ======== 5. SUPPLEMENTAL CASH FLOW INFORMATION During 1998, 1997, and 1996, the Company acquired property, plant and equipment for $12.9 million, $16.2 million and $8.9 million, respectively, which was included in accounts payable and accrued expenses at the respective year ends. The Company has recorded as a change to stockholders' equity the issuance of common stock to the Employee Stock Ownership Plan in 1998 and foreign currency translation adjustments annually, which are noncash transactions. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable include book overdrafts of $12.0 million at December 31, 1997, and retainage from construction projects of $12.7 million, $13.2 million and $12.5 million at December 31, 1998, 1997 and 1996, respectively. At December 31, 1996, accrued expenses include accrued vacation of $6.5 million. 7. DEBT AND FINANCING ARRANGEMENTS Debt balances were as follows as of December 31: 1998 1997 1996 -------- -------- -------- (IN THOUSANDS) 11% First Mortgage Notes due 2003 $235,000 $235,000 $235,000 Revolving bank loan 93,700 88,800 45,500 CF&I acquisition term loan 38,187 45,559 51,290 Camrose revolving bank loan 4,417 5,487 5,777 -------- -------- -------- Total debt 371,304 374,846 337,567 Less current maturities and short-term debt 100,864 7,373 6,574 -------- -------- -------- Non-current maturity of long-term debt $270,440 $367,473 $330,993 ======== ======== ======== The Company has outstanding $235 million principal amount of 11% First Mortgage Notes ("Notes") due 2003. The Notes are guaranteed by New CF&I and CF&I ("Guarantors"). The Notes and the guarantees are secured by a lien on substantially all the property, plant and equipment and certain other assets of the Company (exclusive of Camrose) and the Guarantors. The collateral for the Notes and the guarantees does not include, among other things, inventory and accounts receivable. The indenture under which the Notes were issued contains potential restrictions on new indebtedness and various types of disbursements, including dividends, based on the Company's net income in relation to its fixed charges, as defined. Under these restrictions, $10.3 million was available for cash dividends at December 31, 1998. The Company maintains a $125 million revolving bank credit facility ("Amended Credit Agreement"), which expires June 11, 1999, and may be drawn upon based on the Company's accounts receivable and inventory balances, except those of Camrose. At the Company's election, interest on the Amended Credit Agreement is based on the (1) London Interbank Offering Rate ("LIBOR"), (2) the prime rate or (3) the federal funds rate, plus a margin determined by the Company's leverage ratio. As of December 31, 1998, the average interest rate on borrowings under the Amended Credit Agreement was 8.1 percent. Annual commitment fees are .5 percent of the unused portions of the Amended Credit Agreement. The Amended Credit Agreement is collateralized by substantially all of the Company's consolidated inventory and accounts receivable, except -31- those of Camrose. Amounts outstanding under the Amended Credit Agreement are guaranteed by the Guarantors. The Amended Credit Agreement contains various restrictive covenants including a minimum tangible net worth, minimum interest coverage ratio, and a maximum debt to total capitalization ratio. The Amended Credit Agreement has been amended to, among other things, modify the interest coverage ratio due to lower than anticipated earnings and higher than anticipated borrowings. CF&I incurred term debt of $67.5 million as part of the purchase price of certain assets of CF&I Steel Corporation on March 3, 1993. This debt is without stated collateral and is payable over ten years with interest at 9.5 percent. Camrose maintains a $15 million (Canadian dollars) revolving credit facility with a bank, the proceeds of which may be used for working capital and general corporate purposes. The facility is collateralized by substantially all of the assets of Camrose, and borrowings under this facility are limited to an amount equal to specified percentages of Camrose's eligible trade accounts receivable and inventories. The facility expires on December 30, 1999. Depending on Camrose's election at the time of borrowing, interest is payable based on (1) the bank's Canadian dollar prime rate, (2) the bank's U.S. dollar prime rate, or (3) LIBOR. As of December 31, 1998, the interest rate of this facility was 6.75 percent. Annual commitment fees are .25 percent of the unused portion of this facility. As of December 31, 1998, principal payments on debt are due as follows (in thousands): 1999 $100,864 2000 12,278 2001 8,625 2002 9,464 Balance due in installments through 2003 240,073 -------- $371,304 ======== The Company has uncollateralized and uncommitted revolving lines of credit with two banks which may be used to support issuance of letters of credit, foreign exchange contracts and interest rate hedges. At December 31, 1998, $9.0 million was restricted under outstanding letters of credit. 8. FINANCIAL INSTRUMENTS AND FAIR VALUES The Company uses foreign currency forward exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. Such contracts are typically short-term in duration and related to specific transactions. At December 31, 1998, the Company had used $4.0 million notional amount outstanding under such contracts, with expiration dates through March 31, 1999. At December 31, 1998, there were no material unrealized gains or losses. The carrying amount of foreign currency forward exchange contracts approximates fair value based on year-end currency exchange rates. The estimated fair values of the Company's financial instruments are as follows as of December 31 (in thousands):
1998 1997 1996 --------------------------- ----------------------- ------------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE ----------- --------- ---------- --------- ---------- ---------- Cash and cash equivalents $ 9,044 $ 9,044 $ 570 $ 570 $ 739 $ 739 Short-term debt 93,700 93,700 - - - - Long-term debt, including current portion 277,604 282,818 374,846 393,407 337,567 351,011
The carrying amounts of cash or cash equivalents and short-term debt approximate fair value due to their short maturity. The fair value of long-term debt, including current portion, is estimated based on quoted market prices or by discounting future cash flows based on the Company's incremental borrowing rate for similar types of borrowing arrangements. -32- 9. INCOME TAXES The income tax expense consists of the following: 1998 1997 1996 --------- -------- --------- (IN THOUSANDS) Current: Federal $ 806 $ 547 $ (9,750) State (95) (99) (361) Foreign (654) (11) (25) -------- -------- -------- 57 437 (10,136) -------- -------- -------- Deferred: Federal (5,373) (4,498) (2,174) State (2,459) (343) 541 Foreign (612) (2,258) 362 -------- -------- -------- (8,444) (7,099) (1,271) -------- -------- -------- Income tax expense $ (8,387) $ (6,662) $(11,407) ======== ======== ======== The components of the net deferred tax assets and liabilities as of December 31 were as follows:
1998 1997 1996 -------- ------- ------- (IN THOUSANDS) Net current deferred tax asset: Assets Inventories $ 4,584 $ 4,531 $ 3,143 Accrued expenses 5,807 9,053 6,345 Accounts receivable 507 576 1,024 Deferred sales revenue - - 2,236 Foreign tax credit 3,754 2,886 - Net operating loss carryforward 1,789 2,380 - State tax credits - - 100 Provision for rolling mill closures - 2,928 5,594 -------- ------- ------- 16,441 22,354 18,442 Liabilities Other 2,848 5,092 1,358 -------- ------- ------- Net current deferred tax asset $ 13,593 $17,262 $17,084 ======== ======= ======= Net noncurrent deferred income tax liability: Assets: Postretirement benefits other than pensions $ 2,238 $ 1,864 $ 1,467 State tax credits 5,719 6,907 6,637 Alternative minimum tax credit 15,561 15,532 12,654 Environmental liability 12,791 12,829 12,915 Foreign tax credit 1,258 633 45 Net operating loss carryforward 40,117 20,657 7,699 Other 5,304 487 2,502 -------- ------- ------- 82,988 58,909 43,919 Valuation allowance (3,105) - - -------- ------- ------- 79,883 58,909 43,919 -------- ------- ------- Liabilities Property, plant and equipment 104,054 77,025 54,530 Cost in excess of net assets acquired 10,917 11,642 11,695 Other 1,327 1,883 2,059 -------- ------- ------- 116,298 90,550 68,284 -------- ------- ------- Net noncurrent deferred income tax liability $ 36,415 $31,641 $24,365 ======== ======= =======
-33- A reconciliation of the statutory tax rate to the effective tax rate on income before income taxes is as follows: 1998 1997 1996 ------ ------ ------ U.S. statutory income tax rate ................ (35.0%) (35.0%) (35.0%) Deduction for dividends to ESOP participants .. 1.8 2.1 1.2 State taxes, net .............................. (11.8) (2.9) (.5) Foreign sales corporation benefit ............. 4.7 2.3 1.1 Foreign tax in excess of U.S. rate ............ (.5) (2.9) .2 Other, net .................................... (.5) .6 .6 ------ ------ ------ (41.3%) (35.8%) (32.4%) ====== ====== ====== At December 31, 1998, the Company has state tax credits of $2.6 million expiring 2000 through 2010 which are available to reduce future income taxes payable. At December 31, 1998, the Company has $98.8 million in federal net operating loss carryforwards expiring in 2012 and 2018. In addition, the Company has $133.3 million in state net operating loss carryforwards expiring in 2009 through 2013. A $3.1 million valuation allowance has been established for state tax credit carryforwards in 1998. Management believes that it is more likely than not that future taxable income will not be sufficient to realize the full benefit of the state tax credit carryforwards. No valuation allowance has been established for net operating loss carryforwards. 10. EMPLOYEE BENEFIT PLANS UNITED STATES PENSION PLANS The Company has noncontributory defined benefit retirement plans covering all of its eligible domestic employees. The plans provide benefits based on participants' years of service and compensation. The Company funds at least the minimum annual contribution required by ERISA. The following table sets forth the funded status of the plans and the amounts recognized in the Company's consolidated balance sheets:
1998 1997 1996 ------- ------- ------- (IN THOUSANDS) Change in benefit obligation Projected benefit obligation at January 1 $52,566 $46,184 $39,777 Service cost 3,100 3,804 4,431 Interest cost 3,617 3,445 2,930 Actuarial loss 4,407 1,248 684 Early retirement benefits 2,528 -- -- Benefits paid (1,693) (2,115) (1,638) -------- -------- -------- Projected benefit obligation at December 31 64,525 52,566 46,184 -------- -------- -------- Change in plan assets Fair value of plan assets at January 1 49,877 42,087 34,283 Actual return on plan assets 9,559 7,139 4,243 Company contribution 2,189 2,766 5,199 Benefits paid (1,693) (2,115) (1,638) ------- -------- -------- Fair value of plan assets at December 31 59,932 49,877 42,087 ------- -------- -------- Projected benefit obligation in excess of plan assets (4,593) (2,689) (4,097) Unrecognized net (gain) loss (57) (711) 1,381 Unrecognized prior service cost 506 626 746 Unrecognized net obligation at January 1, 1987 being recognized over 15 years 225 301 377 ------- ------- ------- Pension liability recognized in consolidated balance sheet $(3,919) $(2,473) $(1,593) ======= ======= =======
-34- Net pension cost was $5.0 million, $3.7 million and $4.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. During 1998 the Company offered a voluntary early retirement package to certain management employees at CF&I. As a result, the projected benefit obligation was increased by $2.5 million, which is included in the above table, and the annual pension cost. Plan assets are invested in common stock and bond funds (96 percent), marketable fixed income securities (1 percent) and insurance company contracts (3 percent) at December 31, 1998. The plans do not invest in the stock of the Company. CANADIAN PENSION PLANS The Company has noncontributory defined benefit retirement plans covering all of its eligible Camrose employees. The plans provide benefits based on participants' years of service and compensation. The following table sets forth the funded status and the amounts recognized:
1998 1997 1996 ------ ------- ------ (IN THOUSANDS) Change in benefit obligation Projected benefit obligation at January 1 $ 9,616 $ 7,351 $7,222 Service cost 541 355 374 Interest cost 706 568 562 Actuarial (gain) loss 295 1,719 (551) Benefits paid (126) (256) (239) Foreign currency exchange rate change (722) (121) (17) ------- ------- ------ Projected benefit obligation at December 31 10,310 9,616 7,351 ------- ------- ------ Change in plan assets Fair value of plan assets at January 1 11,045 9,953 8,020 Actual return on plan assets 734 1,028 1,702 Company contribution 482 462 492 Benefits paid (126) (256) (239) Foreign currency exchange rate change (795) (142) (22) ------- ------- ------ Fair value of plan assets at December 31 11,340 11,045 9,953 ------- ------- ------ Plan assets in excess of projected benefit obligation 1,030 1,429 2,602 Unrecognized net (gain) loss 718 118 (1,506) ------- ------- ------ Pension asset recognized in consolidated balance sheet $ 1,748 $ 1,547 $1,096 ======= ======= ====== Net pension cost was $280,000, $6,000 and $222,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The following table sets forth the significant actuarial assumptions for the United States and Canadian pension plans: 1998 1997 1996 ---- ---- ---- Discount rate 6.8% 7.0% 7.5% Rate of increase in future compensation levels: United States Plans 4.0% 4.0% 4.0% Canadian Plan 4.0% 4.0% 4.0% Expected long-term rate of return on plan assets 8.5% 8.8% 8.8%
-35- POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The Company provides certain health care and life insurance benefits for substantially all of its retired employees. Employees are generally eligible for benefits upon retirement after 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:
1998 1997 1996 -------- -------- -------- Change in benefit obligation: Accumulated postretirement benefit obligation at January 1 $ 17,372 $ 17,737 $ 17,610 Service cost 411 397 449 Interest cost 1,181 1,263 1,298 Actuarial (gain) loss 399 (1,317) (920) Benefits paid (852) (686) (697) Plan Amendments 273 -- -- Foreign currency exchange rate change (123) (22) (3) -------- -------- -------- Accumulated postretirement benefit obligation at December 31 18,661 17,372 17,737 -------- -------- -------- Projected benefit obligation in excess of plan assets (18,661) (17,372) (17,737) Unrecognized net (gain) loss (351) (617) 772 Unrecognized transition obligation 4,926 5,334 7,923 Unrecognized prior service cost 315 -- -- -------- -------- -------- Postretirement liability recognized in consolidated balance sheet $(13,771) $(12,655) $ (9,042) ======== ======== ========
Net postretirement benefit cost was $1.8 million, $2.1 million and $2.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. For measurement purposes, a long-term inflation rate of 4.5 to 10 percent is assumed for health care cost trend rates. A one percentage point increase in the assumed health care cost trend for 1999 would increase the accumulated postretirement benefit obligation by $525,000; the aggregate service and interest cost would increase $50,000. A one percentage point decrease in the assumed health care cost trend for 1999 would decrease the accumulated postretirement benefit obligation by $444,000; the aggregate service and interest cost would decrease $43,000. The discount rate used in determining the accumulated postretirement benefit obligation was 6.8, 7.0 and 7.5 percent for 1998, 1997 and 1996, respectively. OTHER EMPLOYEE BENEFIT PLANS The Company has an unfunded supplemental retirement plan designed to maintain benefits for all nonunion domestic employees at the plan formula level. The amount expensed for this plan in 1998, 1997 and 1996 was $297,000, $236,000 and $226,000, respectively. The Company has an Employee Stock Ownership Plan ("ESOP") noncontributory qualified stock bonus plan for eligible domestic employees. Contributions to the plan are made at the discretion of the Board of Directors and are in the form of newly issued shares of the Company's common stock. Shares are allocated to eligible employees' accounts based on annual compensation. At December 31, 1998, the ESOP held 1.8 million shares of Company common stock. Dividends on shares held by the ESOP are paid to eligible employees. The Company has discretionary profit participation plans under which it distributes quarterly to eligible employees 12 percent to 20 percent, depending on operating unit, of its pretax income after adjustments for certain nonoperating items. Each eligible employee receives a share of the distribution based upon the employee's base compensation compared with the total base compensation of all eligible employees of the operating unit. The Company has qualified Thrift (401(k)) plans for eligible domestic employees under which the Company matches 25 or 50 percent, depending on location, of the first 4 or 6 percent of the participants' deferred compensation. Company contribution expense in 1998, 1997 and 1996 was $1.4 million, $765,000 and $799,000, respectively. -36- 11. RELATED PARTY TRANSACTIONS STELCO, INC. Camrose purchases steel coil and plate under a steel supply agreement with Stelco, Inc. ("Stelco") a 40 percent owner of Camrose, or its subsidiaries. Transactions under the agreement are at negotiated market prices. The following table summarizes the transactions between Camrose and Stelco. 1998 1997 1996 ------- ------- ------- (IN THOUSANDS) Sales to Stelco $ 435 $ 330 $ 138 Purchases from Stelco 24,000 83,478 60,231 Accounts receivable from Stelco at December 31 108 58 3,254 Accounts payable to Stelco at December 31 911 7,303 4,127 Under the acquisition agreement for the mill, either the Company or Stelco may initiate a buy-sell procedure pursuant to which the initiating party establishes a price for Camrose and the other party must either sell its interest at that price or purchase the initiating party's interest at that price. 12. 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 at the time of evaluation. 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 cost within a range is recorded. If there is no best estimate, the low end of the range is recorded, and the range is disclosed. The Company has accrued $2.1 million at December 31, 1998, for environmental remediation relating to the Company's Napa, California pipe mill. The Company's estimate of this environmental liability was based on several remedial investigations and feasibility studies performed by an independent engineering consultant. The accrual includes costs for remedial action which is scheduled to be completed in 1998 with sampling, monitoring and maintenance costs continuing through 2024. In connection with the 1993 acquisition of CF&I, the Company accrued a liability of $36.7 million for environmental remediation at Pueblo, Colorado steel mill. The Company believed $36.7 million was the best estimate from a range of $23.1 to $43.6 million. The Company 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, CF&I and the Colorado Department of Public Health and Environment finalized 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 a prioritized corrective action schedule which is substantially reflective of a straight-line rate of expenditure over 30 years. As of December 31, 1998, 11 solid waste management units have closed with no further action needed. 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, 1998, the accrued liability was $33.3 million, of which $30.9 million was classified as noncurrent in the consolidated balance sheet. 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 at CF&I for approximately 1,000 bargaining unit employees. The parties failed to reach final agreement on a new labor contract due to differences on economic -37- 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. 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 December 1998, 90 former striking employees had returned to work as a result of their unconditional offer. Approximately 720 former striking workers remain unreinstated ("Unreinstated Employees"). On February 27, 1998 the Regional Director of the National Labor Relations Board ("NLRB") Denver office issued a complaint against CF&I, alleging 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. On August 17, 1998, a hearing on these allegations commenced before an Administrative Law Judge. Testimony and other evidence was presented on various hearing dates in the latter part of 1998 and early 1999. The hearing concluded on February 25, 1999. The Administrative Law Judge will render a decision which is automatically appealable by either party to the NLRB in Washington, D.C. 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 470 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. In addition, during the strike 39 bargaining unit employees of the Colorado & Wyoming Railway Company ("C&W"), a wholly-owned subsidiary of New CF&I which provides rail service to the Pueblo Mill, refused to report to work for an extended period of time. The bargaining unit employees of C&W were not on strike. C&W considered these employees to have quit their employment and, accordingly, C&W declined to return those individuals to work. The unions representing these individuals have filed lawsuits against C&W claiming its members had refused to cross the picket line because they were honoring the picket line of another organization or because of safety concerns stemming from those picket lines. The Company believes it has substantial defenses against these claims. However, it is possible that one or more of them will proceed to arbitration before the National Railroad Adjustment Board or otherwise. The outcome of such proceedings is inherently uncertain and it is not possible to estimate any potential settlement amount which would result from an adverse legal or arbitration decision. CONTRACTS WITH KEY EMPLOYEES The Company has employment agreements with certain officers which provide for severance compensation in the event their employment with the Company is terminated subsequent to a change in control (as defined) of the Company. OTHER CONTINGENCIES The Company is 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. -38- 13. CAPITAL STOCK In connection with the March 1993 acquisition of certain assets of CF&I Steel Corporation, the Company agreed to issue 598,400 shares of its common stock in March 2003 to specified creditors of CF&I Steel Corporation. At the date of acquisition, the stock was valued at $11.2 million using the Black-Scholes method. 14. SALES OF SUBSIDIARY'S COMMON STOCK In June 1994, New CF&I's Board of Directors approved an increase in New CF&I's authorized $1 par value common stock from 100 to 1,000 shares and declared an 80 percent stock dividend, increasing the Company's holding of New CF&I's common stock to 180 shares. In August 1994, New CF&I sold additional common stock (10 percent equity interest) to a subsidiary of Nippon Steel Corporation ("Nippon"). In connection with the sale, New CF&I and the Company entered into a stockholders' agreement with Nippon pursuant to which Nippon was granted a right to sell all, but not less than all, of its 10 percent equity interest in New CF&I back to New CF&I at the then fair market value in certain circumstances. Those circumstances include, among other things, a change of control, as defined, in New CF&I, certain changes involving the composition of the board of directors of New CF&I, and the occurrence of certain other events which are within the control of New CF&I and the Company. The Company also agreed not to transfer voting control of New CF&I to a nonaffiliate except in circumstances where Nippon is offered the opportunity to sell its interest in New CF&I to the transferee at the same per share price obtained by the Company. New CF&I has also retained a right of first refusal in the event that Nippon desires to transfer its interest in New CF&I to a nonaffiliate. During the fourth quarter of 1995, the Company sold a 3 percent equity interest in New CF&I to the Nissho Iwai Group under substantially the same terms and conditions of the Nippon transaction. The Company believes that it is not probable that the conditions which would permit a subsidiary stock redemption will occur. 15. UNUSUAL AND NONRECURRING ITEMS SETTLEMENT OF LITIGATION Operating income for 1998 includes a $7.0 million gain from a settlement of litigation with certain graphite electrode suppliers. GAIN ON SALES OF ASSETS Operating income for 1998 and 1997 include net gains from sales of assets of $4.7 million and $2.2 million, respectively. GAIN ON SALE OF EQUITY OWNERSHIP INTEREST Other income for 1997 includes a net gain from the sale of an equity ownership of $3.0 million. LOSS ON TERMINATION OF INTEREST RATE SWAP AGREEMENTS During 1996, the Company incurred a $1.2 million pretax loss for terminating certain interest rate swap agreements. The swap agreements were terminated in conjunction with the repayment of certain borrowings under the previous bank credit agreement. 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 CF&I. In total, the Company received approximately $7 million in insurance proceeds from this claim of which $4.5 million was recorded in 1996 as reimbursement of excess costs in that period. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None -39- PART III ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND EXECUTIVE COMPENSATION A definitive proxy statement of Oregon Steel Mills, Inc. will be filed not later than 120 days after the end of the fiscal year with the Securities and Exchange Commission. The information set forth therein under "Nomination and Election of Class B Directors", "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" is incorporated herein by reference. Executive Officers of Oregon Steel Mills, Inc. are listed on page 13 of this Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required is set forth under the caption "Principal Stockholders" in the Proxy Statement for the 1999 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required is set forth under the captions "Nomination and Election of Class B Directors" and "Executive Compensation" in the Proxy Statement for the 1999 Annual Meeting of Stockholders and is incorporated herein by reference. -40- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K PAGE (a) (i) FINANCIAL STATEMENTS: Report of Independent Accountants - 1998, 1997 and 1996.......... 24 Consolidated Financial Statements: Balance Sheets at December 31, 1998, 1997 and 1996........... 25 Statements of Income for each of the three years in the period ended December 31, 1998...................... 26 Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1998... 27 Statements of Cash Flows for each of three years in the period ended December 31, 1998...................... 28 Notes to Consolidated Financial Statements................... 29 (ii) Financial Statement Schedule for each of the three years in the period ended December 31, 1998: Schedule II - Valuation and Qualifying Accounts.............. 42 (iii) Exhibits: Reference is made to the list on page 43 of the exhibits filed with this report. (b) Reports on Form 8-K: No reports on Form 8-K were required to be filed by the Registrant during the fourth quarter of the year ended December 31, 1998 -41- OREGON STEEL MILLS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS 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 - -------------- ---------- ---------- -------- ---------- ----------- 1998 ---- Allowance for doubtful accounts $ 1,374 $ 290 -- $ (516) $ 1,148 1997 ---- Allowance for doubtful accounts $ 2,735 $ 1,338 $ -- $(2,699) $ 1,374 Provision for rolling mill closures: Inventories $ 1,500 -- -- $ (1,500) (1) $ -- Property, plant and equipment $ 7,485 -- -- $ (7,485) (1) $ -- Other assets $ 78 -- -- $ (78) (1) $ -- 1996 ---- Allowance for doubtful accounts $ 1,905 $ 917 -- $ (87) $ 2,735 Provision for rolling mill closures: Inventories $ 1,500 -- -- -- $ 1,500 Property, plant and equipment $ 7,485 -- -- -- $ 7,485 Other assets $ 78 -- -- -- $ 78
- -------------- (1) Results from write-offs of related assets. -42- LIST OF EXHIBITS* 2.0 Asset Purchase Agreement dated as of January 2, 1992, by and between Camrose Pipe Company (a partnership) and Stelco Inc. (Filed as exhibit 2.0 to Form 8-K dated June 30, 1992 and incorporated by reference herein. 2.1 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 Form 8-K dated March 3, 1993, and incorporated by reference herein.) 3.1 Restated Certificate of Incorporation of the Company. (Filed as exhibit 3.1 to Form 10-K for the year ended December 31, 1992, and incorporated by reference herein.) 3.2 Bylaws of the Company. (Filed as exhibit 3.2 to Form 10-Q dated March 31, 1993, and incorporated by reference herein.) 3.3 Amendment to Bylaws of the Company. (Filed as exhibit 3.3 to Form 8-K dated July 30, 1998, and incorporated by reference herein.) 4.1 Specimen Common Stock Certificate. (Filed as exhibit 4.1 to Form S-1 Registration Statement 33-38379 and incorporated by reference herein.) 4.4 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, LP, 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.) 4.5 Form of Deed of Trust, Assignment of Rents and Leases and Security Agreement. (Filed as exhibit 4.2 to Amendment #1 to Form S-3 Registration Statement 333-02355 and incorporated by reference herein.) 4.6 Form of Security Agreement. (Filed as exhibit 4.3 to Amendment #1 to Form S-3 Registration Statement 333-02355 and incorporated by reference herein.) 4.7 Form of Intercreditor Agreement. (Filed as exhibit 4.4 to Amendment #1 to Form S-3 Registration Statement 333-02355 and incorporated by reference herein.) 10.1** Form of Indemnification Agreement between the Company and its directors. (Filed as exhibit 10.6 to Form S-1 Registration Statement 33-20407 and incorporated by reference herein.) 10.2** Form of Indemnification Agreement between the Company and its executive officers. (Filed on exhibit 10.7 to Form S-1 Registration Statement 33-20407 and incorporated by reference herein.) 10.3 Agreement for Electric Power Service between registrant and Portland General Electric Company. (Filed as exhibit 10.20 to Form S-1 Registration Statement 33-20407 and incorporated by reference herein.) 10.4** Key employee contract for Thomas B. Boklund. (Filed as exhibit 10.11 to Form 10-K for the year ended December 31, 1988, and incorporated by reference herein.) 10.5** Key employee contract for L. Ray Adams. (Filed as exhibit 10.10 to Form 10-K for the year ended December 31, 1990, and incorporated by reference herein.) 10.6** Key employee contract for Joe E. Corvin. (Filed as exhibit 10.10 to Form 10-K for the year ended December 31, 1995, and incorporated by reference herein.) 10.7 Amended and Restated Credit Agreement dated June 12, 1996, among Oregon Steel Mills, Inc., as 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.) -43- 10.8 Second Amendment dated as of December 11, 1997 to the Amended and Restated 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. (Filed as exhibit 10.8 to Form 10-K for the year ended December 31, 1997, and incorporated by reference herein.) 10.9 Third Amendment dated February 17, 1998 to the Amended and Restated 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. (Filed as exhibit 10.9 to Form 10-K for the year ended December 31, 1997, and incorporated by reference herein.) 10.10 Fourth Amendment dated October 30, 1998 to the Amended and Restated 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. 10.11** Directors' Retirement Plan. (Filed as exhibit 10.10 to Form 10-K for the year ended December 31, 1997, and incorporated by reference herein.) 21.0 Subsidiaries of registrant. (Filed as exhibit 21.0 to Form 10-K for the year ended December 31, 1997, and incorporated by reference herein.) 23.0 Consent of Independent Accountants - PricewaterhouseCoopers LLP. 27.0 Financial Data Schedule. 99.0 Partnership Agreement dated as of January 2, 1992, by and between Camrose Pipe Corporation and Stelcam Holding, Inc. (Filed as exhibit 28.0 to Form 8-K dated June 30, 1992, and incorporated by reference herein.) - ---------------------- * The Company will furnish to stockholders a copy of the exhibit upon payment of $.25 per page to cover the expense of furnishing such copies. Requests should be directed to Vicki A. Tagliafico, Director of Communications and Planning, Oregon Steel Mills, Inc., PO Box 5368, Portland, Oregon 97228. ** Management contract or compensatory plan. -44- SIGNATURES REQUIRED FOR FORM 10-K Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Oregon Steel Mills, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OREGON STEEL MILLS, INC. (Registrant) By /s/ Thomas B. Boklund ------------------------------- Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Oregon Steel Mills, Inc. and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Thomas B. Boklund Chairman of the Board March 1, 1999 - ---------------------------- (Thomas B. Boklund) Chief Executive Officer (Principal Executive Officer) /s/ Joe E. Corvin President, Chief Operating March 1, 1999 - ---------------------------- (Joe E. Corvin) Officer and Director /s/ L. Ray Adams Vice President of Finance, March 1, 1999 - --------------------------- (L. Ray Adams) and Chief Financial Officer (Principal Financial Officer) /s/ Christopher D. Cassard Corporate Controller March 1, 1999 - ----------------------------- (Christopher D. Cassard) (Principal Accounting Officer) /s/ V. Neil Fulton Director March 1, 1999 - ----------------------------- (V. Neil Fulton) /s/ Robert W. Keener Director March 1, 1999 - ----------------------------- (Robert W. Keener) /s/ Richard G. Landis Director March 1, 1999 - ----------------------------- (Richard G. Landis) /s/ James A. Maggetti Director March 1, 1999 - ----------------------------- (James A. Maggetti) /s/ John A. Sproul Director March 1, 1999 - ----------------------------- (John A. Sproul) /s/ George J. Stathakis Director March 1, 1999 - ----------------------------- (George J. Stathakis) /s/ William Swindells Director March 1, 1999 - ----------------------------- (William Swindells) -45- EX-27 2
5 1000 12-MOS DEC-31-1998 DEC-31-1998 9044 0 68402 1148 196279 292765 844124 205515 993970 252516 235000 0 0 258 344859 993970 892583 892583 781789 781789 0 0 38485 20316 8387 11929 0 0 0 11929 .45 .45
EX-10 3 FOURTH AMENDMENT TO CREDIT AGREEMENT THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Fourth Amendment"), ---------------- dated as of October 30, 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 and that certain Third Amendment to Credit Agreement dated as of February 17, 1998 (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 Fourth Amendment shall have the following meanings: "Amended Credit Agreement" shall mean the Existing Credit Agreement as ------------------------ amended by this Fourth Amendment. "Fourth 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 Fourth 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 chart that is included in the definition of the term "Applicable Margin" in Section 1.1 of the Existing Credit Agreement is hereby amended and restated to read in its entirety as follows: Reserve Adjusted Base Swingline Leverage LIBO Rate Rate Ratio Margin Margin Margin -------- -------- ------ --------- Less than 2.0 to 1.0 1.00% .0% 1.00% 2.0 to 1.0 or more but 1.50% .50% 1.50% less than 3.0 to 1.0 3.0 to 1.0 or more but 1.75% .75% 1.75% less than 3.5 to 1.0 3.5 to 1.0 or more but 2.50% 1.50% 2.50% less than 4.0 to 1.0 4.0 to 1.0 or more but 2.75% 1.75% 2.75% less than 4.5 to 1.0 4.5 to 1.0 or more 3.00% 2.00% 3.00% 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 "2.15 to 1.00" opposite the date -2- September 30, 1998 and replacing it with the ratio of "1.75 to 1.0". 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 Fourth 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 Fourth Amendment shall become -------------- effective on the date (herein called the "Fourth 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 Fourth 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 4.1.3. Amendment Fee. The Borrower shall have made payment to ------------- each Lender of an amendment fee in an amount equal to .25% of such Lender's Revolving Loan Commitment. 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 October 30, 1998, the - --- agreements of the parties contained in this Fourth Amendment shall, unless otherwise agreed -3- 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 --------------------------------------------------- Fourth 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 Fourth 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 FOURTH 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 Fourth 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/s Jeff S. Stewart ----------------------------- Title: Treasurer -4- WELLS FARGO BANK NATIONAL ASSOCIATION, as Administrative Agent and Managing Agent By: s/s David Goode --------------------------- Title: Vice President --------------------- THE BANK OF NOVA SCOTIA, as Syndication Agent and Managing Agent By: s/s Daryl K Hogge --------------------------- Title: Officer --------------------- LENDERS ------- WELLS FARGO BANK NATIONAL ASSOCIATION By: s/s David Goode ---------------------------- Title: Vice President ---------------------- THE BANK OF NOVA SCOTIA By: s/s Daryl K Hogge ---------------------------- Title: Officer ---------------------- U.S. BANK NATIONAL ASSOCIATION By: s/s Dale Parshall ---------------------------- Title: Vice President ---------------------- KEYBANK, NATIONAL ASSOCIATION By: Thomas A. Crandell ---------------------------- Title: Vice President ---------------------- -5- THE FIRST NATIONAL BANK OF CHICAGO By: s/s Mark A. Isley ---------------------------- Title: First Vice President ---------------------- THE BANK OF TOKYO-MITSUBISHI, LTD., PORTLAND BRANCH By: ---------------------------- Title: ---------------------- PNC BANK, NATIONAL ASSOCIATION By: s/s Troy Brown ---------------------------- Title: Corporate Banking Officer NATIONSBANK N.A. By: s/s Charles F. Lilygren ---------------------------- Title: Sr. Vice President ---------------------- UNION BANK OF CALIFORNIA, N.A. By: ---------------------------- Title: ---------------------- -6- EX-23 4 EXHIBIT 23.0 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-16739) of Oregon Steel Mills, Inc. of our report dated January 22, 1999 appearing on page 24 of this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Portland, Oregon March 18, 1999 -----END PRIVACY-ENHANCED MESSAGE-----