<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 12, 1994
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
NATIONAL STEEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 25-0687210
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4100 EDISON LAKES PARKWAY
MISHAWAKA, INDIANA 46545-3440
(219) 273-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROBERT M. GREER
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
NATIONAL STEEL CORPORATION
4100 EDISON LAKES PARKWAY
MISHAWAKA, INDIANA 46545-3440
(219) 273-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
CHARLES W. MULANEY, JR. RICHARD J. SANDLER
SKADDEN, ARPS, SLATE, DAVIS POLK & WARDWELL
MEAGHER & FLOM 450 LEXINGTON AVENUE
333 WEST WACKER DRIVE NEW YORK, NEW YORK 10017
CHICAGO, ILLINOIS 60606 (212) 450-4000
(312) 407-0700
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
NUMBER OF PROPOSED MAXIMUM
SHARES MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SHARES TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class B Common Stock,
$.01 Par Value................. 6,900,000 $19.4375 $134,118,750 $46,248
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 900,000 shares to cover Underwriters' over-allotment options.
(2) Estimated pursuant to paragraph (c) of Rule 457 solely for the purpose of
calculating the registration fee, based upon the average of the reported
high and low sales prices for a share of Class B Common Stock on October 6,
1994, as reported on the New York Stock Exchange Composite Tape.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectuses: one to be used
in connection with a United States and Canadian offering (the "U.S. Prospec-
tus") and one to be used in a concurrent offering outside the United States and
Canada (the "International Prospectus"). The U.S. Prospectus and the Interna-
tional Prospectus are identical except for the front cover page. The alternate
page for the International Prospectus included herein is labeled "Alternate
Cover Page for International Prospectus."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion Dated October 12, 1994
6,000,000 Shares
LOGO
Class B Common Stock
(par value $.01 per share)
All of the shares of Class B Common Stock, par value $.01 per share (the "Class
B Common Stock"), of National Steel Corporation, a Delaware corporation (the
"Company"), offered hereby are being sold by the Company. Of the 6,000,000
shares of Class B Common Stock offered hereby, 4,800,000 shares initially are
being offered in the United States and Canada by the U.S. Underwriters (the
"U.S. Underwriters") and 1,200,000 shares initially are being offered outside
the United States and Canada by the International Managers (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters").
NKK Corporation owns 22,100,000 shares of the Company's Class A Common Stock,
par value $.01 per share (the "Class A Common Stock"), which, after completion
of the Offering, will represent approximately 68.6% of the combined voting
power of the outstanding Class A Common Stock and Class B Common Stock (collec-
tively, the "Common Stock") (assuming the Underwriters' over-allotment options
are not exercised).
The Class B Common Stock is substantially identical to the Class A Common Stock
except with respect to voting power and, except as otherwise required by law,
will vote together with the Class A Common Stock as one class on all matters
submitted to a vote of stockholders, including the election of directors. The
Class A Common Stock is entitled to two votes per share and the Class B Common
Stock is entitled to one vote per share.
The Class B Common Stock is listed on the New York Stock Exchange under the
trading symbol "NS." On October , 1994, the closing price for the Class B
Common Stock, as reported on the New York Stock Exchange Composite Tape, was
$ .
SEE "CERTAIN CONSIDERATIONS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PRO-
SPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- -------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------------
Total (3) $ $ $
- -------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain lia-
bilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the U.S. Underwriters and the International Manag-
ers options, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 720,000 and 180,000 shares of Class B Common
Stock, respectively, on the same terms as set forth above, solely to cover
over-allotments, if any. If such over-allotment options are exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwrit-
ing."
The Class B Common Stock offered by this Prospectus is being offered by the
U.S. Underwriters, subject to prior sale, when, as and if delivered to and ac-
cepted by the U.S. Underwriters, and subject to approval of certain legal mat-
ters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected
that delivery of the certificates representing the shares of Class B Common
Stock will be made against payment therefor on or about , 1994 at the
offices of J.P. Morgan Securities Inc., 60 Wall Street, New York, New York
10260.
J.P. MORGAN SECURITIES INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
, 1994
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[Alternate Cover Page for International Prospectus]
PROSPECTUS Subject to Completion
6,000,000 Shares Dated October 12, 1994
LOGO
Class B Common Stock
(par value $.01 per share)
All of the shares of Class B Common Stock, par value $.01 per share (the "Class
B Common Stock"), of National Steel Corporation, a Delaware corporation (the
"Company"), offered hereby are being sold by the Company. Of the 6,000,000
shares of Class B Common Stock offered hereby, 1,200,000 shares initially are
being offered outside the United States and Canada by the International Manag-
ers (the "International Managers") and 4,800,000 shares initially are being of-
fered in the United States and Canada by the U.S. Underwriters (the "U.S.
Underwriters" and, together with the International Managers, the "Underwrit-
ers").
NKK Corporation owns 22,100,000 shares of the Company's Class A Common Stock,
par value $.01 per share (the "Class A Common Stock"), which, after completion
of the Offering, will represent approximately 68.6% of the combined voting
power of the outstanding Class A Common Stock and Class B Common Stock (collec-
tively, the "Common Stock") (assuming the Underwriters' over-allotment options
are not exercised).
The Class B Common Stock is substantially identical to the Class A Common Stock
except with respect to voting power and, except as otherwise required by law,
will vote together with the Class A Common Stock as one class on all matters
submitted to a vote of stockholders, including the election of directors. The
Class A Common Stock is entitled to two votes per share and the Class B Common
Stock is entitled to one vote per share.
The Class B Common Stock is listed on the New York Stock Exchange under the
trading symbol "NS." On October , 1994, the closing price for the Class B
Common Stock, as reported on the New York Stock Exchange Composite Tape, was
$ .
SEE "CERTAIN CONSIDERATIONS" FOR INFORMATION THAT SHOULD BE CONSIDERED BY PRO-
SPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- ----------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ----------------------------------------------------
Total (3) $ $ $
- ----------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the International Managers and U.S. Un-
derwriters against certain liabilities, including liabilities under the Secu-
rities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the International Managers and the U.S. Underwrit-
ers options, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 180,000 and 720,000 shares of Class B Common
Stock, respectively, on the same terms as set forth above, solely to cover
over-allotments, if any. If such over-allotment options are exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwrit-
ing."
The Class B Common Stock offered by this Prospectus is being offered by the In-
ternational Managers, subject to prior sale, when, as and if delivered to and
accepted by the International Managers, and subject to approval of certain le-
gal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is ex-
pected that delivery of the certificates representing the shares of Class B
Common Stock will be made against payment therefor on or about , 1994
at the offices of J.P. Morgan Securities Inc., 60 Wall Street, New York, New
York 10260.
J.P. MORGAN SECURITIES LTD.
PAINEWEBBER INTERNATIONAL
SALOMON BROTHERS INTERNATIONAL LIMITED
, 1994
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
CLASS B COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE,
IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CLASS B
COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY
ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE CLASS B COMMON STOCK
OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE AC-
TION FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS
INTO WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO
THE OFFERING OF THE CLASS B COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPEC-
TUS.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the Securi-
ties and Exchange Commission (the "Commission"), are hereby incorporated by
reference in this Prospectus: (i) Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994; (ii) Current Report on Form 8-K, filed with the Commission
on June 27, 1994; (iii) Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994; (iv) Current Report on Form 8-K, filed with the Commission on
January 10, 1994; (v) Annual Report on Form 10-K for the year ended December
31, 1993; and (vi) the description of the Class B Common Stock contained in the
Registration Statement on Form 8-A filed with the Commission on February 22,
1993. All documents filed by the Company with the Commission pursuant to Sec-
tion 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), subsequent to the date of this Prospectus and
prior to the termination of the Offering shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the respective
dates of filing of such documents. Any statement contained herein or in a docu-
ment incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the ex-
tent that a statement contained in any subsequently filed document which also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Pro-
spectus.
The Company will provide without charge to each person to whom this Prospectus
is delivered, on the written or oral request of any such person, a copy of any
or all of the documents incorporated herein by reference (other than exhibits,
unless such exhibits are specifically incorporated by reference in such docu-
ments). Written requests for such copies should be directed to: Joseph A.
Rainis, Director, Investor Relations, National Steel Corporation, 4100 Edison
Lakes Parkway, Mishawaka, Indiana 46545-3440, telephone (219) 273-7158.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Incorporation of Certain Documents
by Reference..................... 2
Prospectus Summary................. 3
The Company........................ 8
Certain Considerations............. 10
Use of Proceeds.................... 15
Price Range of Class B Common Stock
and Dividend Policy.............. 15
Capitalization..................... 16
Selected Financial Information..... 17
Management's Discussion and Analy-
sis of Financial Condition and
Results of Operations............ 18
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business.............................................................. 26
Management............................................................ 42
Certain Relationships and Related Transactions........................ 44
Description of Capital Stock.......................................... 47
Certain United States Tax Consequences to Non-United States Holders... 51
Underwriting.......................................................... 52
Legal Matters......................................................... 54
Experts............................................................... 54
Additional Information................................................ 54
Index to Financial Statements......................................... F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed infor-
mation and financial statements appearing elsewhere in this Prospectus. Unless
the context requires otherwise, the "Company" refers to National Steel Corpora-
tion, a Delaware corporation, and its consolidated subsidiaries. Except where
specifically stated otherwise, all information contained in this Prospectus re-
lating to the Company's capital stock assumes no exercise of the Underwriters'
over-allotment option.
THE COMPANY
The Company is the fourth largest integrated steel producer in the United
States as measured by production and is engaged in the manufacture and sale of
a wide variety of flat rolled carbon steel products, including hot rolled, cold
rolled, galvanized, tin and chrome plated steels. The Company targets high
value added applications of flat rolled carbon steel for sale to the automo-
tive, metal buildings and container markets. Since 1984, the Company has in-
vested $2 billion in capital improvements to enhance the Company's competitive
position and penetrate growing segments of these markets. The Company operates
two integrated steel plants, a finishing mill and an iron ore pelletizing plant
and participates in two joint ventures that produce coated products.
On June 1, 1994, the Board of Directors replaced certain members of the
Company's senior management for the purpose of improving operating performance
and achieving sustained profitability. V. John Goodwin, who has twenty seven
years of experience in the steel industry, was appointed President and Chief
Operating Officer and Robert M. Greer, who has thirty three years of steel in-
dustry and related business experience, was appointed Senior Vice President and
Chief Financial Officer. Four other managers experienced in the areas of qual-
ity control, primary steel production and finishing and human resources joined
the remaining members of management. Mr. Goodwin and the other new members of
the Company's management are credited with substantially improving operating
performance and labor relations and reducing production costs in their previous
employment.
The Company's mission is to achieve sustained profitability, thereby enhancing
stockholder value, by reducing the costs of production and improving productiv-
ity and product quality. Management has developed a number of strategic
initiatives designed to achieve the Company's goals. These initiatives focus
on:
. Reducing the cost of hot rolled bands, the largest component of the
Company's finished product cost;
. Reducing the cost of poor quality, which currently results in the sale of
non-prime products at lower prices and requires substantial reprocessing
costs;
. Installing a predictive maintenance program which is designed to maximize
production and the useful life of equipment while minimizing unscheduled
equipment outages;
. Increasing steel production capabilities by identifying and eliminating
manufacturing bottlenecks;
. Enhancing the Company's cooperative partnership with the United
Steelworkers of America (the "USWA") by increasing employee participation
at all levels of the production process; and
. Improving information and cost control systems to enable management to
exercise greater control over production costs.
In addition, the Company plans to more fully utilize its alliance with its
principal stockholder, NKK Corporation (collectively, with its subsidiaries,
hereinafter referred to as "NKK"), and its partnership with customers and to
better utilize equipment and facilities, many of which have been enhanced by
the Company's $2 billion capital investment program.
As a first step in implementing its strategy, management negotiated with the
USWA the reopening of the Company's iron ore mine and pelletizing plant, Na-
tional Steel Pellet Company ("NSPC"), which had been temporarily idled due to a
strike that began in August 1993. Management also successfully negotiated new
agreements with public utilities, transportation companies, property owners and
others, the effect of which will be a $4 per gross ton savings in the cost of
delivered pellets from the Company's pre-strike costs. Based upon NSPC's esti-
mated production of 5 million tons of pellets per year, this will result in a
savings of $20 million annually compared to the Company's pre-strike costs. Ad-
ditionally, by taking this action, management reaffirmed the importance of the
Company's cooperative partnership with labor.
3
<PAGE>
The Company operates in an industry whose fundamentals are currently favorable.
Demand for steel from the Company's principal markets--automotive, metal build-
ings and container--is strong, and management believes that demand will remain
strong through 1995. Strengthening demand resulted in an industry capacity uti-
lization rate for the first six months of 1994 of approximately 89.1%, the
highest level since 1988. As a result of more favorable market conditions, the
industry and the Company have been able to realize a series of price increases
that began in certain of the Company's markets in January 1993.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered:
U.S. Offering........... 4,800,000 shares of Class B Common Stock
International Offering.. 1,200,000 shares of Class B Common Stock
Total Offering.......... 6,000,000 shares of Class B Common Stock
Common Stock Outstanding
after the Offering....... 22,100,000 shares of Class A Common Stock
20,276,156 shares of Class B Common Stock
Total Shares Outstand-
ing.................... 42,376,156 shares of Common Stock
Use of Proceeds........... The Company will use substantially all of the net
proceeds of the Offering for debt reduction. See
"Use of Proceeds."
Voting Rights; Conversion. Each share of Class B Common Stock is entitled to
one vote and each share of Class A Common Stock is
entitled to two votes. Except as otherwise
required by law, the Class A Common Stock and
Class B Common Stock will vote together on all
matters submitted to a vote of stockholders,
including the election of directors. Following the
Offering, the outstanding shares of Class B Common
Stock will represent approximately 31.4% of the
combined voting power of the outstanding Common
Stock (32.4% if the Underwriters' over-allotment
options are exercised in full). Each share of
Class A Common Stock is convertible into Class B
Common Stock on a one-to-one basis at any time at
the option of the holder thereof and in certain
other circumstances. See "Description of Capital
Stock."
Cash Dividends on Common The Company is currently prohibited from paying
Stock.................... cash dividends on its Common Stock by covenants
contained in certain of the Company's financing
arrangements. Class A Common Stock and Class B
Common Stock will be entitled to share ratably, as
a single class, in any dividends declared by the
Company on the Common Stock. See "Certain
Considerations--Certain Factors Relating to the
Class B Common Stock," "Price Range of Class B
Common Stock and Dividend Policy" and "Description
of Capital Stock."
New York Stock Exchange "NS"
Trading Symbol...........
</TABLE>
5
<PAGE>
CERTAIN CONSIDERATIONS
Prospective purchasers should consider carefully the factors discussed under
the heading "Certain Considerations" relating to an investment in the Company,
including the following:
. The Company has reported net operating losses for the past three years
and incurred a net loss, excluding the effect of an unusual gain, for the
first six months of 1994.
. The Company is subject to stringent federal, state and local laws and
regulations relating to the protection of human health and the environ-
ment which may result in substantial expenditures by the Company for com-
pliance with these laws and regulations.
. Following the Offering, NKK will continue to exercise control over the
business of the Company by virtue of its ability to elect all the members
of the Board of Directors and its majority voting power. Additionally,
the Company's Certificate of Incorporation contains provisions recogniz-
ing that conflicts of interest may arise between the Company and NKK, and
NKK has no duty to communicate to the Company potential transactions or
matters that may be corporate opportunities for both the Company and NKK.
NKK will not be liable for breach of any fiduciary duty as a stockholder
for failure to present a corporate opportunity to the Company. The Cer-
tificate of Incorporation also provides that any person acquiring shares
of Common Stock will be deemed to have consented to such provisions re-
lating to conflicts of interest.
. Domestic steel producers, including the Company, face significant compe-
tition from foreign steel producers, many of which are owned, controlled
or subsidized by their governments.
. The domestic steel industry is highly competitive and continues to be ad-
versely affected by excess world capacity. Additionally, the Company com-
petes with a number of domestic steel producers that have gone through
bankruptcy reorganization. These proceedings have resulted in reduced op-
erating costs and have enabled such producers to price their products be-
low levels that could otherwise be maintained by them and at which it
would be profitable for the Company to sell its products.
. The steel industry is highly cyclical in nature. While a recovery in
steel markets is currently underway and is expected by management to con-
tinue into 1995, there can be no assurance as to the extent of any future
improvement in domestic industry earnings.
. Management is currently evaluating alternatives to improve the competi-
tive position of the Company and such alternatives may lead to the re-
structuring of businesses and operations in the future. Any such
restructuring could result in substantial charges.
. Certain risk factors with respect to the Class B Common Stock include the
potential adverse effect on the market price of Class B Common Stock as a
result of the sale of substantial amounts of Class B Common Stock in the
public market following the Offering and restrictions on the payment of
Common Stock dividends contained in certain of the Company's financing
arrangements.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following consolidated summary of financial information presents certain
financial data for the three years ended December 31, 1993 and for the six
months ended June 30, 1994 and 1993 and should be read in conjunction with the
Consolidated Financial Statements and the related notes. The Statement of Oper-
ations Data for each of the years in the three-year period ended December 31,
1993 and the Balance Sheet Data as of December 31, 1993 and 1992 have been de-
rived from the Consolidated Financial Statements included herein, which have
been audited by Ernst & Young LLP, the Company's independent auditors. The Bal-
ance Sheet Data as of December 31, 1991 have been derived from separate audited
consolidated financial statements of the Company. The Statement of Operations
Data for the six-month periods ended June 30, 1994 and 1993 and the Balance
Sheet Data as of June 30, 1994 are unaudited and include all adjustments, con-
sisting of normal recurring accruals, which the Company considers necessary for
a fair presentation of the financial position and results of operations for
these periods. Operating results for the six months ended June 30, 1994 are not
necessarily indicative of the results for the entire year ending December 31,
1994.
<TABLE>
--------------------------------
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
(DOLLARS IN MILLIONS, EXCEPT 1994 1993 1993 1992 1991
PER SHARE AND PER TON DATA) ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 1,273 $1,210 $ 2,419 $ 2,373 $ 2,330
Cost of products sold 1,146 1,126 2,254 2,107 2,103
Depreciation, depletion and
amortization 70 68 137 115 117
------- ------ -------- -------- --------
Gross profit 58 16 27 152 110
Selling, general and adminis-
trative 68 67 137 133 139
Unusual charges (credit) (111) - 111 37 111
Income (loss) from operations 102 (51) (218) (12) (131)
Net income (loss) applicable
to Common Stock 73 (95) (272) (66) (207)
Per share data applicable to
Common Stock:
Income (loss) before
extraordinary items and
cumulative effect of
accounting changes 2.02 (2.52) (7.55) (3.61) (8.11)
Net income (loss) 2.02 (3.04) (8.04) (2.58) (8.11)
--------------------------
<CAPTION>
AS OF
JUNE 30, AS OF DECEMBER 31,
1994 1993 1992 1991
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 139 $ 27 $ 74 $ 120
Net property, plant and equipment 1,421 1,399 1,395 1,249
Total assets 2,423 2,304 2,189 1,986
Long-term obligations and related
party indebtedness
(including current portion) 736 702 695 518
Redeemable Preferred Stock--Series B 67 68 138 141
Stockholders' equity 263 190 327 393
--------------------------------
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
1994 1993 1993 1992 1991
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Shipments (net tons, in thou-
sands) 2,507 2,582 5,005 4,974 4,906
Effective capacity utilization 93.9% 99.5% 100.0% 100.5% 92.5%
Continuously cast percentage 100.0% 100.0% 100.0% 100.0% 99.8%
Liquid steel to finished prime
product yield 80.0% 79.5% 79.6% 80.0% 79.6%
Manhours per net ton shipped 3.87 3.82 3.96 4.03 4.27
Number of employees (end of
period) 9,762 10,277 10,069 10,299 11,176
Capital investments $ 91 $ 40 $ 161 $ 284 $ 178
Operating profit (loss) per
net ton shipped excluding un-
usual items $ (4) $ (20) $ (21) $ 5 $ (4)
</TABLE>
7
<PAGE>
THE COMPANY
The Company is the fourth largest integrated steel producer in the United
States as measured by production and is engaged in the manufacture and sale of
a wide variety of flat rolled carbon steel products, including hot rolled, cold
rolled, galvanized, tin and chrome plated steels. The Company targets high
value added applications of flat rolled carbon steel for sale to the automo-
tive, metal buildings and container markets. Since 1984, the Company has in-
vested $2 billion in capital improvements to enhance the Company's competitive
position and penetrate growing segments of these markets.
On June 1, 1994, the Board of Directors replaced certain members of the
Company's senior management for the purpose of improving operating performance
and achieving sustained profitability. V. John Goodwin, who has twenty seven
years of experience in the steel industry, was appointed President and Chief
Operating Officer and Robert M. Greer, who has thirty three years of steel in-
dustry and related business experience, was appointed Senior Vice President and
Chief Financial Officer. Four other managers experienced in the areas of qual-
ity control, primary steel production and finishing and human resources joined
the remaining members of management. Mr. Goodwin and the other new members of
the Company's management are credited with substantially improving operating
performance and labor relations and reducing production costs in their previous
employment.
The Company's mission is to achieve sustained profitability, thereby enhancing
stockholder value, by reducing the costs of production and improving productiv-
ity and product quality. Management has developed a number of strategic
initiatives designed to achieve the Company's goals. These initiatives focus
on:
. Reducing the cost of hot rolled bands, the largest component of the
Company's finished product cost;
. Reducing the cost of poor quality, which currently results in the sale of
non-prime products at lower prices and requires substantial reprocessing
costs;
. Installing a predictive maintenance program which is designed to maximize
production and the useful life of equipment while minimizing unscheduled
equipment outages;
. Increasing steel production capabilities by identifying and eliminating
manufacturing bottlenecks;
. Enhancing the Company's cooperative partnership with the USWA by increas-
ing employee participation at all levels of the production process; and
. Improving information and cost control systems to enable management to
exercise greater control over production costs.
In addition, the Company plans to more fully utilize its alliance with its
principal stockholder, NKK, and its partnership with customers and to better
utilize equipment and facilities, many of which have been enhanced by the
Company's $2 billion capital investment program.
As a first step in implementing its strategy, management negotiated with the
USWA the reopening of the Company's iron ore mine and pelletizing plant, NSPC,
which had been temporarily idled due to a strike that began in August 1993.
Management also successfully negotiated new agreements with public utilities,
transportation companies, property owners and others, the effect of which will
be a $4 per gross ton savings in the cost of delivered pellets from the
Company's pre-strike costs. Based upon NSPC's estimated production of 5 million
tons of pellets per year, this will result in a savings of $20 million annually
compared to the Company's pre-strike costs. Additionally, by taking this ac-
tion, management reaffirmed the importance of the Company's cooperative part-
nership with labor.
The Company operates three principal facilities: two integrated steel plants,
one near Detroit, the other near St. Louis, and a finishing facility near Chi-
cago. Annual effective steelmaking capacity is approximately 6 million net
tons, all of which is continuously cast. The Company also operates NSPC, an
iron ore mine and pelletizing facility in Keewatin, Minnesota, with a current
annual capacity of 5 million tons. The Company closely coordinates the opera-
tions of these facilities in order to maintain high operating rates throughout
its processing facilities and to minimize redundant capital investments.
In order to improve the Company's penetration of growing segments of the auto-
motive and metal buildings markets, the Company has entered into two joint ven-
tures to construct and operate processing lines for coated steel. Both of these
joint ventures are operational. The Company's share of the combined output of
these facilities will represent approximately 320,000 tons of galvanized and
Galvalume(R) steel coating capacity when both facilities are fully operational
in 1995, an increase from the current level of 230,000 tons. The Company also
sells hot and cold rolled steel to a wide variety of other users including the
pipe and tube industry and independent steel service centers.
8
<PAGE>
Major projects of the Company's recently completed ten year, $2 billion capital
investment program included an electrolytic galvanizing line, a continuous
caster, a ladle metallurgy station, a vacuum degasser, a complete coke oven
battery rebuild and a high speed pickle line, each of which services the
Company's plant near Detroit, and a continuous caster and a ladle metallurgy
station, each of which services its plant near St. Louis. Major improvements at
its finishing facility near Chicago include the installation of process control
equipment to upgrade its finishing capabilities.
The Company has a strong alliance with its principal stockholder, NKK, the sec-
ond largest steel company in Japan and the fifth largest in the world as mea-
sured by production. NKK is also engaged in the shipbuilding and engineering
industries, among others. Since 1984, the Company has had access to a wide
range of NKK's steelmaking, processing and applications technology. In addi-
tion, NKK has provided financial assistance to the Company in the form of in-
vestments, loans and introductions to Japanese financial institutions and
trading companies.
The Company was formed through the merger of Great Lakes Steel, Weirton Steel
and Hanna Iron Ore Company and was incorporated in Delaware on November 7,
1929. The Company built a finishing facility, now the Midwest Division, in 1961
and in 1971 purchased Granite City Steel Corporation, now the Granite City Di-
vision. On September 13, 1983, the Company became a wholly owned subsidiary of
National Intergroup, Inc. (collectively, with its subsidiaries, hereinafter re-
ferred to as "NII") through a restructuring. On January 11, 1984, the Company
sold the principal assets of its Weirton Steel Division and retained certain
liabilities related thereto. On August 31, 1984, NKK purchased a 50% equity in-
terest in the Company from NII. On June 26, 1990, NKK purchased an additional
20% equity interest in the Company from NII. In April 1993, the Company com-
pleted an initial public offering of its Class B Common Stock. In October 1993,
NII converted all of its shares of Class A Common Stock to an equal number of
shares of Class B Common Stock, resulting in NKK having a 75.6% voting interest
in the Company. NII sold substantially all of its shares of Class B Common
Stock in the market in January 1994. See "Certain Relationships and Related
Transactions" for a more detailed description of these transactions, including
a description of certain ongoing indemnity obligations of NII arising out of
the disposition of the Weirton Steel Division. The Company's ability to fully
realize the benefits of NII's indemnification obligations is necessarily depen-
dent upon NII's financial condition at the time of any claim with respect to
such obligations.
The Company's principal executive offices are located at 4100 Edison Lakes
Parkway, Mishawaka, Indiana 46545-3440; telephone (219) 273-7000.
9
<PAGE>
CERTAIN CONSIDERATIONS
Prospective investors should consider carefully, in addition to the other in-
formation contained in this Prospectus, the following considerations and risk
factors before purchasing the Class B Common Stock offered hereby:
CERTAIN FACTORS RELATING TO THE COMPANY
Recent Losses
The Company incurred a net loss of $29.0 million and a net loss applicable to
Common Stock of $34.5 million for the first six months of 1994, excluding a
net gain of $107.9 million related to the receipt of a judgment in favor of
the Company against the Bessemer & Lake Erie Railroad (the "B&LE"). The Com-
pany reported a net loss of $258.9 million and a net loss applicable to Common
Stock of $272.2 million for the year ended December 31, 1993. This net loss
included a net charge of $94.4 million related to the temporary idling of the
Company's pellet operations. For the year ended December 31, 1992, the Company
reported a net loss of $48.4 million and a net loss applicable to Common Stock
of $65.9 million.
The Company currently expects to report a net profit for the third quarter of
1994, exclusive of any unusual gain relating to the decision to reopen NSPC.
The ability of the Company to achieve sustained profitability is dependent
upon several managerial and operational changes designed to reduce costs, im-
prove productivity and product quality and achieve an improved product mix, as
well as various factors outside the Company's control, including the level of
steel prices, domestic steel demand and the level of the U.S. dollar. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For a discussion of competitive and other factors affecting the
steel industry in general, see "Certain Factors Relating to the Steel Indus-
try" below.
Business Subject to Stringent Environmental Regulation
Domestic steel producers, including the Company, are subject to stringent fed-
eral, state and local laws and regulations relating to the protection of human
health and the environment. Domestic producers have expended, and can be ex-
pected to expend in the future, substantial amounts for compliance with these
environmental laws and regulations. The Company currently estimates that capi-
tal expenditures in connection with matters relating to environmental control
will be approximately $7.9 million and $13.6 million for 1994 and 1995, re-
spectively. In addition, the Company expects to record expenses for environ-
mental compliance, including depreciation, in the amount of approximately $70
million and $73 million for 1994 and 1995, respectively. Since environmental
laws are becoming increasingly stringent, the Company's environmental capital
expenditures and costs for environmental compliance may increase in the fu-
ture. In addition, due to the possibility of future unanticipated factual or
regulatory developments, the amount and timing of future environmental expen-
ditures could vary substantially from those currently anticipated. The Company
is currently involved in a number of environmental proceedings, and the out-
comes of such proceedings, to the extent that they exceed any applicable re-
serves, could have a material adverse effect on the Company's results of
operations for the applicable period. The costs for environmental compliance
may also place domestic steel producers, including the Company, at a competi-
tive disadvantage with respect to foreign steel producers, as well as manufac-
turers of steel substitutes, that are subject to less stringent environmental
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Environmental," "Business--Environmental Matters"
and "Certain Relationships and Related Transactions."
Since 1989, the United States Environmental Protection Agency (the "EPA") and
the eight Great Lakes states have been developing guidance for discharge stan-
dards in the Great Lakes Basin that are even more stringent than the best
available technology standards currently being enforced (the "Great Lakes Ini-
tiative"). As required under section 118 of the Clean Water Act, as amended,
which is intended to codify the efforts of the EPA and such states under the
Great Lakes Initiative, on April 16, 1993, the EPA published the proposed "Wa-
ter Quality Guidance for the Great Lakes System" (the "Guidance Document").
Once finalized, the Guidance Document will establish minimum water quality
standards and other pollution control policies and procedures for waters
within the Great Lakes System. The EPA is required to publish the final Guid-
ance Document by March 1995. Preliminary studies conducted by the American
Iron and Steel Institute (the "AISI") prior to publication of the proposed
Guidance Document estimated that the potential capital cost for a fully inte-
grated steel mill to comply with draft standards under the Great Lakes Initia-
tive could range from approximately $50 million to $175 million and the
potential annual operating and maintenance cost would be approximately 15% of
the estimated capital cost. Until the Guidance Document is finalized and cor-
responding state laws and regulations are promulgated, the Company is unable
to determine whether such estimates are accurate and whether the Company's ac-
tual costs for compliance will be comparable. Although the Company believes
only the Great Lakes Division would be required to incur significant costs for
compliance, there can be no assurances that compliance with the Great Lakes
Initiative will not have a material adverse effect on the Company's financial
condition or results of operations. See "Business--Environmental Matters."
10
<PAGE>
Charges and Liabilities Related to Pensions and Other Postretirement Benefits
The Company has substantial financial obligations related to its employee
postretirement benefit plans for pensions and OPEB. As of December 31, 1993,
the Company's consolidated balance sheet reflects liabilities of $299.7 million
and $157.4 million for pensions and OPEB, respectively. The calculation of
these obligations for active employees assumes continued employment with pro-
jections for retirements, deaths, resignations and discharges. If the actual
retirement of active employees is significantly earlier than projected (for
plant closings or other reasons), the obligations would increase substantially.
The recording of these charges could result in a material adverse effect on the
Company's financial condition and results of operations because of the increase
in recorded liabilities, decrease in stockholders' equity and increases in re-
quired contributions to the pension fund.
As a result of a decline in long term interest rates in the United States, at
December 31, 1993, the Company reduced the discount rate used to calculate the
actuarial present value of its accumulated benefit obligation for OPEB by 100
basis points to 7.75% and for pensions by 125 basis points to 7.50%, from the
rate used at December 31, 1992. This decline in the discount rate used to cal-
culate its pension obligation increased the minimum pension liability recorded
on the Company's balance sheet to $134.7 million and increased the related in-
tangible asset to $128.8 million, with the remaining $5.9 million charged to
stockholders' equity. If interest rates at December 31, 1994 are significantly
different from December 31, 1993, the Company will be required to change the
discount rate used to calculate the actuarial present value of its pension ob-
ligation. An increase in such discount rate could reduce the recorded pension
liability and eliminate the current charge to stockholders' equity, depending
on the then market value of its pension trust fund assets. While the same re-
duction in the discount rate as of December 31, 1993 and potential future re-
ductions also apply to the actuarial present value of the Company's OPEB
obligation, such reductions do not result in any increase in the recorded lia-
bility or potential charge to equity because of different required accounting
principles.
Potential Charges
Management is currently evaluating alternatives to improve the competitive po-
sition of the Company and such alternatives may lead to the restructuring of
businesses and operations in the future. Any such restructuring could result in
substantial charges. The recording of these charges could have a material ad-
verse effect on the Company's financial condition and results of operations be-
cause of the increase in recorded liabilities and decrease in stockholders'
equity.
Limitation on Utilization of Net Operating Loss Carryforwards
If an "ownership change" within the meaning of Section 382 of the Internal Rev-
enue Code of 1986, as amended (the "Code"), were to occur with respect to the
Company as a result of the Offering, the Company's ability to utilize its net
operating loss carryforwards ("NOLs") to offset its taxable income would be se-
verely limited. The Company believes that the Offering will not cause the Com-
pany to undergo an ownership change but that, immediately following the
Offering, the Company will be within approximately one percentage point of an
ownership change. Because certain events beyond the Company's control, as well
as future primary stock offerings and other events, could cause the Company to
undergo an ownership change, there can be no assurance that such an ownership
change will not occur in the future. Events beyond the Company's control that
could cause the Company to undergo an ownership change include acquisitions and
dispositions of Company stock by stockholders who own or owned 5% or more of
the Company's stock and certain transactions by 5% or more stockholders (or
their stockholders) with respect to their own stock (including issuances of se-
curities, redemptions, and recapitalizations). Additionally, due to certain am-
biguities in the regulations under Section 382, there can be no assurance that
the Internal Revenue Service would not challenge the Company's position that no
ownership change will occur as a result of the Offering or that such a chal-
lenge, if asserted, would not be sustained by a court of law.
Significance of the Automotive Industry
Demand for the Company's products is affected by, among other things, the rela-
tive strength or weakness of the domestic automotive industry. Shipments to
General Motors Corporation ("General Motors"), the Company's largest customer,
accounted for approximately 11%, 12% and 12% of net sales in each of 1993, 1992
and 1991, respectively. There can be no assurance that future sales to General
Motors will equal historical levels. Sales of the Company's products to the
automotive market accounted for approximately 29%, 27% and 26% of the Company's
total net sales in 1993, 1992 and 1991, respectively.
Control by and Alliance with NKK
Following the Offering, approximately 68.6% of the combined voting power of the
Company's outstanding capital stock will be held by NKK. As a result, NKK will
continue to exercise control over the business of the Company by virtue of its
ability to elect all the members of the Board of Directors (and, consequently,
the ability to cause, among other things, the
11
<PAGE>
Company to redeem shares of Series A Preferred Stock (as defined herein) owned
by NKK or issue additional capital stock of the Company) and its majority vot-
ing power with respect to actions requiring stockholder approval. If NKK were
to cease to own a majority of the combined voting power of the outstanding cap-
ital stock of the Company, an event of default would occur under certain of the
Company's financing arrangements. See "Certain Relationships and Related Trans-
actions."
In connection with the Company's relationship with NKK, NKK has provided finan-
cial assistance to the Company in the form of investments, loans and introduc-
tions to Japanese financial institutions and trading companies. No assurances
can be given with respect to the extent of NKK's future financial support be-
yond existing contractual commitments. See "Business--Strategy."
Conflicts of Interest
The nature of the respective businesses of the Company and NKK is such as to
give rise to conflicts of interest between the two companies. The Company's Re-
stated Certificate of Incorporation (the "Certificate of Incorporation") con-
tains provisions recognizing that NKK may engage in business activities similar
to those of the Company and shall have no duty to communicate to the Company,
may pursue and acquire for itself, or may direct to another person potential
transactions or matters which may be corporate opportunities for both NKK and
the Company. The Certificate of Incorporation provides that NKK will not be li-
able to the Company or its stockholders for breach of any fiduciary duty as a
stockholder of the Company by reason of the fact that NKK pursues or acquires
such corporate opportunity for itself, directs such corporate opportunity to
another person or does not present the corporate opportunity to the Company.
Consequently, certain corporate opportunities which may have been made avail-
able to the Company, instead may be available only to NKK. The Certificate of
Incorporation also provides that any person purchasing or otherwise acquiring
any interest in shares of Common Stock will be deemed to have notice of and to
have consented to the provisions of the Certificate of Incorporation relating
to conflicts of interest, which may limit the ability of stockholders to suc-
cessfully challenge these provisions in a court of law or otherwise. See "De-
scription of Capital Stock--Certain Provisions of the Certificate of
Incorporation Relating to Corporate Opportunities."
Significant Amount of Financial Leverage
Upon consummation of the Offering, the Company will continue to have outstand-
ing substantial indebtedness which could affect its ability to service its in-
debtedness, which in turn could limit its ability to make certain capital
investments or take advantage of certain business opportunities or could force
it to restructure or refinance its indebtedness or seek additional equity capi-
tal. See "Management's Discussion and Analysis of Results of Operations--Li-
quidity and Sources of Capital."
Ability to Fully Realize the Benefits of NII's Indemnification Obligations
On August 31, 1984, NKK purchased 50% of the capital stock of the Company from
NII. Pursuant to the terms of that transaction, NII agreed with the Company to
provide funds to the Company for the payment of, and to indemnify the Company
against, claims and litigation arising out of the operation of its former Weir-
ton Steel Division ("Weirton") prior to May 1, 1983 (the "Weirton Liabili-
ties"). NII also agreed to indemnify the Company for certain other
environmental liabilities related to the former operations of the Hanna Furnace
Corporation, a subsidiary of the Company, and the Donner Hanna Coke Joint Ven-
ture, a joint venture of the Hanna Furnace Corporation and LTV Steel Company,
Inc. The Company's ability to fully realize the benefits of NII's indemnifica-
tion obligations is necessarily dependent upon NII's financial condition at the
time of any claim with respect to such obligations. The failure of NII to sat-
isfy any of such indemnity obligations could have a material adverse effect on
the Company's liquidity. In January 1994, the Company received $10 million from
NII as an unrestricted prepayment for environmental obligations which may arise
after such prepayment and for which NII has previously agreed to indemnify the
Company. The Company is required to repay to NII portions of the $10 million to
the extent the Company's expenditures for such environmental liabilities do not
meet specified levels by certain dates over a twenty year period. See "Certain
Relationships and Related Transactions."
Preferences of Preferred Stock and Certain Related Matters
Pursuant to the Certificate of Incorporation, the Board of Directors is
authorized to establish and designate one or more series of Preferred Stock,
without further authorization of the Company's stockholders, and to fix the
number of shares, the dividend and the relative rights, preferences and
limitations of any such series. The Company's Series A Preferred Stock and the
Series B Preferred Stock are entitled to certain preferences upon liquidation
and the payment of dividends. As a result of NKK's control over the business of
the Company by virtue of its ability to elect all of the members of the Board
of Directors, NKK may cause the Company to redeem the Series A Preferred Stock
and cause the issuance of additional preferred stock which may have superior
voting rights to the Common Stock.
12
<PAGE>
CERTAIN FACTORS RELATING TO THE STEEL INDUSTRY
Cyclicality
The domestic steel industry is highly cyclical in nature. Domestic integrated
steel producers suffered substantial losses in the first half of the 1980s as a
result of a number of factors, including recessionary conditions, a high level
of steel imports, the strength of the United States dollar against other
currencies, worldwide production overcapacity, increased domestic and
international competition, high labor cost and inefficient plants. During the
second half of the 1980s, domestic steel producers benefited from improved
industry conditions as steel demand increased substantially, the value of the
dollar declined against other currencies, the level of steel imports receded,
excess capacity was reduced through restructurings, and facilities were
modernized. These favorable conditions reached their peak in 1988 when domestic
industry earnings reached record levels. Steel demand and pricing began to
decline in the latter half of 1989 and the domestic industry has reported
substantial losses, including restructuring and other charges, during recent
years. While a recovery in steel markets is currently under way and is expected
by management to continue into 1995, there can be no assurance as to the extent
of any future improvement in domestic industry earnings.
Overcapacity
Annual United States raw steel production capability has been reduced from 154
million tons in 1982 to 110 million tons in 1993. This reduction has resulted
in higher utilization rates. Average utilization of domestic industry capabil-
ity improved from 60% in the 1982-1986 period to 82% in 1987-1992 period and
more than 89% in 1993. Despite these improvements, steel consumption in the
United States has not grown with the overall economy in recent years and excess
production capacity continues to exist in certain product lines in domestic
markets and, to a greater extent, worldwide. Production capacity has been in-
creased by most integrated producers, including the Company, in certain higher
value-added product lines. With further increases in production capacity cur-
rently under way and anticipated, overcapacity could arise in certain of these
product lines.
Competition
Imports. Domestic steel producers face significant competition from foreign
producers and have been adversely affected by unfairly traded imports. Imports
of finished steel products accounted for approximately 17% of the domestic mar-
ket for the first six months of 1994, approximately 14% of the domestic market
in 1993 and approximately 15% of the domestic market in 1992 and 1991. Many
foreign steel producers are owned, controlled or subsidized by their govern-
ments. Decisions by these foreign producers with respect to production and
sales may be influenced to a greater degree by political and economic policy
considerations than by prevailing market conditions.
In 1992, the Company and eleven other domestic steel producers filed unfair
trade cases with the United States Department of Commerce (the "Commerce De-
partment") and the United States International Trade Commission (the "ITC")
against foreign steel producers covering imports of flat rolled carbon steel
products. In June 1993, the Commerce Department imposed final antidumping and
subsidy margins averaging 37% for all products under review. In July 1993, the
ITC made final determinations that material injury had occurred in cases repre-
senting an estimated 51% of the dollar value and 42% of the volume of all flat
rolled carbon steel imports under investigation. In the four product catego-
ries, injury was found in cases relating to 97% of the volume of plate steel,
92% of the volume of higher value-added corrosion resistant steel and 36% of
the volume of cold rolled steel. No injury was found with respect to hot rolled
steel products. For the first six months of 1994, approximately 41% of the
Company's shipments consisted of hot rolled steel, while approximately 31% con-
sisted of corrosion resistant steel, 16% consisted of cold rolled steel and
less than 1% consisted of plate steel. Imports of products not covered by af-
firmative ITC injury determinations have increased and may continue to in-
crease, which may have an adverse effect on the Company's shipments of these
products and the prices it realizes for such products. The Company and the
other domestic producers who filed these cases have appealed the negative deci-
sions of the ITC and are defending appeals brought by foreign producers involv-
ing decisions favorable to domestic producers. These appeals are proceeding
before the Court of International Trade in New York and, in the case of Canada,
before Binational Dispute Panels under the U.S.-Canada Free Trade Agreement.
Decisions from the Court of International Trade are expected in the first half
of 1995; a decision from the Binational Dispute Panel is due before the end of
1994. Future increases in other steel imports are also possible, particularly
if the value of the dollar should rise in relation to foreign currencies or if
legislation implementing the recently concluded GATT Uruguay Round agreements
is enacted in a form which substantially weakens United States trade laws.
Reorganized/Reconstituted Mills. The intensely competitive conditions within
the domestic steel industry have been exacerbated by the continued operation,
modernization and upgrading of marginal steel production facilities through
bankruptcy
13
<PAGE>
reorganization procedures, thereby perpetuating overcapacity in certain indus-
try product lines. Overcapacity is also caused by the continued operation of
marginal steel production facilities that have been sold by integrated steel
producers to new owners, who operate such facilities with a lower cost struc-
ture.
Mini-mills. Domestic integrated producers, such as the Company, have lost mar-
ket share in recent years to domestic mini-mills. Mini-mills provide signifi-
cant competition in certain product lines, including hot rolled and cold rolled
sheets, which represented, in the aggregate, approximately 60% of the Company's
shipments in 1993. Mini-mills are relatively efficient, low-cost producers of
steel from scrap in electric furnaces, have lower employment and environmental
costs and target regional markets. Thin slab casting technologies have allowed
mini-mills to enter certain sheet markets which have traditionally been sup-
plied by integrated producers. One mini-mill has constructed two such plants
and announced its intention to start a third. Certain companies have begun con-
struction of, announced plans for, or have indicated that they are evaluating
whether to construct additional mini-mill plants for sheet products in the
United States.
Steel Substitutes. In the case of many steel products, there is substantial
competition from manufacturers of other products, including plastics, aluminum,
ceramics, glass, wood and concrete. Conversely, the Company and certain other
manufacturers of steel products have begun to compete in recent years in mar-
kets not traditionally served by steel producers.
CERTAIN FACTORS RELATING TO THE CLASS B COMMON STOCK
Potential Adverse Market Price Effect of Future Sales of Common Stock
Sales of substantial amounts of Class B Common Stock in the public market fol-
lowing the Offering could adversely affect the market price of the Class B Com-
mon Stock. In addition to the shares of Class B Common Stock offered hereby,
22,100,000 additional shares of Class B Common Stock (issuable upon conversion
of outstanding shares of Class A Common Stock held by NKK) are eligible for im-
mediate resale in the public market subject to certain volume and other re-
strictions set forth in Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). The Company, NKK and each of the current directors and
executive officers of the Company have agreed with the Underwriters, however,
not to sell any shares of Common Stock until 90 days after the date of this
Prospectus without the prior written consent of J.P. Morgan Securities Inc. NKK
has informed the Company that NKK has no present intention to dispose of any
shares of Common Stock. NKK has also been granted certain registration rights
by the Company with respect to its shares of Common Stock. See "Certain Rela-
tionships and Related Transactions" and "Underwriting."
Restrictions on the Payment of Common Stock Dividends
The Company has not paid dividends on its Common Stock since 1984, with the ex-
ception of an aggregate dividend payment of $6.7 million in 1989. The Company
is currently prohibited from paying cash dividends on its Common Stock, includ-
ing the Class B Common Stock, by covenants contained in certain of the
Company's financing arrangements. See "Price Range of Class B Common Stock and
Dividend Policy."
14
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering (based on an assumed offering price of
$ per share and after deduction of estimated underwriting discounts and
commissions and expenses associated with the Offering) are expected to be ap-
proximately $ million ($ million if the Underwriters' over-allotment
options are exercised in full). The Company will use substantially all of the
net proceeds of the Offering for debt reduction. Pending such utilization, the
Company intends to invest the net proceeds of the Offering in short-term in-
vestment grade instruments.
PRICE RANGE OF CLASS B COMMON STOCK AND DIVIDEND POLICY
The Class B Common Stock is listed on the New York Stock Exchange (the "NYSE")
and traded under the symbol "NS." The following table sets forth for the peri-
ods indicated the high and low sales prices of the Class B Common Stock as re-
ported on the NYSE Composite Tape. Prior to March 30, 1993, the Company did not
have any publicly traded shares.
<TABLE>
-----------------
<CAPTION>
SALE PRICE
---------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Year Ended December 31, 1993
First Quarter $15 3/8 $14
Second Quarter 20 3/8 14
Third Quarter 20 5/8 10 7/8
Fourth Quarter 13 3/8 10 3/8
Year Ended December 31, 1994
First Quarter 17 11 1/2
Second Quarter 16 1/2 11 3/4
Third Quarter 22 7/8 15 3/8
Fourth Quarter (through October 10, 1994) 20 18 3/4
</TABLE>
See the cover page of this Prospectus for a recent closing price of Class B
Common Stock on the NYSE.
As of June 30, 1994, there were approximately 110 registered holders of Class B
Common Stock.
The Company has not paid dividends on its Common Stock since 1984, with the ex-
ception of an aggregate dividend payment of $6.7 million in 1989. The Company
is currently prohibited from paying cash dividends on its Common Stock, includ-
ing the Class B Common Stock, by covenants contained in certain of the
Company's financing arrangements. In the event the payment of dividends is not
prohibited in the future by such covenants, the decision whether to pay divi-
dends on the Common Stock will be determined by the Board of Directors in light
of the Company's earnings, cash flows, financial condition, business prospects
and other relevant factors. Holders of Class A Common Stock and Class B Common
Stock will be entitled to share ratably, as a single class, in any dividends
paid on the Common Stock. In addition, dividends with respect to the Common
Stock are subject to the prior payment of cumulative dividends on any outstand-
ing series of Preferred Stock, including the Series A Preferred Stock and Se-
ries B Preferred Stock, and must be matched by an equal payment into the
Voluntary Employee Benefit Association Trust (the "VEBA Trust"), until the as-
set value of the VEBA Trust exceeds $100 million, under the terms of the coop-
erative labor agreement between the Company and the USWA effective August 1,
1993 (the "1993 Settlement Agreement"). See "Description of Capital Stock--Pre-
ferred Stock."
15
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company
at June 30, 1994 and as adjusted to give effect to the sale of the Class B Com-
mon Stock offered hereby and the application of the estimated net proceeds
thereof (assuming the Underwriters' over-allotment options are not exercised
and based on an assumed offering price of $ per share and after deduction
of estimated underwriting discounts and commissions and expenses associated
with the Offering).
<TABLE>
----------------------
<CAPTION>
AS
ADJUSTED
FOR THE
ACTUAL OFFERING
(Dollars in millions) --------- ---------
<S> <C> <C>
Long term obligations and related party indebt-
edness due within one year $ 26.4 $
Long term obligations and related party indebt-
edness 709.5
Redeemable Preferred Stock 67.3 67.3
--------- ---------
Total Debt and Redeemable Preferred Stock 803.2
--------- ---------
Stockholders' equity
Preferred Stock--Series A 36.7 36.7
Common Stock--Class A .2 .2
Common Stock--Class B .1
Additional paid-in capital 360.3
Retained earnings (deficit) (134.0) (134.0)
--------- ---------
Total Stockholders' Equity 263.3
--------- ---------
Total Capitalization $ 1,066.5 $
========= =========
</TABLE>
16
<PAGE>
SELECTED FINANCIAL INFORMATION
The following consolidated summary of financial information presents certain
financial data for the three years ended December 31, 1993 and for the six
months ended June 30, 1994 and 1993 and should be read in conjunction with the
Consolidated Financial Statements and the related notes. The Statement of
Operations Data for each of the years in the three-year period ended December
31, 1993 and the Balance Sheet Data as of December 31, 1993 and 1992 have been
derived from the Consolidated Financial Statements included herein, which have
been audited by Ernst & Young LLP, the Company's independent auditors. The
Balance Sheet Data as of December 31, 1991 have been derived from separate
audited consolidated financial statements of the Company. The Statement of
Operations Data for the six-month periods ended June 30, 1994 and 1993 and the
Balance Sheet Data as of June 30, 1994 are unaudited and include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for the six months
ended June 30, 1994 are not necessarily indicative of the results for the
entire year ending December 31, 1994.
<TABLE>
--------------------------
<CAPTION>
(Dollars in millions, except per
share and SIX MONTHS ENDED YEARS ENDED
per ton data) JUNE 30, DECEMBER 31,
1994 1993 1993 1992 1991
--------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $1,273 $1,210 $2,419 $2,373 $2,330
Cost of products sold 1,146 1,126 2,254 2,107 2,103
Depreciation, depletion and am-
ortization 70 68 137 115 117
-------- -------- ------ ------ ------
Gross profit 58 16 27 152 110
Selling, general and adminis-
trative 68 67 137 133 139
Unusual charges (credit) (111) -- 111 37 111
Income (loss) from operations 102 (51) (218) (12) (131)
Financing costs (net) 30 31 62 62 59
Income (loss) before income
taxes, extraordinary items
and
cumulative effect of account-
ing changes 71 (82) (280) (75) (189)
Extraordinary charge - - - (50) -
Cumulative effect of accounting
changes - (16) (16) 76 -
Net income (loss) applicable to
Common Stock 73 (95) (272) (66) (207)
Per share data applicable to
Common Stock:
Income (loss) before extraordi-
nary items and cumulative
effect of accounting changes 2.02 (2.52) (7.55) (3.61) (8.11)
Net income (loss)(1) 2.02 (3.04) (8.04) (2.58) (8.11)
--------------------
<CAPTION>
AS OF
JUNE 30, AS OF DECEMBER 31,
1994 1993 1992 1991
---------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 82 $ 5 $ 55 $ 64
Working capital 139 27 74 120
Net property, plant and equipment 1,421 1,399 1,395 1,249
Total assets 2,423 2,304 2,189 1,986
Long-term obligations and related party
indebtedness due within one year 26 28 33 32
Long-term obligations and related party
indebtedness 710 674 662 486
Redeemable Preferred Stock--Series B 67 68 138 141
Stockholders' equity 263 190 327 393
Total debt and redeemable preferred stock
as a percent of total capitalization 75.3% 80.2% 71.8% 62.6%
--------------------------
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
1994 1993 1993 1992 1991
--------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Shipments (net tons, in thou-
sands) 2,507 2,582 5,005 4,974 4,906
Raw steel production (net tons,
in thousands) 2,795 2,787 5,551 5,380 5,247
Effective capacity utilization 93.9% 99.5% 100.0% 100.5% 92.5%
Continuously cast percentage 100.0% 100.0% 100.0% 100.0% 99.8%
Liquid steel to finished prime
product yield 80.0% 79.5% 79.6% 80.0% 79.6%
Manhours per net ton shipped 3.87 3.82 3.96 4.03 4.27
Number of employees (end of pe-
riod) 9,762 10,277 10,069 10,299 11,176
Capital investments $91 $40 $161 $284 $178
Operating profit (loss) per net
ton shipped excluding
unusual items $(4) $(20) $(21) $5 $(4)
Common shares outstanding at
end of period (in thousands) 36,361 36,361 36,361 25,500 25,500
</TABLE>
- -------
(1) No cash dividends were paid by the Company during the periods presented.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On June 1, 1994, the Board of Directors replaced certain members of the
Company's senior management for the purpose of improving operating performance
and achieving sustained profitability. V. John Goodwin, who has twenty seven
years of experience in the steel industry, was appointed President and Chief
Operating Officer and Robert M. Greer, who has thirty three years of steel in-
dustry and related business experience, was appointed Senior Vice President and
Chief Financial Officer. Four other managers experienced in the areas of qual-
ity control, primary steel production and finishing, and human resources joined
the remaining members of management. Mr. Goodwin and the other new members of
the Company's management are credited with substantially improving operating
performance and labor relations and reducing production costs in their previous
employment.
During 1994, the Company has successfully implemented price increases for flat
rolled products sold to spot market customers. These increases of $15 per ton
on January 1 and $10 per ton on July 1 were implemented on approximately 55% of
total shipments. The Company is currently negotiating price increases with the
Company's contract buyers, which represent approximately 45% of total ship-
ments. Management is optimistic about the Company's ability to achieve these
price increases, the majority of which will be effective January 1, 1995. Addi-
tionally, the Company has announced a $30 per ton increase for January 2, 1995,
to be implemented in the spot market segment. The Company's ability to success-
fully implement such price increases is subject to, among other things, the
strength of the Company's principal customer markets and general economic con-
ditions. To the extent that the Company is successful in implementing the an-
nounced price increases, such increases will not be reflected in sales made
pursuant to contracts prior to the expiration of such contracts.
Anticipated Third Quarter 1994 Results
The Company currently expects to report a net profit for the third quarter of
1994, exclusive of any unusual gain resulting from the decision to reopen NSPC.
The ability of the Company to achieve sustained profitability is dependent upon
the effectiveness of several managerial and operational changes designed to re-
duce costs, improve productivity and product quality and achieve an improved
product mix. Performance will also be affected by factors outside the Company's
control, including the level of steel prices, domestic steel demand and the
level of the U.S. dollar.
RESULTS OF OPERATIONS--COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1994
AND 1993
Net Sales
Net sales for the first half of 1994 totaled $1.27 billion, a 5.2% increase
when compared to 1993. This increase was attributable to both an increase in
realized selling prices, as well as an improvement in product mix to higher
margin coated products and from lower margin secondary products. Steel ship-
ments for the first half of 1994 were 2,507,000 tons, a 2.9% decrease from the
2,582,000 tons shipped during the same period in 1993. Management believes this
change is due primarily to customer requests to accelerate shipments during
1993 prior to the July 31 expiration of a number of labor contracts within the
steel industry. This decrease in volume was more than offset by the improvement
in product mix and selling prices. Raw steel production increased to 2,795,000
tons, a slight increase from the 2,787,000 tons produced during the six month
period ended June 30, 1993.
Cost of Products Sold
Cost of products sold as a percentage of net sales decreased to 90.0% in the
first half of 1994 from 93.1% for the same period in 1993. This decrease is the
result of improvements in realized selling prices, product mix and performance
yields, as well as a reduction in product costs.
Unusual Items
On January 24, 1994, the United States Supreme Court denied the B&LE's petition
to hear the appeal in the Iron Ore Antitrust Litigation, thus sustaining the
judgment in favor of the Company against the B&LE. On February 11, 1994 in sat-
isfaction of this judgment, the Company received approximately $111 million,
including interest, which was recognized as an unusual gain. The Company uti-
lized a portion of the proceeds from this judgment to repurchase $25.2 million
aggregate principal amount of its outstanding 8.375% First Mortgage Bonds. Pur-
suant to the 1993 Settlement Agreement, approximately $11 million of the pro-
ceeds will be deposited into the VEBA Trust.
The Company did not recognize any income taxes associated with these proceeds,
other than alternative minimum taxes of $3.1 million, as regular federal income
tax expense was offset by the utilization of previously reserved tax assets.
18
<PAGE>
In June 1994, in an effort to reduce delivered iron ore pellet costs and im-
prove pellet mix, as well as to strengthen the cooperative partnership approach
to labor relations, management considered the feasibility of reopening the NSPC
facility. They determined that if a total reduction of $4 per gross ton in de-
livered pellet costs from pre-strike costs could be achieved, NSPC could be re-
opened on a cost effective basis. After a series of negotiations, a labor
agreement was reached between the USWA and NSPC (the "NSPC Labor Agreement").
The NSPC Labor Agreement led to negotiations with other stakeholders such as
public utilities, transportation companies, property owners and suppliers and
resulted in the achievement of the requisite $4 per gross ton savings in deliv-
ered pellet costs and the reopening of the facility in August 1994. Based upon
NSPC's estimated production of 5 million tons of pellets per year, this will
result in a savings of $20 million annually compared to the Company's pre-
strike costs.
The reopening of NSPC resulted in the restoration of approximately $59 million
of the 1993 unusual charge, or $49 million net of the applicable income tax ef-
fect, related to the temporary idling. Additionally, start-up expenses and cer-
tain expenses related to the NSPC Labor Agreement totaled approximately $6.5
million and were charged to cost of products sold. Both of these adjustments
were recorded in the third quarter of 1994.
Income Taxes
During the first six months of 1994, the Company recognized an income tax
credit and a deferred tax asset of $10.8 million, bringing the total net de-
ferred tax asset to $91.4 million at June 30, 1994. The Company also recognized
$3.1 million in alternative minimum tax expense related to the receipt of the
judgment in favor of the Company against the B&LE.
Comparability of Earnings Per Share
While the Company has chosen to amortize its SFAS 106 transition obligation
over twenty years, most of the Company's competitors have chosen to immediately
recognize their respective SFAS 106 transition obligations. As a result, any
earnings per share ("EPS") comparison between the Company and these competitors
should be adjusted for the per share adverse impact of this amortization. The
Company's after tax EPS was negatively impacted by $.22 for the six months
ended June 30, 1994.
RESULTS OF OPERATIONS--COMPARISON OF THE YEARS ENDED DECEMBER 31, 1993 AND 1992
Net Sales
Net sales for 1993 increased by 1.9% to $2.42 billion, due primarily to in-
creases in volume and realized selling prices, coupled with a favorable shift
in product mix. Steel shipments in 1993 were 5,005,000 tons, a slight increase
from 4,974,000 tons in 1992. Raw steel production increased to 5,551,000 tons,
a 3.2% increase from the 5,380,000 tons produced in 1992.
Cost of Products Sold
Cost of products sold as a percentage of net sales increased from 88.8% in 1992
to 93.2% in 1993. Significant operating problems and increased costs resulting
from the negotiation of the 1993 Settlement Agreement increased costs by ap-
proximately $112 million in 1993. However, this increase was also attributable
to the effect of non-cash items. Significant among non-cash items was the
Company's implementation of OPEB or Statement of Financial Accounting Standards
No. 106, "Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
106"), effective January 1, 1993. The excess of the postretirement benefit ex-
pense under SFAS 106 over the former pay-as-you-go basis was approximately
$59.5 million in 1993. Finally, $25.3 million of present value interest relat-
ing to postretirement benefit liabilities and certain Weirton Benefit Liabili-
ties, previously recorded for facility sales and restructurings and charged to
interest expense, was charged to cost of products sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 2.9% from $132.8 mil-
lion in 1992, to $136.7 million in 1993, primarily due to legal costs incurred
in pursuing unfair trade litigation.
Depreciation, Depletion and Amortization
Depreciation expense for 1993 increased by $22.6 million, or 19.7% as compared
to 1992, primarily as a result of the completion of the rebuild of the No. 5
coke oven battery at the Great Lakes Division in November 1992.
19
<PAGE>
Unusual Items Related to the Temporary Idling of NSPC
NSPC was temporarily idled in October 1993, following a strike by the USWA on
August 1, 1993, and the subsequent decision to satisfy the Company's iron ore
pellet requirements from external sources. At December 31, 1993, it was the
previous management's intention to externally satisfy its iron ore pellet re-
quirements for a period in excess of two years, which would have caused NSPC to
remain idle for that period. In connection with the temporary idling of the fa-
cility, the Company recorded an unusual charge of $108.6 million during the
fourth quarter of 1993. This charge was primarily comprised of employee bene-
fits such as pensions and OPEB costs, along with expenses relating to the tem-
porary idling of the facility.
Financing Costs
Net financing costs decreased by $0.3 million from 1992 to 1993. Interest ex-
pense associated with the financing of the No. 5 coke oven battery rebuild was
$25.1 million in 1993. However, this was largely offset by a $20.5 million re-
duction in financing costs for present value interest expense attributable to
postretirement benefits which are now being charged to cost of products sold.
Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109, "Ac-
counting for Income Taxes" ("SFAS 109"), at December 31, 1992. At that time,
available tax planning strategies served as the only basis for determining the
amount of the net deferred tax asset to be recognized. As a result, a full val-
uation allowance was recorded, except for the $43 million recognized pursuant
to those tax planning strategies. In 1993, the Company determined it was more
likely than not that sufficient future taxable income would be generated to
justify increasing the net deferred tax asset after valuation allowance to
$80.6 million. Accordingly, the Company recognized an additional deferred tax
asset of $37.6 million in 1993, which had the effect of decreasing the
Company's net loss by a like amount.
Cumulative Effect of Accounting Change
During the fourth quarter of 1993, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employer's Accounting for Postemployment Bene-
fits" ("SFAS 112"), which requires accrual accounting for benefits payable to
inactive employees who are not retired. The cumulative effect as of January 1,
1993 of this change was to de- crease net income by $16.5 million or $.49 per
share. The results of operations for the first quarter of 1993 have been re-
stated to reflect the effect of adopting SFAS 112 at January 1, 1993. The ef-
fect of the change on 1993 income before the cumulative effect of the change
was not material; therefore, the remaining quarters of 1993 have not been re-
stated.
Adoption of SFAS 106
During the first quarter of 1993, the Company adopted SFAS 106, which requires
the accrual of retiree medical and life insurance costs as these benefits are
earned, rather than recognition of these costs as claims are paid. At January
1, 1993, the Company calculated its transition obligation to be $622.1 million
with $66.1 million recorded prior to implementation of SFAS 106 in connection
with facility sales and restructurings. The Company has elected to amortize its
transition obligation over a period of 20 years. Total postretirement benefit
cost in 1993 was $123.7 million, or $85.6 million excluding the $38.1 million
of curtailment charges related primarily to the idling of NSPC. Excluding these
curtailment charges, the excess of postretirement benefit expense recorded un-
der SFAS 106 over the Company's former method of accounting for these benefits
was $59.5 million, or $1.08 per share net of tax.
Discount Rate Assumptions
As a result of a decline in long term interest rates in the United States, at
December 31, 1993, the Company reduced the discount rate used to calculate the
actuarial present value of its accumulated benefit obligation for OPEB by 100
basis points to 7.75% and for pensions by 125 basis points to 7.50%, from the
rate used at December 31, 1992. The effect of these changes did not impact 1993
expense. However, this decline in the discount rate used to calculate the pen-
sion obligation increased the minimum pension liability recorded on the
Company's balance sheet to $134.7 million and increased the related intangible
asset to $128.8 million, with the remaining $5.9 million charged to stockhold-
ers' equity. While the same reduction in the discount rate as of December 31,
1993 also applies to the actuarial present value of the Company's OPEB obliga-
tion, such reductions do not result in any increase in the recorded liability
or potential charge to equity because of different required accounting princi-
ples.
Comparability of Earnings Per Share
Any EPS comparison between the Company and its competitors should be adjusted
for the impact of the Company's amortization of its SFAS 106 transition obliga-
tion over twenty years. The Company's after tax EPS was negatively impacted by
$0.51 for the year ended December 31, 1993.
20
<PAGE>
USWA Agreement
On August 27, 1993, the 1993 Settlement Agreement between the Company and the
USWA was ratified by union members of the Company's three steel divisions and
corporate headquarters. The 1993 Settlement Agreement, effective August 1, 1993
through July 31, 1999, protects the Company and the USWA from a strike or lock-
out for the duration of the agreement. Either the Company or the USWA may re-
open negotiations, except with respect to pensions and certain other matters,
after three years, with any unresolved issues subject to binding arbitration.
The Company estimates the additional annual cost resulting from the 1993 Set-
tlement Agreement to be approximately $25 million per year through 1996. How-
ever, there is the potential that these higher costs may be reduced by
productivity gains which are difficult to quantify. The Company is unable to
estimate the impact of the 1993 Settlement Agreement beyond 1996 since it then
may be reopened as discussed above.
RESULTS OF OPERATIONS--COMPARISON OF THE YEARS ENDED DECEMBER 31, 1992 AND 1991
Net Sales
Net sales for 1992 increased by 1.9% to $2,373.3 million, due primarily to a
shift in product mix from lower priced export, secondary and slab sales to
higher priced coated products, coupled with an increase in steel shipments. A
general decline in selling prices was partially offset by an improvement in
product mix. Steel shipments in 1992 were 4,974,000 tons, up 1.4% from
4,906,000 tons in 1991. The increase in shipments reflected modest improvements
in the domestic steel market in 1992. Raw steel production increased to
5,380,000 tons, a 2.5% increase from the 5,247,000 tons produced in 1991.
Cost of Products Sold
The Company's cost of products sold as a percentage of net sales decreased from
90.2% in 1991 to 88.8% in 1992. This decrease was primarily the result of a
Company-wide emphasis on cost-reduction programs which began in the second
quarter of 1991 and continued throughout 1992 and was achieved despite an aver-
age $.50 per hour wage increase which became effective January 1, 1992 under
the Company's prior labor agreement with the USWA and the continuing escalation
in health care costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by 4.7% from $139.3 mil-
lion in 1991 to $132.8 million in 1992 primarily as a result of the Company's
cost reduction programs.
Unusual Items
In 1992, the Company recorded unusual charges aggregating $37.0 million relat-
ing principally to a pension window and the Company's decision to exit the coal
mining business. A charge of $13.3 million was recognized relating to a 1992
pension window as part of the consolidation of certain staff functions and the
relocation of the Company's corporate offices to Mishawaka, Indiana from Pitts-
burgh, Pennsylvania. The decision to relocate was made in order to be closer to
the Company's customer base, to consolidate certain staff functions and to be
closer to the Company's steel plants. As a result of management's decision to
exit the coal mining business, an unusual charge of $24.9 million was recog-
nized in the fourth quarter to reduce certain coal properties to net realizable
value and record postretirement, environmental and other liabilities.
During 1991, the Company recorded unusual charges which totalled $110.7 mil-
lion. A charge of $41.5 million was recognized for the estimated costs to be
incurred in conjunction with the consolidation of certain staff functions and
relocation in 1992 of the Company headquarters as described above. A charge of
$25.5 million was recognized relating to the Company's decision to permanently
idle its Mathies coal mine after efforts to obtain third party financing to re-
open the mine after a fire were unsuccessful. Concurrently, the Company under-
took an evaluation of its other coal properties and operations. While no
decision was made during 1991 as to the disposition of these properties, the
net book value of certain of the assets exceeded their net realizable value.
Therefore, a charge of $43.7 million was recognized to reduce certain coal
properties to net realizable value and to recognize postemployment, environmen-
tal and other liabilities.
Financing Costs
Interest and other financial income decreased to $2.0 million, a decrease of
$4.1 million. This decrease was attributable to lower interest rates coupled
with lower average balances of cash and cash equivalents. Interest and other
financial expense was $64.0 million in 1992 compared to $64.8 million in 1991.
21
<PAGE>
Extraordinary Item
During 1992, the Company recorded a charge of $50 million, representing man-
agement's best estimate of the Company's liability for United Mine Workers of
America ("UMWA") beneficiaries under the Rockefeller Amendment. Based upon
preliminary assignments from the Secretary of Health and Human Services in
1993, the Company believes this reserve is adequate. Since the Company noti-
fied the UMWA that it did not intend to renew its labor contract which expired
February 1, 1993, thereby ending the Company's active involvement in the coal
industry, the $50 million charge was recorded as an extraordinary item in ac-
cordance with accounting guidance provided by the Emerging Issues Task Force.
No deferred tax benefits were recognized relating to the $50 million charge
generated by the Rockefeller Amendment. Based upon preliminary assignments
from the Secretary of Health and Human Services received during 1993, the Com-
pany believes this reserve is adequate.
Cumulative Effect of Accounting Change
During the fourth quarter of 1992, the Company adopted SFAS 109. The Company
formerly accounted for income taxes under the provisions of Accounting Princi-
ples Board Opinion No. 11, "Accounting for Income Taxes." As permitted under
SFAS 109, the Company elected not to restate the financial statements of prior
years. The effect of adopting SFAS 109 as of January 1, 1992 was recorded as a
cumulative effect of a change in accounting method and reduced the Company's
net loss by $76.3 million, or $2.99 per share. The previously reported net
loss for the first quarter of 1992 has been restated and reduced by $76.3 mil-
lion. The change did not have an impact on the remaining quarters of 1992.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity needs arise primarily from capital investments, prin-
cipal and interest payments on its indebtedness and working capital require-
ments. The Company has satisfied these liquidity needs over the last three
years primarily with funds provided by long-term borrowings, cash provided by
operations and proceeds of the Company's initial public offering (the "IPO")
of Class B Common Stock in 1993. The Company's available sources of liquidity
include a new $180 million receivables purchase agreement (the "Receivables
Purchase Agreement") and $15 million in an uncommitted, unsecured line of
credit (the "Uncommitted Line of Credit"). Prior to entering into the Receiv-
ables Purchase Agreement, the Company had satisfied its liquidity needs with a
$100 million revolving secured credit arrangement (the "Revolver") and a $150
million subordinated loan agreement (the "Subordinated Loan Agreement"), both
of which have been terminated at the Company's request. The Company is cur-
rently in compliance with all material covenants of, and obligations under,
the Receivables Purchase Agreement, Uncommitted Line of Credit and other debt
instruments. The Company has satisfied its liquidity needs with minimal use of
its credit facilities.
Cash and cash equivalents totaled $82.1 million and $5.3 million as of June
30, 1994 and December 31, 1993, respectively. This increase is primarily the
result of the receipt on February 11, 1994 of approximately $111 million, in-
cluding interest, in satisfaction of the judgment in favor of the Company
against the B&LE, net of certain uses of the B&LE proceeds. The Company used a
portion of the proceeds to repurchase $25.2 million aggregate principal amount
of the Company's 8.375% First Mortgage Bonds on March 31, 1994 and will con-
tribute approximately $11 million to the VEBA Trust. The remaining B&LE pro-
ceeds will be used for further debt reduction, working capital and general
corporate purposes.
Cash Flows from Operating Activities
For the six months ended June 30, 1994, cash provided from operating activi-
ties increased by $169.4 million compared to the same 1993 period. This in-
crease was primarily attributable to the receipt of approximately $111 million
of proceeds from the B&LE judgment along with an improvement in operating re-
sults.
For the year ended December 31, 1993, cash provided from operating activities
decreased by $73.2 million compared to 1992, due to the effect of working cap-
ital items, along with a reduction in net income after adjusting for the ef-
fect of noncash items on operations. Changes in working capital items reduced
cash flows by $27.2 million during 1993, as a substantial decrease in accounts
payable was combined with the smaller negative effects of accounts receivable
and accrued liabilities changes. In 1992, working capital items had a $36.0
million favorable impact on cash flows from operations, due primarily to the
timing of cash disbursement clearings.
Cash Flows from Investing Activities
Capital investments for the first half of 1994 and 1993 amounted to $90.8 mil-
lion and $39.8 million, respectively. This increase is largely attributable to
the completion of a pickle line servicing the Great Lakes Division, which was
financed under a turnkey contract and did not become the property of the Com-
pany until completion and acceptance of the facility, which occurred during
the first quarter of 1994. The Company plans to invest approximately $84 mil-
lion during the second half of 1994 for capital expenditures.
22
<PAGE>
Capital investments for the years ended December 31, 1993 and 1992 amounted to
$160.7 million and $283.9 million, respectively, which included $31.9 million
and $198.4 million related to the complete rebuild of the No. 5 coke oven bat-
tery at the Great Lakes Division. Additionally, in 1993, the Company spent
$58.9 million on the relining of a blast furnace servicing the same division.
Budgeted capital investments approximating $346.1 million, of which $92.5 mil-
lion is committed at December 31, 1993, are expected to be made during 1994 and
1995, primarily for the completion in 1994 of a pickle line servicing the Great
Lakes Division and the relining in 1995 of a blast furnace servicing the Gran-
ite City Division.
Cash Flows from Financing Activities
Financing activities included borrowings for the first half of 1994 and 1993 of
$88.0 million and $40.5 million, respectively, representing primarily the com-
mencement of the permanent financing for the pickle line servicing the Great
Lakes Division and the remaining financing commitment for the rebuild of the
No. 5 coke oven battery at the Great Lakes Division, respectively. This in-
crease in borrowings was largely offset by the repurchase of $25.2 million ag-
gregate principal amount of the Company's 8.375% First Mortgage Bonds and $14.0
million aggregate principal amount of Series 1985 River Rouge Pollution Control
Bonds during the first half of 1994.
In April 1993, the Company completed its IPO of 10,861,100 shares of its Class
B Common Stock, at an offering price of $14 per share, which generated net pro-
ceeds to the Company of approximately $141.4 million. On May 4, 1993, the Com-
pany utilized $67.8 million of the IPO proceeds to fund the early redemption of
10,000 shares of the Series B Preferred Stock held by NII. An additional $20
million of the IPO proceeds were used to reduce the amount of construction fi-
nancing outstanding and the permanent financing commitment for a pickle line
servicing the Great Lakes Division, and the remaining proceeds were used for
general working capital purposes.
Total borrowings for the years ended December 31, 1993 and 1992 amounted to
$40.6 million and $209.7 million, respectively, primarily representing the re-
maining financing from a subsidiary of NKK related to the rebuild of the No. 5
coke oven battery at the Great Lakes Division. Correspondingly, cash basis in-
terest expense increased by $19.7 million from 1992 to 1993 as a result of the
completion of, and commencement of permanent financing for, the No. 5 coke oven
battery.
Sources of Financing
Effective May 16, 1994, the Company entered into a Purchase and Sale Agreement
with National Steel Funding Corporation ("NSFC"), a newly created wholly owned
subsidiary. Effective on that same date, NSFC entered into the Receivables Pur-
chase Agreement with a group of twelve banks. The total commitment of the banks
is $180 million, including up to $150 million in letters of credit. To imple-
ment the arrangement, the Company sold substantially all of its accounts re-
ceivable, and will sell additional receivables as they are generated, to NSFC.
NSFC will finance its ongoing purchase of receivables from a combination of
cash received from receivables already in the pool, short-term intercompany
notes and the cash proceeds derived from selling interests in the receivables
to the participating banks from time to time.
The Certificates of Participation sold to the banks by NSFC have been rated AAA
by Standard & Poor's Corporation, resulting in lower borrowing costs to the
Company. As of June 30, 1994 no funded participation interests had been sold
under the facility, although $89.4 million in letters of credit had been is-
sued. With respect to the pool of receivables at June 30, 1994, after reduction
for letters of credit outstanding, the amount of participating interests eligi-
ble for sale was $83.9 million. During the period May 16, 1994 through June 30,
1994, the eligible amount ranged from $79.6 million to $90.6 million. The
banks' commitments are currently scheduled to expire on May 16, 1997. The Com-
pany will continue to act as servicer of the assets sold into the program and
will continue to make billings and collections in the ordinary course of busi-
ness according to established practices.
The Company terminated the Revolver, which included a letter of credit facility
on May 16, 1994. On that same date, the Company also terminated the Subordi-
nated Loan Agreement.
No borrowings were outstanding under the Revolver from 1987 until its termina-
tion. At December 31, 1993 and 1992, letters of credit outstanding under the
Revolver totaled $113.7 million and $113.6 million, respectively. On February
7, 1994, the Company borrowed $20 million under the Subordinated Loan Agree-
ment, all of which was repaid on February 17, 1994. Prior to this, the last
borrowing under the Subordinated Loan Agreement occurred in 1991, when the Com-
pany borrowed $50 million, all of which was repaid later in that year.
23
<PAGE>
The Uncommitted Line of Credit permits the Company to borrow up to $15 million
on an unsecured, short-term basis for periods of up to thirty days. This ar-
rangement has no fixed expiration date but may be withdrawn at any time without
notice. During 1993, the Company borrowed a maximum of $7.7 million under its
Uncommitted Line of Credit, which was repaid the following day. No borrowings
were outstanding at December 31, 1993 and 1992. However, in February 1994, the
Company borrowed a maximum of $5.0 million under the Uncommitted Line of Credit
which was repaid later in the month.
During 1993, the Company utilized $20 million of the proceeds from the IPO to
reduce the amount of construction financing outstanding and the permanent fi-
nancing commitment for a pickle line servicing the Great Lakes Division to $90
million. As of December 31, 1993, the construction financing was being provided
by the contractor and was not a liability of the Company. In January 1994, upon
completion and acceptance of the pickle line pursuant to the construction con-
tract, the permanent financing commenced with repayment scheduled to occur over
a fourteen-year period. The pickle line is not subject to the lien securing the
Company's First Mortgage Bonds, but is subject to a first mortgage in favor of
the lender.
Weirton Liabilities and Preferred Stock
In connection with the Company's June 1990 recapitalization, the Company re-
ceived $146.6 million from NII in cash and recorded a net present value equiva-
lent liability with respect to certain released Weirton Benefit Liabilities,
primarily healthcare and life insurance. As a result of this transaction, the
Company's future cash flow will decrease as the released Weirton Benefit Lia-
bilities are paid. During 1993, such cash payments were $20.0 million compared
to $15.3 million during 1992.
On October 28, 1993, NII converted all of its 3,400,000 shares of Class A Com-
mon Stock to an equal number of shares of Class B Common Stock. During January
1994, NII sold substantially all of such shares of Class B Common Stock. As
previously agreed, the Company received $10 million of proceeds from the sale
of such shares from NII as an unrestricted prepayment for environmental obliga-
tions which may arise after such prepayment and for which NII has previously
agreed to indemnify the Company. The Company is required to repay to NII por-
tions of the $10 million to the extent the Company's expenditures for such en-
vironmental liabilities do not reach specified levels by certain dates over a
twenty year period. Since NII retains responsibility to indemnify the Company
for remaining environmental liabilities arising after such prepayment and in
excess of $10 million (as reduced by any above described repayments to NII),
these environmental liabilities are not expected to have a material adverse ef-
fect on the Company's liquidity. However, the failure of NII to satisfy any
such indemnity obligations could have a material adverse effect on the
Company's liquidity.
In connection with the June 1990 recapitalization, the Series B Preferred Stock
was issued to NII. On May 4, 1993, the Company redeemed 10,000 shares of Series
B Preferred Stock held by NII. These shares were subject to mandatory redemp-
tion on August 5, 1995. Pursuant to the terms of the Series B Preferred Stock
and certain other agreements between the Company and NII, the Company paid the
redemption amount directly to a pension trustee and released NII from a corre-
sponding amount of NII's indemnification obligations with respect to certain
employee benefit liabilities of the Company retained in connection with the
sale of its Weirton Steel Division.
At December 31, 1993, there were 10,000 remaining shares of Series B Preferred
Stock issued and outstanding, all of which were held by NII. The Series B Pre-
ferred Stock carries annual cumulative dividend rights of $806.30 per share,
which equates to approximately an 11% yield. At December 31, 1993 and 1992,
$68.0 million and $137.8 million, respectively, of the Series B Preferred Stock
was outstanding.
Dividends on the Series B Preferred Stock are cumulative and payable quarterly
in the form of a release of NII from its obligation to indemnify the Company
for a corresponding amount of the remaining unreleased portion of the Weirton
Benefit Liabilities to the extent such liabilities are due and owing, with the
balance, if any, payable in cash. The Series B Preferred Stock dividend permit-
ted release and payment of $10.6 million and $15.4 million of previously unre-
leased Weirton Benefit Liabilities during 1993 and 1992, respectively, and cash
dividends of $1.4 million and $.8 million during 1993 and 1992, respectively,
to reimburse NII for an obligation previously incurred in connection with the
Weirton Benefit Liabilities.
The remaining Series B Preferred Stock is presently subject to mandatory re-
demption by the Company on August 5, 2000 at a redemption price of $58.3 mil-
lion and may be redeemed beginning January 1, 1998 without the consent of NII
at a redemption price of $62.2 million. Based upon the Company's actuarial
analysis, the unreleased Weirton Benefit Liabilities approximate the aggregate
remaining dividend and redemption payments with respect to the Series B Pre-
ferred Stock and accordingly, such payments are expected to be made in the form
of releases of NII from its obligations to indemnify the Company for corre-
sponding amounts of the remaining unreleased Weirton Benefit Liabilities. See
"Description of Capital
24
<PAGE>
Stock--Preferred Stock." Dividend and redemption payments with respect to the
Series B Preferred Stock reduce the Company's cash flow, even though they are
paid in the form of a release of NII from such obligations, because the Company
is obligated, subject to certain limited exceptions, to pay such amounts to the
trustee of the pension plan included in the Weirton Benefit Liabilities.
If any dividend or redemption payment otherwise required pursuant to the terms
of the Series B Preferred Stock is less than the amount required to satisfy
NII's then current indemnification obligation, NII would be required to pay
such shortfall in cash to the Company. The Company's ability to fully realize
the benefits of NII's indemnification obligations is necessarily dependent upon
NII's financial condition at the time of any claim with respect to such obliga-
tions. See "Certain Relationships and Related Transactions."
The June 1990 recapitalization agreement also created the Series A Preferred
Stock which carries annual cumulative dividend rights of $806.30 per share,
which equates to an 11% yield. The Series A Preferred Stock is held by NKK and
$36.7 million was outstanding at December 31, 1993 and 1992. Dividends on the
Series A Preferred Stock are paid quarterly in cash and totalled $4 million in
each of the years ended December 31, 1993, 1992 and 1991.
Miscellaneous
At June 30, 1994, obligations guaranteed by the Company approximated $42.9 mil-
lion, compared to $41.0 million at December 31, 1993. This increase in 1994 is
primarily due to additional borrowings of the Double G Coatings, L.P. joint
venture, 50% of which are separately guaranteed by the Company. See "Business--
Double G Coatings, L.P."
Total debt and redeemable preferred stock as a percentage of total capitaliza-
tion improved to 75.3% at June 30, 1994 as compared to 80.2% at December 31,
1993, primarily as a result of net income of $78.9 million for the six month
period ending June 30, 1994.
ENVIRONMENTAL
The Company's operations are subject to numerous laws and regulations relating
to the protection of human health and the environment. The Company will incur
significant capital expenditures in connection with matters relating to envi-
ronmental control and will also be required to expend additional amounts in
connection with ongoing compliance with such laws and regulations, including,
without limitation, the Clean Air Act amendments of 1990. Proposed regulations
establishing standards for corrective action under the Resource Conservation
and Recovery Act of 1976, as amended ("RCRA"), and the Guidance Document pub-
lished pursuant to the Great Lakes Initiative may also require further signifi-
cant expenditures by the Company in the future. Additionally, the Company is
currently one of many potentially responsible parties at a number of sites re-
quiring remediation. The Company has estimated that it will incur capital ex-
penditures for matters relating to environmental control of approximately $7.9
million and $13.6 million for 1994 and 1995, respectively. In addition, the
Company expects to record expenses for environmental compliance, including de-
preciation, in the amount of approximately $70 million and $73 million for 1994
and 1995, respectively. Since environmental laws are becoming increasingly
stringent, the Company's environmental capital expenditures and costs for envi-
ronmental compliance may increase in the future. See "Business--Environmental
Matters."
25
<PAGE>
BUSINESS
INTRODUCTION
The Company is the fourth largest integrated steel producer in the United
States as measured by production and is engaged in the manufacture and sale of
a wide variety of flat rolled carbon steel products, including hot rolled, cold
rolled, galvanized, tin and chrome plated steels. The Company targets high
value added applications of flat rolled carbon steel for sale to the automo-
tive, metal buildings and container markets. Since 1984, the Company has in-
vested $2 billion in capital improvements to enhance the Company's competitive
position and penetrate growing segments of these markets.
STRATEGY
The Company's mission is to achieve sustained profitability, thereby enhancing
stockholder value, by reducing the costs of production and improving productiv-
ity and product quality. Management has developed a number of strategic
initiatives designed to achieve the Company's goals. These initiatives focus
on:
. Reducing the cost of hot rolled bands, the largest component of the
Company's finished product cost;
. Reducing the cost of poor quality, which currently results in the sale of
non-prime products at lower prices and requires substantial reprocessing
costs;
. Installing a predictive maintenance program which is designed to maximize
production and the useful life of equipment while minimizing unscheduled
equipment outages;
. Increasing steel production capabilities by identifying and eliminating
manufacturing bottlenecks;
. Enhancing the Company's cooperative partnership with the USWA by increas-
ing employee participation at all levels of the production process; and
. Improving information and cost control systems to enable management to
exercise greater control over production costs.
In addition, the Company plans to more fully utilize its alliance with its
principal stockholder, NKK, and its partnership with customers and to better
utilize equipment and facilities, many of which have been enhanced by the
Company's $2 billion capital investment program.
Strategic Initiatives
Reduction in Production Costs. Management's primary focus is to reduce the
costs of producing hot rolled bands, the largest component of the Company's
finished product cost. Reducing all costs associated with the production proc-
ess is essential to the Company's overall cost reduction program. As a first
step in this process, management has achieved a $4 per gross ton savings in de-
livered iron ore pellet costs at NSPC compared to pre-strike costs. Based upon
NSPC's estimated production of 5 million tons of pellets per year, this will
result in savings of $20 million annually compared to the Company's pre-strike
costs. Management intends to reduce production costs by better utilizing exist-
ing equipment, improving productivity, involving labor in improving operating
practices and by the cost efficient use of steelmaking inputs. In addition, the
Company's facility engineers, who have access to a wide range of NKK process
technologies, analyze and implement innovative steelmaking and processing meth-
ods on an ongoing basis.
Quality Improvement. An important element of the Company's strategy is to
reduce the cost of poor quality, which currently results in the sale of non-
prime products at lower prices and requires substantial reprocessing costs. In
particular, management believes a significant opportunity exists to increase
the yield of liquid steel to finished prime product above the Company's 1993
yield level of 79.6% percent. The Company will seek to achieve this increase by
improving process control, utilizing employee based problem solving methods,
eliminating dependence on final inspection and reducing internal rejections and
extra processing. In addition, in June 1994, the Company created a new senior
management position with responsibility solely for quality assurance and
customer satisfaction.
New Maintenance Program. Management is installing a predictive maintenance pro-
gram designed to maximize production and equipment life while minimizing
unscheduled equipment outages. This program should improve operations stability
through improved equipment reliability, which is expected to result in improved
productivity and reduced costs. Although the Company believes this system will
result in certain immediate improvements, the full benefits of this system will
not be realized until the system is fully implemented in approximately two to
three years.
26
<PAGE>
Elimination of Manufacturing Bottlenecks. Manufacturing bottlenecks result in,
among other things, reduced production, delays in customer shipments and in-
creased costs due to operating inefficiencies. Management has initially identi-
fied three major manufacturing bottlenecks: the Granite City Division caster,
the Great Lakes Division melt shop and the Midwest Division pickle line. The
Company is presently negotiating with state environmental authorities in order
to permit higher production levels at the caster at the Granite City Division.
The Company has received a temporary waiver of existing production limits at
the Granite City facility to allow the Company to compensate for production
lost as a result of a planned blast furnace outage in 1995. The Company also
intends to increase the number of heats per day at its Great Lakes facility
through improved maintenance and equipment reliability, material handling and
logistics and refinement of operating practices. This initiative should result
in increased steelmaking production. Finally, the Company intends to increase
the steel throughput of the pickle line at the Midwest Division through im-
proved welder performance, implementation of a large coil program and more ef-
fective crew training.
Cooperative Employee Partnership. Since 1986, the Company has had cooperative
labor agreements with the USWA, which represents approximately 77% of the
Company's employees. The Company entered into a new six year cooperative labor
agreement with the USWA effective as of August 1, 1993. The cooperative labor
agreement with the USWA entered into with respect to the reopening of NSPC runs
concurrently with the 1993 Settlement Agreement. The employment security provi-
sions contained in the Company's labor agreements were the first in the domes-
tic steel industry and have provided the Company with increased flexibility to
improve productivity and consolidate job functions. These labor agreements, in
combination with retirements and attrition, have also allowed the Company to
reduce the number of employees and achieve productivity gains while increasing
the percentage of employee compensation which is productivity based.
Management believes that greater emphasis on labor cooperation as well as em-
ployee involvement in identifying and solving problems in all areas of produc-
tion and delivery present significant opportunities to lower production costs
and improve quality. One immediate result of this emphasis was the reopening of
NSPC in August 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Improve Information and Cost Control Systems. Management intends to enhance its
current information systems in order to exercise greater control over produc-
tion costs, as well as to provide access to profitability analysis by customer
and product line. To attain greater control over production costs, the Company
plans to install an actual cost system to replace the current standard cost
system.
27
<PAGE>
Alliance with NKK
The Company has a strong alliance with its principal stockholder, NKK, the sec-
ond largest steel company in Japan and the fifth largest in the world as mea-
sured by production. Since 1984, the Company has had access to a wide range of
NKK's steelmaking, processing and applications technology. The Company's engi-
neers include approximately 40 engineers transferred from NKK, who now serve
primarily at the Company's Divisions. These engineers, as well as engineers and
technical support personnel at NKK's facilities in Japan, assist in improving
operating practices and developing new manufacturing processes. This support
also includes providing input on ways to improve raw steel to finished product
yields.
In addition, NKK has provided financial assistance to the Company in the form
of investments, loans and introductions to Japanese financial institutions and
trading companies. While no assurances can be given with respect to the extent
of NKK's future financial support beyond existing contractual commitments, NKK
has indicated that it presently plans to continue to provide technical support
and research and development services of the nature and to the extent currently
provided to the Company.
Customer Partnership
The Company's customer partnership enables the Company to differentiate its
products through superior quality and service. Management believes it is able
to differentiate the Company's products and promote customer loyalty by estab-
lishing close relationships through early customer involvement, providing tech-
nical services and support and utilizing its Product Application Center and
Technical Research Center facilities.
The Company operates a research and development facility near its Great Lakes
Division to develop new products, improve existing products and develop more
efficient operating procedures to meet the constantly increasing demands of the
automotive, container and metal buildings markets. The research center employs
approximately 55 chemists, physicists, metallurgists and engineers. The re-
search center is responsible for, among other things, the development of five
new high strength steels for automotive weight reduction and a new galvanized
steel for the metal buildings market. In addition, the Company operates a Prod-
uct Application Center near Detroit dedicated to providing product and techni-
cal support to customers. The Product Application Center assists customers with
application engineering (selecting optimum metal and manufacturing methods),
application technology (evaluating product performance) and technical develop-
ments (performing problem solving at plants). The Company spent $9.4 million,
$9.5 million and $8.8 million for research and development in 1993, 1992 and
1991, respectively. In addition, the Company participates in various research
efforts through the AISI.
Marketing Strategy
The Company's marketing strategy has concentrated on increasing the level of
sales of higher value added products to the automotive, metal buildings and
container markets. These segments demand high quality products, on-time deliv-
ery and effective and efficient customer service. This strategy is designed to
increase margins, reduce competitive threats and maintain high capacity utili-
zation rates by shifting the Company's product mix to higher quality products
and providing superior customer service.
To enable the Company to more efficiently meet the needs of its target markets
and focus on higher value added products, the Company has entered into two sep-
arate joint ventures to build hot dip galvanizing facilities. One joint venture
is with NKK and an unrelated third party and has been built to service the au-
tomotive industry. The second joint venture has been built to service the con-
struction industry. See "Operations--DNN Galvanizing Limited Partnership" and
"--Double G Coatings, L.P."
Capital Investment Program
Since 1984, the Company has invested $2 billion in capital improvements aimed
at upgrading the Company's steelmaking and finishing operations to meet its
customers' demanding requirements for higher quality products and to reduce
production costs. As described above, one of the Company's strategic
initiatives is to more effectively utilize these substantial capital improve-
ments. Major projects include an electrolytic galvanizing line, a continuous
caster, a ladle metallurgy station, a vacuum degasser, a complete coke oven
battery rebuild and a high speed pickle line, each of which services the Great
Lakes Division (located near Detroit, Michigan), and a continuous caster and a
ladle metallurgy station, each of which services the Granite City Division (lo-
cated near St. Louis, Missouri). Major improvements at the Midwest Division
(located near Chicago, Illinois) include the installation of process control
equipment to upgrade its finishing capabilities. Management believes that the
completion of this $2 billion capital investment program will substantially re-
duce the amount of capital investments in the future. Capital investments for
each of 1993, 1992 and 1991 were $160.7 million, $283.9 million and $178.2 mil-
lion, respectively. Capital investments for 1994 are expected to total approxi-
mately $175 million. In early 1991, the Company became the first major
integrated U.S. steel producer to continuously cast 100% of its raw steel pro-
duction.
28
<PAGE>
CUSTOMERS
The Company is a major supplier of hot and cold rolled steel and galvanized
coils to the automotive industry, one of the most demanding steel consumers.
Car and truck manufacturers require wide sheets of steel, rolled to exact di-
mensions. In addition, formability and defect-free surfaces are critical. The
Company has been able to successfully meet these demands. Its steels have been
used in a variety of automotive applications including exposed and unexposed
panels, wheels and bumpers.
The Company is a leading supplier of steel to the domestic metal buildings mar-
ket. Roof and building panels are the principal applications for galvanized and
Galvalume(R) steel in this market. Management believes that demand for
Galvalume(R) steel will exhibit strong growth for the next several years par-
tially as a result of a trend away from traditional building products and that
the Company is well positioned to profit from this growth as a result of both
its position in this market and the additional capacity referred to above.
The Company produces chrome and tin plated steels to exact tolerances of gauge,
shape, surface flatness and cleanliness for the container industry. Tin and
chrome plated steels are used to produce a wide variety of food and non-food
containers. In recent years, the market for tin and chrome plated steels has
been both stable and profitable for the Company.
The Company also supplies the pipe and tube and service center markets with hot
rolled, cold rolled and coated sheet. The Company is a key supplier to trans-
mission pipeline, downhole casing and structural pipe producers. Service cen-
ters generally purchase steel coils from the Company and may process them
further or sell them directly to third parties without further processing.
The following table sets forth the percentage of the Company's revenues from
various markets for the past three years.
<TABLE>
<CAPTION>
---------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Automotive 28.9% 27.2% 25.8%
Metal buildings 14.3 12.8 11.2
Container 13.3 14.9 15.6
Pipe and Tube 8.2 9.4 8.0
Service Centers 15.5 13.6 10.7
All Other 19.8 22.1 28.7
--------- --------- ---------
100.0% 100.0% 100.0%
========= ========= =========
</TABLE>
Shipments to General Motors, the Company's largest customer, accounted for ap-
proximately 11%, 12% and 12% of net sales in each of 1993, 1992 and 1991, re-
spectively. Export sales accounted for approximately .1% of revenue in 1993,
.5% in 1992 and 4.5% in 1991. The Company's products are sold through the
Company's six sales offices located in Chicago, Detroit, Houston, Kansas City,
Pittsburgh and St. Louis. Substantially all of the Company's net revenues are
based on orders for short-term delivery. Accordingly, backlog is not meaningful
when assessing future results of operations.
Although the Company experienced delivery and customer service problems in
1993, the Company has continued to receive numerous quality awards. In 1993,
the Company received the prestigious General Motors Mark of Excellence award.
Additionally, the Company received a supplier award from Diamond Star Motors in
recognition of quality, delivery and performance. The Company also achieved its
quality objectives at Toyota and was recognized by Toyota as the only supplier
to attain its target levels four times in the last five years.
OPERATIONS
The Company operates three principal facilities: two integrated steel plants,
the Great Lakes Division in Ecorse and River Rouge, Michigan, near Detroit and
the Granite City Division in Granite City, Illinois, near St. Louis and a fin-
ishing facility, the Midwest Division in Portage, Indiana, near Chicago. The
Company's centralized corporate structure, the close proximity of the Company's
principal steel facilities and the complementary balance of processing equip-
ment shared by them, enable the Company to closely coordinate the operations of
these facilities in order to maintain high operating rates throughout its
processing facilities and to maximize the return on its capital investments.
29
<PAGE>
The following table details effective steelmaking capacity, actual production,
effective capacity utilization and percentage of steel continuously cast for
the Company and the domestic steel industry for the years indicated.
RAW STEEL PRODUCTION DATA
<TABLE>
<CAPTION>
----------------------------------------------
EFFECTIVE PERCENT
EFFECTIVE ACTUAL CAPACITY CONTINUOUSLY
(000's of CAPACITY PRODUCTION UTILIZATION CAST
net tons) --------- ---------- ----------- ------------
(%) (%)
THE
COMPANY
- -------
<S> <C> <C> <C> <C>
1993 5,550 5,551 100.0 100.0
1992 5,355 5,380 100.5 100.0
1991 5,670 5,247 92.5 99.8
<CAPTION>
DOMESTIC
STEEL
INDUSTRY*
- ---------
<S> <C> <C> <C> <C>
1993 109,900 97,877 89.1 85.7
1992 113,100 92,949 82.2 79.3
1991 117,700 87,896 74.7 75.8
</TABLE>
- -------
*Information as reported by the AISI.
The Company's effective capacity varies annually due to planned blast furnace
outages for maintenance purposes. The effective capacity of the Company
decreased to 5,355 net tons in 1992 as a result of a scheduled blast furnace
reline. Effective capacity utilization fell to 92.5% in 1991 due, in part, to
an unusually high level of inventory carried forward from 1990, along with
scheduled maintenance outages at major finishing units and a low demand for
steel products during the first half of the year.
The Granite City Division
The Granite City Division, located in Granite City, Illinois, has an effective
steelmaking capacity of 2.4 million tons. With the start-up of a second con-
tinuous caster in early 1991, all steel at this Division is now produced by
continuous casting. The Granite City Division also uses ladle metallurgy to
refine the steel chemistry to enable it to meet the exacting specifications of
its customers. The Division's ironmaking facilities consist of two coke bat-
teries and two blast furnaces. Finishing facilities include an 80 inch hot
strip mill, a continuous pickler and two hot dip galvanizing lines. The Gran-
ite City Division ships approximately 20% of its total production to the Mid-
west Division for finishing. Principal products of the Granite City Division
include hot rolled, cold rolled, hot dipped galvanized, grain bin and high
strength, low alloy steels.
The Granite City Division is located on 1,540 acres and employs approximately
2,950 people. The Division's proximity to the Mississippi River and other in-
terstate transit systems, both rail and highway, provides easy accessibility
for receiving raw materials and supplying finished steel products to custom-
ers.
The Great Lakes Division
The Great Lakes Division, located in Ecorse and River Rouge, Michigan, is an
integrated facility engaged in steelmaking primarily for use in the automotive
market with an effective steelmaking capacity of 3.6 million tons. With the
start-up of a second continuous caster in late 1987, all steel at this Divi-
sion is now produced by continuous casting. The Division's ironmaking facili-
ties consist of a recent 85-oven coke battery rebuild and three blast
furnaces. The Division also operates steelmaking facilities consisting of a
vacuum degasser and a ladle metallurgy station. Finishing facilities include a
hot strip mill, a skinpass mill, a shear line, a new high speed pickle line, a
tandem mill, a batch annealing station, two temper mills and two customer
service lines, and an electrolytic galvanizing line. The Great Lakes Division
ships approximately 40% of its production to the Midwest Division for finish-
ing. Principal products of the Great Lakes Division include hot rolled, cold
rolled, electrolytic galvanized, and high strength, low alloy steels.
The Great Lakes Division is located on 1,100 acres and employs approximately
3,750 people. The Division is strategically located with easy access to lake,
rail and highway transit systems for receiving raw materials and supplying
finished steel products to customers.
The Midwest Division
The Midwest Division, located in Portage, Indiana, finishes hot rolled bands
produced at the Granite City and Great Lakes Divisions primarily for use in
the automotive, metal buildings and container markets. The Division's facili-
ties include a continuous pickling line, two cold reduction mills and two con-
tinuous galvanizing lines, a 48 inch wide line which can produce galvanized or
Galvalume(R) steel products and which services the metal buildings markets,
and a 72 inch wide line
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which services the automotive market; finishing facilities for cold rolled
products consisting of a batch annealing station, a sheet temper mill and a
continuous stretch leveling line; and an electrolytic cleaning line, a continu-
ous annealing line, two tin temper mills, two tin recoil lines, an electrolytic
tinning line and a chrome line which services the container markets. Principal
products of the Midwest Division include tin mill products, hot dipped galva-
nized and Galvalume(R) steel, cold rolled, and electrical lamination steels.
The Midwest Division is located on 1,100 acres in Portage, Indiana and employs
approximately 1,400 people. Its location provides excellent access to rail, wa-
ter and highway transit systems for receiving raw materials and supplying fin-
ished steel products to customers.
National Steel Pellet Company
NSPC, located on the western end of the Mesabi Iron Ore Range in Keewatin, Min-
nesota, mines, crushes, concentrates and pelletizes low grade taconite ore into
iron ore pellets. NSPC operations include two primary crushers, ten primary
mills, five secondary mills, a concentrator and a pelletizer. The facility has
a current annual effective iron ore pellet capacity of 5 million gross tons and
has a combination of rail and vessel access to the Company's integrated steel
mills.
DNN Galvanizing Limited Partnership
As part of its strategy to focus its marketing efforts on high quality steels
for the automotive industry, the Company has entered into an agreement with NKK
and Dofasco Inc., a large Canadian steel producer ("Dofasco"), to build and op-
erate DNN, a 400,000 ton per year, hot dip galvanizing facility in Windsor, On-
tario, Canada. This facility incorporates state-of-the-art technology to
galvanize steel for critically exposed automotive applications. The facility is
modeled after NKK's Fukuyama Works Galvanizing Line that has provided high
quality galvanized steel to the Japanese automotive industry for several years.
The Company is committed to utilize 50% of the available line time of the fa-
cility and pay a tolling fee designed to cover fixed and variable costs with
respect to 50% of the available line time, whether or not such line time is
utilized. The plant began production in January 1993 and is currently operating
at full capacity. The Company's steel substrate requirements are provided to
DNN by the Great Lakes Division.
Certain types of galvanized steel coated for the Company by DNN and shipped to
the United States are subject to an anti-dumping duty order and to cash depos-
its of estimated anti-dumping duties. Certain Canadian steel producers, includ-
ing Dofasco, are currently appealing the ITC's determination of injury relating
to such order, and the Company is appealing the methodology used to calculate
the estimated duty it deposits. Dofasco has requested an administrative review
of the duty calculation, which could result in a change in the amount of cash
deposits being paid by the Company. The Company does not believe that the costs
associated with the anti-dumping duty order and cash deposits will have a mate-
rial adverse effect on the Company's financial condition. See "Competition--Im-
ports."
Double G Coatings, L.P.
To continue to meet the needs of the growing metal buildings market, the Com-
pany and an unrelated party formed a joint venture to build and operate Double
G Coatings, L.P. ("Double G"), a 270,000 ton per year hot dip galvanizing and
Galvalume(R) steel facility near Jackson, Mississippi. The facility is capable
of coating 48 inch wide steel coils with zinc to produce a product known as
galvanized steel and a zinc and aluminum coating to produce a product known as
Galvalume(R) steel. Double G will primarily serve the metal buildings segment
of the construction market in the south central United States. The Company is
committed to utilize and pay a tolling fee in connection with 50% of the avail-
able line time at the facility. The joint venture commenced production in the
second quarter of 1994 and is expected to reach full operating capacity in
1995. The Company's steel substrate requirements will be provided to Double G
by the Great Lakes and Midwest Divisions.
ProCoil Corporation
ProCoil Corporation ("ProCoil"), a joint venture among the Company, Marubeni
Corporation, Mitsubishi Corporation and NKK, located in Canton, Michigan, oper-
ates a steel processing facility which began operations in 1988 and a warehous-
ing facility which began operations in 1992. Each of the Company and Marubeni
Corporation owns a 44% equity interest in ProCoil. ProCoil blanks, slits and
cuts steel coils to desired lengths to service automotive market customers. In
addition, ProCoil warehouses material to assist the Company in providing just-
in-time delivery to customers.
For a description of the Company's other properties see "--Other Properties"
below.
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RAW MATERIALS
Iron ore. The metallic iron requirements of the Company are supplied primarily
from iron ore pellets that are produced from a concentration of low grade
ores. The Company, directly through NSPC and through an affiliate, has re-
serves of iron ore adequate to produce approximately 500 million gross tons of
iron ore pellets. The Company's iron ore reserves are located in Minnesota,
Michigan and Quebec, Canada. Excluding the effects of the temporary idling of
NSPC from October 1993 through August 1994, a significant portion of the
Company's average annual consumption of iron ore pellets was obtained from the
deposits of the Company or those of its affiliate during the last five years.
The remaining iron ore pellets consumed by the Company were purchased from
third parties. Agreements reached with the USWA and other suppliers to NSPC in
1994 have resulted in a $4 per gross ton reduction in delivered pellet costs,
making the cost of NSPC pellets competitive with market prices. Iron ore pel-
lets available to the Company from its own deposits, its affiliate and outside
suppliers are sufficient to meet the Company's total iron ore requirements for
the foreseeable future.
Coal. In 1992, the Company decided to exit the coal mining business. At that
time, the Company owned underground coal properties in Pennsylvania, Kentucky
and West Virginia as well as undeveloped coal reserves in Pennsylvania and
West Virginia. During 1993, the Pennsylvania and Kentucky properties were sold
except for the coal reserves which were leased on a long term basis. Negotia-
tions are in process for the sale and/or lease of the West Virginia proper-
ties. While the undeveloped coal reserves are for sale, there are no
interested parties at the present time. The remaining coal assets totaling
$43.7 million are included in the assets of the Company and constitute less
than 2% of the Company's total assets. Adequate supplies of coal are readily
available at competitive market prices.
Coke. The Company operates two efficient coke oven batteries servicing the
Granite City Division and the newly rebuilt No. 5 coke oven battery at the
Great Lakes Division. The No. 5 coke battery enhances the quality and stabil-
ity of the Company's coke supply, and incorporates state-of-the-art technology
while meeting the requirements of the Clean Air Act. With the No. 5 coke bat-
tery rebuild, the Company has significantly improved its self-sufficiency and
can supply approximately 60% of its annual coke requirements. The remaining
coke requirements are met through competitive market purchases.
Limestone. The Company, through an affiliated company, has limestone reserves
of approximately 80 million gross tons located in Michigan. During the last
five years, approximately 59% of the Company's average annual consumption of
limestone was derived from these reserves. The Company's remaining limestone
requirements were purchased.
Scrap and Other Materials. Supplies of steel scrap, tin, zinc, and other al-
loying and coating materials are readily available at competitive market pric-
es.
PATENTS AND TRADEMARKS
The Company has the patents and licenses necessary for the operation of its
business as now conducted. The Company does not consider its patents and
trademarks to be material to the business of the Company.
EMPLOYEES
As of June 30, 1994, the Company employed 9,762 people. Approximately 7,550
(77%) of the Company's employees are represented by the USWA. The Company be-
lieves that its relationships with its collective bargaining units are good.
On August 27, 1993, the 1993 Settlement Agreement between the Company and the
USWA was ratified by USWA members at the Company's three steel divisions and
corporate headquarters. The new agreement, effective August 1, 1993 through
July 1, 1999, protects the Company and the USWA from a strike or lockout for
the duration of the agreement. Either the Company or the USWA may reopen nego-
tiations after three years, except with respect to pensions and certain other
matters, with any unresolved issues subject to binding arbitration. Under the
1993 Settlement Agreement, represented employees will receive improved pension
benefits, bonuses to be paid over the term of the agreement, a $.50 per hour
wage increase effective in August 1995, and an additional paid holiday for the
years 1994, 1995 and 1996. The 1993 Settlement Agreement provides for the es-
tablishment of a VEBA Trust to which the Company has agreed to contribute a
minimum of $10 million annually and, under certain circumstances, additional
amounts calculated as set forth in the 1993 Settlement Agreement. The Company
has granted to the VEBA Trust a second mortgage on the No. 5 coke oven battery
at the Great Lakes Division. The 1993 Settlement Agreement also provides for
opportunities to reduce health care costs and for flexible work practices and
opportunities to reduce manning levels through attrition. In addition, the
1993 Settlement Agreement grants the USWA the right to nominate a candidate,
subject to the approval of the Company's Board of Directors and stockholders,
for a seat on the Company's Board of Directors. The Company estimates the ad-
ditional annual cost resulting from the 1993 Settlement Agreement to be ap-
proximately $25 million per year through 1996. However, there is the potential
that these higher costs may be reduced by productivity gains which are diffi-
cult to quantify. The Company is unable to estimate the impact of the 1993
Settlement Agreement beyond 1996 since it then may be reopened as discussed
above.
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In July 1994, a labor agreement was reached between NSPC and the USWA. The NSPC
Labor Agreement, which has been ratified by the USWA and is pending approval by
the Board of Directors, is effective July 1, 1994 through July 31, 1999. The
NSPC Labor Agreement provides for a wage increase of approximately 3% over
three years and modest increases in benefits, while simultaneously providing
for work rule changes designed to increase productivity levels and operational
efficiencies. With the agreement, and the subsequent reopening of the facility,
all labor disputes between the Company, NSPC and the USWA regarding the idling
of the NSPC facility were resolved. The NSPC Labor Agreement may be reopened in
three years along with the 1993 Settlement Agreement.
OTHER PROPERTIES
Generally, the Company's properties are well maintained, considered adequate
and being utilized for their intended purposes. The Company's corporate head-
quarters is located in Mishawaka, Indiana.
Except as stated below, the steel production facilities are owned in fee by the
Company. A continuous caster and related ladle metallurgy facility and an elec-
trolytic galvanizing line, which each service the Great Lakes Division, and a
coke battery, which services the Granite City Division, are operated pursuant
to the terms of operating leases with third parties and are not subject to a
lien securing the Company's First Mortgage Bonds. The electrolytic galvanizing
line lease, the coke battery lease and the continuous caster and related metal-
lurgy facility lease are scheduled to expire in 2001, 2004 and 2008, respec-
tively. Upon expiration, the Company has the option to extend the respective
lease or purchase the facility at fair market value.
All land (excluding certain unimproved land), buildings and equipment (exclud-
ing, generally, mobile equipment) that are owned in fee by the Company at the
Great Lakes Division, Granite City Division and Midwest Division are subject to
a lien securing the First Mortgage Bonds, with certain exceptions, including a
vacuum degasser and a pickle line which service the Great Lakes Division, a
continuous caster which services the Granite City Division and the corporate
headquarters in Mishawaka, Indiana. Additionally, the Company has granted to
the VEBA Trust a second mortgage on the No. 5 coke oven battery at the Great
Lakes Division.
For a description of certain properties related to the Company's production of
raw materials, see "Raw Materials."
COMPETITION
The Company is in direct competition with domestic and foreign flat rolled car-
bon steel producers and producers of plastics, aluminum and other materials
which can be used in place of flat rolled carbon steel in manufactured prod-
ucts. Price, service and quality are the primary types of competition experi-
enced by the Company. The Company believes it is able to differentiate its
products from those of its competitors by, among other things, providing tech-
nical services and support and utilizing its Product Application Center and
Technical Research Center facilities and by its focus on improving product
quality through, among other things, capital investment and research and devel-
opment, as described above.
Imports. Domestic steel producers face significant competition from foreign
producers and have been adversely affected by unfairly traded imports. Imports
of finished steel products accounted for approximately 17% of the domestic mar-
ket for the first six months of 1994, approximately 14% of the domestic market
in 1993 and approximately 15% of the domestic market in 1992 and 1991. Many
foreign steel producers are owned, controlled or subsidized by their govern-
ments. Decisions by these foreign producers with respect to production and
sales may be influenced to a greater degree by political and economic policy
considerations than by prevailing market conditions.
In 1992, the Company and eleven other domestic steel producers filed unfair
trade cases with the Commerce Department and the ITC against foreign steel pro-
ducers covering imports of flat rolled carbon steel products. In June 1993, the
Commerce Department imposed final antidumping and subsidy margins averaging 37%
for all products under review. In July 1993, the ITC made final determinations
that material injury had occurred in cases representing an estimated 51% of the
dollar value and 42% of the volume of all flat rolled carbon steel imports un-
der investigation. In the four product categories, injury was found in cases
relating to 97% of the volume of plate steel, 92% of the volume of higher val-
ue-added corrosion resistant steel and 36% of the volume of cold rolled steel.
No injury was found with respect to hot rolled steel products. For the first
six months of 1994, approximately 41% of the Company's shipments consisted of
hot rolled steel, while 31% consisted of corrosion resistant steel, 16% con-
sisted of cold rolled steel and less than 1% consisted of plate steel. Imports
of products not covered by affirmative ITC injury determinations have increased
and may continue to increase, which may have an adverse effect on the Company's
shipments of these products and the prices it realizes for such products. The
Company and the other domestic producers who filed these cases have appealed
the negative decisions of the
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ITC and are defending appeals brought by foreign producers involving decisions
favorable to domestic producers. These appeals are proceeding before the Court
of International Trade in New York and, in the case of Canada, before
Binational Dispute Panels under the U.S.-Canada Free Trade Agreement. Decisions
from the Court of International Trade are expected in the first half of 1995; a
decision from the Binational Dispute Panel is due before the end of 1994. Fu-
ture increases in other steel imports are also possible, particularly if the
value of the dollar should rise in relation to foreign currencies or if legis-
lation implementing the recently concluded GATT Uruguay Round agreements is en-
acted in a form which substantially weakens United States trade laws.
Reorganized/Reconstituted Mills. The intensely competitive conditions within
the domestic steel industry have been exacerbated by the continued operation,
modernization and upgrading of marginal steel production facilities through
bankruptcy reorganization procedures, thereby perpetuating overcapacity in cer-
tain industry product lines. Overcapacity is also caused by the continued oper-
ation of marginal steel production facilities that have been sold by integrated
steel producers to new owners, who operate such facilities with a lower cost
structure.
Mini-mills. Domestic integrated producers, such as the Company, have lost mar-
ket share in recent years to domestic mini-mills. Mini-mills provide signifi-
cant competition in certain product lines, including hot rolled and cold rolled
sheets, which represented, in the aggregate, approximately 60% of the Company's
shipments in 1993. Mini-mills are relatively efficient, low-cost producers
which produce steel from scrap in electric furnaces, have lower employment and
environmental costs and target regional markets. Thin slab casting technologies
have allowed mini-mills to enter certain sheet markets which have traditionally
been supplied by integrated producers. One mini-mill has constructed two such
plants and announced its intention to start a third in a joint venture with an-
other steel producer. Certain companies have announced plans for, or have indi-
cated that they are currently considering, additional mini-mill plants for
sheet products in the United States.
Steel Substitutes. In the case of many steel products, there is substantial
competition from manufacturers of other products, including plastics, aluminum,
ceramics, glass, wood and concrete. Conversely, the Company and certain other
manufacturers of steel products have begun to compete in recent years in mar-
kets not traditionally served by steel producers.
ENVIRONMENTAL MATTERS
The Company's operations are subject to numerous laws and regulations relating
to the protection of human health and the environment. The Company believes
that it is in substantial compliance with such laws and regulations. The Com-
pany currently estimates that it will incur capital expenditures in connection
with matters relating to environmental control of approximately $7.9 million
and $13.6 million for 1994 and 1995, respectively. In addition, the Company ex-
pects to record expenses for environmental compliance, including depreciation,
of approximately $70 million and $73 million for 1994 and 1995, respectively.
Since environmental laws and regulations are becoming increasingly stringent,
the Company's environmental capital expenditures and costs for environmental
compliance may increase in the future. In addition, due to the possibility of
future factual or regulatory developments, the amount and timing of future en-
vironmental expenditures could vary substantially from those currently antici-
pated. The costs for environmental compliance may also place the Company at a
competitive disadvantage with respect to foreign steel producers, as well as
manufacturers of steel substitutes, that are subject to less stringent environ-
mental requirements.
In 1990, Congress passed amendments to the Clean Air Act which impose more
stringent standards on air emissions. The Clean Air Act amendments will di-
rectly affect the operations of many of the Company's facilities, including its
coke ovens. Under such amendments, coke ovens generally will be required to
comply with progressively more stringent standards over the next thirty years.
The Company believes that the costs for complying with the Clean Air Act amend-
ments will not have a material adverse effect on the Company's financial condi-
tion.
In 1990, the EPA released a proposed rule which establishes standards for the
implementation of a corrective action program under RCRA. The corrective action
program requires facilities that are operating under a permit, or are seeking a
permit, to treat, store or dispose of hazardous wastes to investigate and reme-
diate environmental contamination. Currently, the Company is conducting an in-
vestigation at its Midwest Division facility. The Company estimates that the
potential capital costs for implementing corrective actions at such facility
will be approximately $8 million payable over the next several years. At the
present time, the Company's other facilities are not subject to corrective ac-
tion.
Since 1989, the EPA and the eight Great Lakes states have been developing the
Great Lakes Initiative, which will impose standards that are even more strin-
gent than the best available technology standards currently being enforced. As
required under section 118 of the Clean Water Act, as amended, which is in-
tended to codify the efforts of the EPA and such states under the Great Lakes
Initiative, on April 16, 1993, the EPA published the proposed Guidance Docu-
ment. Once finalized,
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the Guidance Document will establish minimum water quality standards and other
pollution control policies and procedures for waters within the Great Lakes
System. The EPA is required to publish the final Guidance Document by March
1995. Preliminary studies conducted by the AISI prior to publication of the
proposed Guidance Document estimated that the potential capital cost for a
fully integrated steel mill to comply with draft standards under the Great
Lakes Initiative could range from approximately $50 million to $175 million and
the potential annual operating and maintenance cost would be approximately 15%
of the estimated capital cost. Until the Guidance Document is finalized and
corresponding state laws and regulations are promulgated, the Company is unable
to determine whether such estimates are accurate and whether the Company's ac-
tual costs for compliance will be comparable. Although the Company believes
only the Great Lakes Division would be required to incur significant costs for
compliance, there can be no assurances that compliance with the Great Lakes
Initiative will not have a material adverse effect on the Company's financial
condition.
The Company has recorded the reclamation and costs to restore its coal and iron
ore mines at its shut down locations to their original and natural state, as
required by various federal and state mining statutes.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state superfund statutes generally im-
pose joint and several liability on present and former owners and operators,
transporters and generators for remediation of contaminated properties regard-
less of fault. Currently, an inactive site located at the Great Lakes Division
facility is listed on the Michigan Environmental Response Act Site List, but
remediation activity has not been required by the Michigan Department of Natu-
ral Resources ("MDNR"). In addition, the Company and certain of its subsidiar-
ies are involved as potentially responsible parties ("PRPs") in a number of
off-site CERCLA or state superfund site proceedings. The more significant of
these matters are described below. At several of these sites, any remediation
costs incurred by the Company would be satisfied by NII's $10 million prepay-
ment, and any costs in excess of $10 million would constitute Weirton Liabili-
ties for which NII is required to indemnify the Company or other environmental
liabilities for which NII has agreed to indemnify the Company.
Ilada Energy Company Site. The Company and certain other PRPs have performed a
removal action pursuant to an order issued by the EPA under Section 106 of
CERCLA at this waste oil/solvent reclamation site located in East Cape Girar-
deau, Illinois. The Company received a special notice of liability with respect
to this site on December 21, 1988. The Company believes that there are approxi-
mately sixty-three PRPs identified at such site. Pursuant to an Administrative
Order of Consent ("AOC"), the Company and other PRPs are currently performing a
remedial investigation and feasibility study at such site to determine whether
the residual levels of contamination of soil and groundwater remaining after
the removal action pose any threat to either human health or the environment
and therefore whether or not the site will require further remediation. During
the remedial investigation and feasibility study, a floating layer of material,
which the Company believes to be aviation fuel, was discovered above the
groundwater. The Company does not know the extent of this contamination. Fur-
thermore, the Company believes that this material is not considered to be a
hazardous substance as defined under CERCLA. To date, neither the Company nor
the other PRPs have agreed to remediate or take any action with respect to this
material. Due to legal and factual uncertainties remaining at this site, the
Company is unable to estimate its ultimate potential liability. To date, the
Company has paid approximately $2 million for work and oversight costs.
Buck Mine Complex. This is a proceeding involving a large site, called the Buck
Mine Complex, two discrete portions of which were formerly owned or operated by
a subsidiary of the Company. This subsidiary was subsequently merged into the
Company. The Company received a notice of potential liability from the MDNR
with respect to this site on June 24, 1992. The Company's subsidiary had con-
ducted mining operations at only one of these two parcels and had leased the
other parcel to a mining company for numerous years. The MDNR alleges that this
site discharged and continues to discharge heavy metals into the environment,
including the Iron River. Because the Company and approximately eight other
PRPs have declined to undertake a remedial investigation and feasibility study,
the MDNR has advised the Company that it will undertake the investigation at
this site and charge the costs thereof to those parties ultimately held respon-
sible for the cleanup. The MDNR has orally advised the Company that the cost of
the remedial investigation and feasibility study and the remediation at this
site will be approximately $250,000, which cost will be allocated among the
parties ultimately held responsible. The Company does not have complete infor-
mation regarding the relationship of the other PRPs to the site, does not know
the extent of the contamination or of any cleanup that may be required and,
consequently, is unable to estimate its potential liability, if any, in connec-
tion with this site.
Port of Monroe Site. In February 1992, the Company received a notice of poten-
tial liability from the MDNR as a generator of waste materials at this land-
fill. The Company believes that there are approximately 80 other PRPs
identified at this site. The Company's records indicate that it sent some mate-
rial to the landfill. A draft remedial investigation/feasibility study
("RI/FS") for remediation work has been prepared by the owner/operator PRPs and
submitted to the MDNR for its approval. The cost of this RI/FS was approxi-
mately $280,000. In March 1994, the MDNR demanded reimbursement from the
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PRPs for its past and future response costs. The MDNR has since agreed to ac-
cept $500,000 as reimbursement for its past response costs incurred through Oc-
tober 1993. This settlement will be embodied in a consent decree, the terms of
which have been finalized. The owner/operators of this site and certain of the
generator/transporter PRPs (including the Company) have reached an agreement
regarding an interim allocation that will generate sufficient funds to satisfy
the PRPs' obligations under the above-described settlement with the MDNR. The
Company's share under this interim allocation is approximately $50,000, which
amount has been paid to counsel for the PRP group. The owner/operator PRPs have
advised the Company orally that the overall cost of the remedy for the site is
expected to be less than $10 million. However, the Company does not yet have
sufficient information regarding the nature and extent of contamination at the
site and the nature and extent of the wastes that the other PRPs have sent to
the site to determine whether the $10 million estimate is accurate. Based on
currently available information, the Company believes that its proportionate
share of the ultimate liability at this site will be no more than 10% of the
total costs and has accrued for this exposure.
Hamtramck Site. In January 1993, the City of Hamtramck filed a complaint
against the Sherwin-Williams Company and six other defendants seeking contribu-
tion of costs incurred in connection with the remediation of certain property
located in Hamtramck, Michigan. In February 1993, the Sherwin-Williams Company
filed a third party complaint against the Company and seven other third party
defendants seeking contribution in connection with the site. The complaint al-
leges that the Company's Great Lakes Division engaged a third party waste oil
hauler and processor that operated a tank farm at the site, to haul and/or
treat some of the Division's waste oil. The Company entered into an agreement
with the City of Hamtramck in 1983 pursuant to which the Company, without ad-
mitting liability, contributed to the funding of the cleanup of the tank farm,
in return for which the City agreed to indemnify the Company for any releases.
The Company has notified the City of this proceeding, and the City has agreed
to defend and indemnify the Company in this matter. The Company is not aware of
how many other parties are involved in this proceeding, and what, if any, po-
tential liability the Company may have. However, the Company believes that
whatever liability it may ultimately be assessed will be paid for by the City
of Hamtramck.
Martha C. Rose Chemicals Superfund Site. This proceeding involves a former PCB
storage, processing and treatment facility located in Holden, Missouri. The
Company received an initial request for information with respect to this site
on December 2, 1986. The Company believes that there are over 700 PRPs identi-
fied at this site. The Company believes that it sent only one empty PCB trans-
former there. In July 1988, the Company entered into a Consent Party Agreement
with the other PRPs and paid $48,134 in connection with the remediation of such
site. A record of decision selecting the final remedial action and an order
pursuant to Section 106 of CERCLA requiring certain PRPs, not including the
Company, to implement the final remedy have been issued by the EPA. Completion
of construction of the remedy is scheduled for November 1994. To date, the PRP
steering committee has raised approximately $35 million to pay for past removal
actions, the remedial investigation and feasibility study and the final reme-
dial action. While there can be no assurances, the Company believes that this
amount is sufficient to cover such costs. However, if such costs were to exceed
$35 million, the Company does not expect that additional payments required by
it would be significant.
Springfield Township Site. This is a proceeding involving a disposal site lo-
cated in Springfield Township, Davisburg, Michigan in which approximately twen-
ty-two PRPs have been identified. The Company received a general notice of
liability with respect to this site on January 23, 1990. The Company and eleven
other PRPs have entered into AOCs with the EPA for the performance of partial
removal actions at such site and reimbursement of past response costs to the
EPA. The Company's share of costs under the AOCs was $48,000. The PRPs are cur-
rently negotiating with the EPA regarding the final remedial action at such
site. The EPA and the PRP steering committee have estimated the cost to imple-
ment the final remedy at approximately $33 million and $20 million, respective-
ly, depending upon the final remedy. The Company is currently negotiating with
the other PRPs with respect to its share of such cost and has offered to pay
$175,000 in connection with the final remedy. On November 10, 1993, the EPA is-
sued a unilateral order pursuant to Section 106 of CERCLA requiring the PRP
steering committee to implement the groundwater portion of the final remedy.
The members of the PRP steering committee have entered into an agreement among
themselves for the implementation of the groundwater portion of the final reme-
dy. Subject to a final determination by the EPA as to what must be included, a
preliminary estimate by the PRP steering committee of the cost of such work is
approximately $300,000. Additionally, in response to a demand letter from the
MDNR, the PRP steering committee and the MDNR have negotiated an AOC pursuant
to which the MDNR will be reimbursed approximately $700,000 for its past re-
sponse costs incurred through July 1993. The Company has paid its share of this
settlement amount, which was approximately $11,000. The Company has recorded
its overall estimated liability for this matter.
Rasmussen Site. The Company and nine other PRPs have entered into a Consent De-
cree with the EPA in connection with this disposal site located in Livingston,
Michigan. The Company received a general notice of liability with respect to
this site on September 27, 1988. The Company believes that there are approxi-
mately twenty-three PRPs at this site. A record of
36
<PAGE>
decision selecting the final remedial action for this site was issued by the
EPA in March 1991. The PRP steering committee has estimated that remediation
costs are approximately $18.5 million. Pursuant to a participation agreement
among the PRPs, the Company's share of such costs is approximately $420,000,
which has been accrued by the Company. To date the Company has paid $126,000.
Berlin and Farro Liquid Incineration Site. The Company has been identified as a
generator of small amounts of hazardous materials allegedly deposited at this
industrial waste facility located in Swartz Creek, Michigan. The Company re-
ceived an initial request for information with respect to this site on Septem-
ber 19, 1983. The Company believes that there are approximately 125 PRPs at
this site. A record of decision selecting the final remedial action for this
site was issued by the EPA in September 1991. The EPA and the PRP steering com-
mittee have estimated the cost of the selected remedy at approximately $8 mil-
lion and $10.5 million, respectively. A third-party complaint has been filed
against the Company by three PRPs for recovery of the EPA's past and future re-
sponse costs. The Company has entered into a consent decree with the EPA, which
was lodged with the court on February 25, 1994. Pursuant to such consent decree
the Company's share of liability for past and future response costs and natural
resource damages is $105,000, which amount has been paid. The terms of the pro-
posed consent decree provide that settling defendants who are plaintiffs in the
above-referenced cost recovery action will execute and file a dismissal with
prejudice as to their claims against the de minimis settling defendants, in-
cluding the Company. In addition, the MDNR has demanded that the Company reim-
burse the state for its past response costs incurred at this site. In July
1993, the MDNR offered and the Company accepted a "de minimis" buyout settle-
ment of the state's claims for approximately $1,500, which amount has been
paid.
Iron River (Dober Mine) Site. On July 15, 1994, the State of Michigan served
M.A. Hanna Company ("M.A. Hanna") with a complaint seeking response costs in
the amount of approximately $365,000, natural resource damages in the amount of
approximately $2 million and implementation of additional response activities
related to an alleged discharge to the Iron and Brule Rivers of acid mine
drainage. M.A. Hanna operated the Dober Mine pursuant to a management agreement
with the Company. M.A. Hanna has requested that the Company defend and indem-
nify it and the Company has undertaken the defense of the State's claim. The
Company, however, reserved the right to terminate such defense. The Company
filed on behalf of M.A. Hanna an answer to the complaint denying liability at
this site.
NII Sites.
Remediation costs incurred by the Company at the following sites constitute
Weirton Liabilities or other environmental liabilities for which NII has agreed
to indemnify the Company: the Swissvale Site, Swissvale, Pennsylvania; Buckeye
Site, Bridgeport, Ohio; Lowry Landfill, Aurora, Colorado; and Weirton Steel
Corporation Site, Weirton, West Virginia. The Company was notified of potential
liability with respect to each of these sites as follows: the Swissvale Site--
February 1985; Buckeye Site--September 1991; Lowry Landfill--December 1990; and
Weirton Steel Corporation Site--January 1993. In accordance with the terms of
an agreement between the Company and NII, in January 1994, NII paid the Company
$10 million as an unrestricted prepayment for environmental obligations which
may arise after such prepayment and for which NII has previously agreed to in-
demnify the Company. Since NII retains responsibility to indemnify the Company
for any remaining environmental liabilities arising before such prepayment or
arising after such prepayment and in excess of $10 million, these environmental
liabilities are not expected to have a material adverse effect on the Company's
liquidity. However, the failure of NII to satisfy any such indemnity obliga-
tions could have a material adverse effect on the Company's liquidity. See
"Certain Relationships and Related Transactions."
The Company, Earth Sciences, Inc. and Southwire Company are general partners in
the Alumet Partnership ("Alumet"), which has been identified by the EPA as one
of approximately 260 PRPs at the Lowry Landfill Superfund Site. In the August
1993 proposed plan, the EPA has estimated the overall discounted costs for im-
plementing the selected remedial action to be approximately $98 million. Based
on information received by the Company, it appears that Alumet may have con-
tributed approximately 3.8% of the overall volume of industrial materials sent
to this site. Alumet has presented information to the EPA in support of its po-
sition that the material it sent to this site is not a hazardous substance. To
date, however, the EPA has rejected this position, and on November 15, 1993,
Alumet received a demand letter from the EPA requesting approximately $15.3
million for its past response costs incurred as of the date of the letter. The
Company believes that the same demand letter was sent to all PRPs that sent
over 300,000 gallons of waste to the site. The Company does not have sufficient
information to estimate its portion of any liability resulting from the $15.3
million demand. The owners and operators of the Lowry Landfill--the City and
County of Denver, Waste Management of Colorado, Inc. and Chemical Waste Manage-
ment, Inc.--are performing the remediation activities at the site. The City and
County of Denver (the "Plaintiffs") in December 1991 filed a complaint against
40 of the PRPs seeking reimbursement for past and future response costs in-
curred by the Plaintiffs at the Lowry Landfill site. Subsequently, the Plain-
tiffs reached a confidential settlement agreement with Earth Sciences, Inc. and
unsuccessfully attempted to add Alumet as a third-party defendant. In
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<PAGE>
June 1993, Alumet received a settlement demand from the owners and operators of
the Lowry Landfill for response costs associated with Alumet's wastes that were
not covered by the earlier confidential settlement agreement. On May 11, 1994,
the EPA issued a Special Notice Letter to Alumet alleging that Alumet is a PRP
under CERCLA for cleanup of the Lowry Landfill Site and demanding payment of
the EPA's past and future response costs. In July 1994, the City and County of
Denver, Waste Management of Colorado, Inc. and Chemical Waste Management filed
a complaint against multiple entities, including Alumet, NII, the Company and
Southwire. The complaint alleges that Alumet, NII, Southwire and the Company
are liable under CERCLA for the costs of cleaning up the Lowry Landfill Site.
The Company believes that whatever liability it may be ultimately assessed will
be covered by NII's indemnity obligations. Because this is a complex site with
numerous operable units, PRPs and different types of wastes, and because
remediation activities at this site are occurring in various stages, the Com-
pany is unable to estimate its potential liability at this site.
In connection with the Buckeye Site, the Company and thirteen other PRPs have
entered into an AOC with the EPA to perform a remedial design. The Company's
allocated share for the remedial design, as established by a participation
agreement for the remedial design executed by the PRPs, is 4.63% for the first
$1.6 million and 5.05% thereafter. The EPA and the PRP steering committee have
estimated the cost for the remedial design to be approximately $3 million. The
EPA and the PRP steering committee have estimated the total cost for
remediation activities at this site at approximately $50 million and $35 mil-
lion, respectively. The PRPs are currently negotiating with the EPA to reduce
the scope of the remediation activities at the site. Additionally, the Company
and the other thirteen PRPs are discussing an additional participation agree-
ment and allocation governing the costs of the final remedial action and are
continuing to identify other PRPs. The Company believes that its share of the
final remedial action costs will not exceed 5.05%. On March 30, 1994, the Com-
pany was served with a complaint filed by Consolidation Coal Company, a former
owner and operator of the site. Among other claims, the Complaint seeks partic-
ipation from the Federal Abandoned Mine Reclamation Fund, joinder of certain
public entities, one of which delivered waste to the site, and damages and in-
demnity from current owners of the site. One count of the Complaint names the
Company and nine other industrial PRPs and seeks a determination of the alloca-
tion of responsibility among the alleged industrial generators involved with
the site. The Company is reviewing the complaint and intends to defend all
claims against it.
In January 1993, the Company was notified that the West Virginia Division of
Environmental Protection (the "WVDEP") had conducted an investigation at a site
in Weirton, West Virginia which was formerly owned by the Company's Weirton
Steel Division and is currently owned by Weirton Steel Corporation. The WVDEP
alleged that samples taken from four groundwater monitoring wells located at
this site contained elevated levels of contamination. Weirton Steel Corporation
has agreed to cooperate with the WVDEP with respect to conducting a ground wa-
ter monitoring program at the site. The Company does not have sufficient infor-
mation to estimate its potential liability, if any, at this site.
The Company has been named as a third-party defendant in a governmental action
for reimbursement of the EPA's response costs in connection with the Swissvale
Site. The Company understands that on December 2, 1993, the EPA and the origi-
nal defendants reached a tentative settlement agreement regarding the EPA's
cost recovery claim for $4.5 million. Pursuant to that tentative settlement
agreement, the original defendants will pay a total of $1.5 million. The origi-
nal defendants have requested that the eighteen third-party defendants, includ-
ing the Company, pay a total of $375,000. The Company has made a settlement
offer and believes that its share should be less than $20,000.
Other
The Company and its subsidiaries have been conducting steel manufacturing and
related operations at numerous locations, including their present facilities,
for over sixty years. Although the Company believes that it has utilized oper-
ating practices that were standard in the industry at the time, hazardous mate-
rials may have been released on or under these currently- or previously-owned
sites. Consequently, the Company potentially may also be required to remediate
contamination at some of these sites. The Company does not have sufficient in-
formation to estimate its potential liability in connection with any potential
future remediation. However, the Company believes that if any such remediation
is required, it will occur over an extended period of time. In addition, the
Company believes that many of these sites may also be subject to indemnities by
NII to the Company.
In addition to the aforementioned proceedings, the Company is or may be in-
volved in proceedings with various regulatory authorities which may require the
Company to pay various fines and penalties relating to violations of environ-
mental laws and regulations, comply with applicable standards or other require-
ments or incur capital expenditures to add or change certain pollution control
equipment or processes.
During 1992, the Wayne County Air Pollution Control Department (the "WCAPCD")
issued approximately 36 notices of violation to the Company in connection with
particulate emissions at the basic oxygen furnace shop and the ladle metal-
38
<PAGE>
lurgy facility servicing the Great Lakes Division. In 1993, the WCAPCD issued
approximately 39 additional notices of violation to the Company in connection
with alleged exceedances of particulate emissions standards covering various
process and fugitive emissions sources and as of September, 1994 the WCAPCD had
issued approximately 14 additional notices of violation. The WCAPCD has made a
demand for a $227,250 penalty and an environmental credit program valued at
$227,250. The Company is evaluating this demand.
In connection with certain outfalls located at the Great Lakes Division facili-
ty, including the outfall at the 80-inch hot strip mill, the U.S. Coast Guard
(the "USCG") issued certain penalty assessments in 1992. All of these have been
settled except for three. Those three assessments, totalling $8,000, were under
appeal. However, the appeal was decided adverse to the Company in September
1994. The Company intends to pay the $8,000 penalty assessment by October 10,
1994. Additionally, the USCG issued one new penalty assessment in 1994, which
the Company has settled for $6,000. The USCG has also advised the Company that
it may assess two additional penalties totaling $18,000. The Company has pro-
posed settling these two additional potential matters for a total of $5,000.
The MDNR, in April 1992, also notified the Company of a potential enforcement
action alleging approximately 63 exceedances of limitations at the outfall at
the 80-inch hot strip mill. The Company requested the MDNR to provide more in-
formation concerning these exceedances. In April 1993, the MDNR identified the
dates of the alleged exceedances, but no further action has taken place. Addi-
tionally, in July 1994, the MDNR requested that the Company submit a comprehen-
sive plan for addressing oil discharges from the 80-inch hot strip mill. The
Company submitted the proposed plan in August 1994. In the event the Company is
unable to maintain compliance with the terms and conditions of its NPDES permit
through the implementation of its comprehensive plan, it may have to install
additional control systems that could cost approximately $13 million.
The Coke Oven By-Products Plant at the Great Lakes Division currently dis-
charges wastewater to the Detroit Water and Sewerage Department ("DWSD") treat-
ment facility pursuant to a permit issued by the DWSD. The DWSD treats the
Company's wastewater along with large volumes of wastewater from other sources
and discharges such treated wastewaters to the Detroit River. The Company has
appealed the total cyanide limit in the permit and has requested that the DWSD
issue to the Company a variance from the cyanide limit. The DWSD denied the
Company's request for a variance in April 1994, and the Company subsequently
filed a timely petition for reconsideration. The Company and the DWSD are cur-
rently involved in technical discussions regarding the cyanide limit. In the
event that the DWSD denies the Company any relief from the challenged cyanide
limit, the Company likely will be required to install its own treatment facil-
ity at an estimated cost of approximately $8 million.
In connection with certain of these proceedings, the Company has only commenced
investigation or otherwise does not have sufficient information to estimate its
potential liability, if any. Although the outcomes of the proceedings described
above or any fines or penalties that may be assessed in any such proceedings,
to the extent that they exceed any applicable reserves, could have a material
adverse effect on the Company's results of operations for the applicable peri-
od, the Company has no reason to believe that any such outcomes, fines or pen-
alties, whether considered individually or in the aggregate, will have a
material adverse effect on the Company's financial condition.
LEGAL PROCEEDINGS
In addition to the matters specifically discussed below, the Company is in-
volved in various legal proceedings occurring in the normal course of its busi-
ness. In the opinion of the Company's management, adequate provision has been
made for losses which are likely to result from these actions. To the extent
that such reserves prove to be inadequate, the Company would incur a charge to
earnings, which could have a material adverse effect on the Company's results
of operations for the applicable period. The outcome of these proceedings, how-
ever, is not expected to have a material adverse effect on the financial condi-
tion of the Company. For a description of certain environmental matters
involving the Company, see "Environmental Matters" above.
Baker's Port, Inc. v. National Steel Corporation
On July 1, 1988, Baker's Port, Inc. ("BPI") and Baker Marine Corporation
("BMC") filed a lawsuit in the District Court for San Patricio County, Texas
against the Company, two of its subsidiaries, NS Land Company ("NS Land") and
Natland Corporation ("Natland"), and several other defendants, alleging breach
of their general warranty of title, violation of the Texas Deceptive Trade
Practice Act (the "DTPA") and fraud, in connection with the sale by Natland to
BPI in 1981 of approximately 3,000 acres of land near Corpus Christi, Texas.
Approximately $24.7 million of the purchase price was in the form of a note
(the "Note") secured by a Deed of Trust (mortgage) and BMC's guarantee. BPI and
BMC sought actual damages in excess of $55 million, or, alternatively, rescis-
sion of the sale, and exemplary damages in excess of $155 million, as well as
treble damages under the DTPA. Natland counterclaimed for the amount defaulted
on by BPI under the Note which totaled approximately $19 million at the time of
trial. The State of Texas also claimed the rights to certain
39
<PAGE>
riparian lands. On September 7, 1990, after trial, a judgment was entered,
holding, among other things, (i) that the affirmative claims of BPI and BMC
were barred, except that the finding of $22 million in damages for fraud could
be used as a setoff against the Note and except as set forth in (iii) below,
(ii) that recovery by Natland on the Note was barred due to the setoff re-
ferred to in (i) above, (iii) that BPI was entitled to approximately $.4 mil-
lion plus pre-judgment interest thereon in the sum of approximately $.5
million, plus post-judgment interest thereon and (iv) that Natland's Deed of
Trust lien on the property was fully released and discharged. On June 30,
1993, the Court of Appeals issued an opinion generally in favor of the Company
and its subsidiaries. The Court of Appeals affirmed in part and reversed and
remanded in part the judgment of the trial court. Specifically, the Court of
Appeals (i) affirmed the dismissal by the trial court of the title claims
brought by the State of Texas, (ii) reversed the finding by the trial court of
$22 million of damages for fraud, which had been applied to offset the entire
amount then owing on the Note, (iii) reversed the trial court's award of ap-
proximately $.4 million plus pre-judgment interest thereon in the amount of
approximately $.5 million plus post-judgment interest and (iv) remanded the
case for a new trial on one remaining title claim. All parties filed appeals
with the Texas Supreme Court which subsequently declined to hear them. As a
result, the appellate rights available to the parties have been exhausted, and
the case has been remanded for a new trial on limited issues. A trial date has
not yet been set by the court, but a pretrial conference on the matter has
been scheduled for November 21, 1994. As of December 31, 1993, approximately
$13.3 million in principal and $10.8 million in interest was due under the
Note. The Company has reserved the entire amount owing under the Note and an
additional $.9 million in its financial statements.
Detroit Coke Corporation v. NKK Chemical USA, Inc.
On October 4, 1991, Detroit Coke Corporation ("Detroit Coke") filed a lawsuit
against NKK Chemical USA, Inc. ("NKK Chemical") and the Company in the United
States District Court for the Eastern District of Michigan, Southern Division,
alleging damages in excess of $160 million arising under coal and coke pur-
chase and sale agreements among the parties and a subsidiary of the Company.
Detroit Coke alleges that the defendants supplied it with defective coal and
coal blends, which caused damage to its coke making facility and environmental
problems, thereby forcing the shutdown of its facility. On July 2, 1992, the
action was transferred to the United States District Court for the Western
District of Pennsylvania. In October 1992, Detroit Coke added a new defendant,
Trans-Tech Corporation, and claimed an additional $1.4 million allegedly due
for coke and coke oven gas sales. In August 1994, Detroit Coke filed a motion
for leave to amend its complaint to clarify its theories of relief, alleging
that certain coal and coke purchase and sale agreements among the parties were
one integrated transaction and that it has suffered damages it believes exceed
$150 million. The Company has previously denied all of the allegations of De-
troit Coke and is defending this action. The Company will file a response to
Detroit Coke's motion to file a second amended complaint and file an answer to
the second amended complaint if Detroit Coke's motion is granted.
Donner-Hanna Coke Joint Venture
Hanna Furnace Corporation ("Hanna"), a wholly-owned subsidiary of the Company,
was a 50% participant, along with LTV Steel Company, Inc. ("LTV"), in the Don-
ner-Hanna Coke Joint Venture ("Donner-Hanna") which ceased its coke making op-
erations in 1982. LTV filed a petition in July 1986 with the United States
Bankruptcy Court for the Southern District of New York for relief under Chap-
ter 11 of the Bankruptcy Code, and, with the approval of the Bankruptcy Court,
rejected the Donner-Hanna-Coke Joint Venture Agreement. As a result of LTV's
actions, Donner-Hanna has failed to make its annual minimum pension contribu-
tions to the trustee of its salaried and hourly pension plans (the "Plans")
for each of the plan years 1985 through 1992 in the aggregate amount of ap-
proximately $7.2 million. The Company estimates the 1993 minimum contribution
to be $.7 million, which also has not been made. The Company has fully re-
served for these amounts at December 31, 1993. The total unfunded liability of
the Plans was determined to be $15.5 million on May 20, 1993, for purposes of
settling Hanna's bankruptcy claim against LTV. Since July 1991, the Pension
Benefit Guaranty Corporation (the "PBGC") has funded the monthly pension bene-
fits under the hourly pension plan. On August 13, 1993, the Internal Revenue
Service assessed Hanna, as a general partner of Donner-Hanna, approximately
$2.7 million for excise taxes (including interest through August 31, 1993) and
penalties for plan years 1985 through 1991 arising from the failure to meet
minimum funding standards for the Plans. In November 1993, Hanna contributed
approximately $1.2 million to the salaried plan, representing proceeds from
the sale of LTV stock received for Hanna's claim in the LTV bankruptcy pro-
ceeding. On December 30, 1993, the Pension Benefit Guarantee Corporation
("PBGC") notified Hanna and the Pension Committee for the Plans that the PBGC
was terminating the hourly plan retroactive to July 1, 1991, and was terminat-
ing the salaried plan as of December 31, 1993. In February 1994, the PBGC sub-
mitted a proposed Termination Agreement to the Company for review. The PBGC
and the Pension Committee for the Plans did not reach agreement on the PBGC's
proposed Termination Agreement, and, on July 8, 1994, the PBGC filed an appli-
cation in the United States District Court for the Western District of New
York to terminate Donner-Hanna's hourly pension plan retroactively to July 1,
1991 and the salaried plan retroactively to December 31, 1993. The Court has
ordered that the Plans be terminated no later than the dates requested by the
PBGC. Hanna has been granted leave to intervene in this proceeding for the
purpose of contending
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<PAGE>
that the Plans should be deemed to have been terminated as of an earlier date.
Hanna is liable to the PBGC for the underfunding of the Plans. There has been
no funding in 1994 of either of the Plans. The PBGC has indicated that it may
seek to hold the Company liable for the unfunded liability of the Plans. Al-
though the Company believes that under applicable law Hanna is solely liable
and the Company has valid defenses to any such action by the PBGC, the Company
is unable to predict with certainty the final outcome of any such action by the
PBGC.
USX Corporation v. National Steel Corporation
In June of 1994, USX Corporation ("USX") sued the Company, three of its direc-
tors, six other individuals who became officers of the Company on June 1, 1994
and NKK Corporation in Indiana State Court, alleging that the defendants misap-
propriated trade secrets and other confidential information of U.S. Steel's
Gary Works, interfered with USX's relationship with its former employees, and
engaged in corporate raiding and unfair trade practices involving USX's tin
plate and automotive business with the intent to cause injury. The core of the
claims is that the Company had hired five management employees and one former
management employee at the Gary Works who had signed confidentiality agreements
while employees of USX. None of the six former USX employees had signed employ-
ment agreements or covenants not to compete. USX requested injunctive relief
and unspecified monetary damages. Following a hearing on the request for the
preliminary injunction, the Indiana trial court in June of 1994 denied USX's
preliminary injunction request, holding that there had been no showing that any
of the six former USX employees had misappropriated USX trade secrets or had
engaged in any illegal conduct. USX's claims for a permanent injunction and
monetary relief remain pending. No material developments have occurred in the
litigation since the denial of the request for a preliminary injunction.
Management believes that the final disposition of the Baker's Port, Detroit
Coke, Donner-Hanna Coke and USX Corporation matters will not have a material
adverse effect on the Company's financial condition.
41
<PAGE>
MANAGEMENT
The following table sets forth, as of October 1, 1994, certain information with
respect to the executive officers of the Company:
<TABLE>
<CAPTION>
EXECUTIVE
NAME (AGE) OFFICER SINCE POSITION
- ---------- ------------- --------
<S> <C> <C>
Osamu Sawaragi (65) 1990 Chairman of the Board
V. John Goodwin (50) 1994 President and Chief Operating Officer
Robert M. Greer (58) 1994 Senior Vice President and Chief Financial Officer
Keisuke Murakami (55) 1991 Vice President--Administration
Hiroshi Matsumoto (43) 1994 Vice President and Assistant to the President
David L. Peterson (44) 1994 Vice President and General Manager--Great Lakes
Division
Kenneth J. Leonard (45) 1993 Vice President and General Manager--Granite City
Division
Robert G. Pheanis (58) 1994 Vice President and General Manager--Midwest
Division
William E. Goebel (55) 1993 Vice President--Marketing and Sales
David A. Pryzbylski (45) 1994 Vice President--Human Resources and Secretary
George D. Lukes (48) 1994 Vice President--Quality Assurance and Customer
Satisfaction
David A. Chatfield (54) 1987 Vice President--Diversified Businesses, Services
and Support
Richard S. Brzenk (52) 1987 Vice President--Information Systems
James L. Wainscott (37) 1991 Treasurer and Assistant Secretary
Carl M. Apel (38) 1992 Corporate Controller, Accounting and Assistant
Secretary
Milan J. Chestovich (52) 1985 Assistant Secretary
</TABLE>
Biographical information concerning certain of the Company's senior executive
officers is presented below.
V. John Goodwin, President and Chief Operating Officer. Mr. Goodwin joined the
Company as President and Chief Operating Officer in June 1994. Mr. Goodwin was
formerly employed by U.S. Steel Corporation ("U.S. Steel") for twenty seven
years beginning in 1967 and held a variety of operating assignments at its
Fairless Works. He became general foreman of the facility's hot strip mill in
1976 and division superintendent of Rolling Operations in 1981. In 1984, Mr.
Goodwin was promoted to general manager of U.S. Steel's Mon Valley Works. In
1987, he was named general manager of U.S. Steel's Gary Works, the country's
largest steel plant ("Gary Works").
Robert M. Greer, Senior Vice President and Chief Financial Officer. Mr. Greer
joined the Company as Senior Vice President and Chief Financial Officer in June
1994. Mr. Greer was formerly employed by U.S. Steel for thirty three years in a
variety of financial assignments pertaining to steel operations, raw materials
and both international and Great Lakes shipping. Prior to retiring in April
1994, he had been plant controller at the Gary Works. Mr. Greer was involved at
U.S. Steel in a number of cost improvement activities, negotiations with sup-
pliers and other steel companies and other projects involving asset redeploy-
ments.
Keisuke Murakami, Vice President--Administration. Mr. Murakami joined the Com-
pany in 1991 as vice president--technical and management coordination and as-
sumed his present responsibilities the following year. Previously, Mr. Murakami
had served since 1962 in various positions with NKK. He has had experience in
corporate planning through service as general manager--operations scheduling at
NKK's Fukuyama Works facility and later as general manager--corporate planning
for Toshin Steel Corporation, a major NKK subsidiary. Before transferring to
the Company, he had been serving as general manager--business and product de-
velopment at NKK's headquarters.
Hiroshi Matsumoto, Vice President and Assistant to the President. Mr. Matsumoto
joined the Company in June 1994, following eighteen years with NKK. Mr.
Matsumoto served as manager of NKK's corporate planning department from 1982 to
1986. For the following three years, he was a guest fellow at The Brookings In-
stitution, lecturing on "The Trade Balance Between Japan and the United
States--Problems and Solutions." In 1989 he was appointed to serve as the first
senior representative in the Washington, D.C. office of its American subsidi-
ary, NKK America Inc.
42
<PAGE>
David L. Peterson, Vice President and General Manager--Great Lakes Division.
Mr. Peterson joined the Company in June 1994 as Vice President and General Man-
ager--Great Lakes Division. Mr. Peterson had formerly been employed by U.S.
Steel since 1971. He was promoted to the plant manager level at U.S. Steel in
1988 and directed all operating functions from cokemaking to sheet and tin
products. In 1988 he was named plant manager--primary operations at the Gary
Works. He is credited with the transition at the Gary Works to 100% continuous
casting of all sheet, tin and plate products.
Kenneth J. Leonard, Vice President and General Manager--Granite City Division.
Mr. Leonard began his career with the Company in 1983 as assistant engineering
manager--primary facilities at the Company's headquarters, following work with
several construction and manufacturing companies. A year later he was promoted
to project manager--major projects. Late in 1984 Mr. Leonard moved to the
Company's Granite City Division as manager--engineering, subsequently being
promoted to director--ironmaking and assistant general manager--administration.
He was promoted to his present position in 1993.
Robert G. Pheanis, Vice President and General Manager--Midwest Division. Mr.
Pheanis joined the Company in June 1994 as Vice President and General Manager--
Midwest Division. Mr. Pheanis formerly served in various management positions
at U.S. Steel at the Gary Works for 35 years and in 1992 was named its plant
manager--finishing operations, with responsibility for its total hot rolled,
sheet and tin operations.
William E. Goebel, Vice President--Marketing and Sales. Mr. Goebel joined the
Company in 1968 following employment with Morgan Guaranty Trust Company and
Bethlehem Steel Corporation. After assignments in the Company's New York and
Philadelphia district sales offices, he moved to the Great Lakes Division as a
product manager--cold rolled in 1979. He transferred to the corporate marketing
and sales department in 1981, holding a succession of management posts before
assuming the Company's top marketing and sales post in 1993.
David A. Pryzbylski, Vice President--Human Resources and Secretary. Mr.
Pryzbylski joined the Company in June 1994 as Vice President--Human Resources
and Secretary. Mr. Pryzbylski was employed by U.S. Steel for fifteen years,
serving since 1987 as the senior employee relations executive at the Gary
Works. He was active in implementing a health care cost control strategy, de-
veloped a technical training program that enabled the plant to become the first
steel mill to receive the National Maintenance Excellence Award and negotiated
a productivity improvement plan with the USWA.
George D. Lukes, Vice President--Quality Assurance and Customer Satisfaction.
Mr. Lukes joined the Company in June 1994 to fill the newly created position of
Vice President--Quality Assurance and Customer Satisfaction. Mr. Lukes had pre-
viously been employed by U.S. Steel since 1968. He served in a succession of
process, product and administrative metallurgical posts before being appointed
manager--quality assurance at the Fairless Works in 1983. Four years later he
moved to the Gary Works in a similar capacity and is credited with being in-
strumental in the mill's receipt of thirty seven quality recognition awards,
including those of the nation's "Big 3" auto companies.
David A. Chatfield, Vice President--Diversified Businesses, Services and Sup-
port. Dr. Chatfield joined the Company's research & development department in
1965. He held management posts in that department before moving to the Midwest
Division, where he ultimately became operating superintendent for its tin fin-
ishing and galvanizing facilities. He then served as director--quality control
for the Granite City Division before returning to the Midwest Division as vice
president and general manager in 1984. He moved to corporate headquarters in
1987 as vice president--technology and was named vice president--engineering
and diversified businesses in 1992. He was named vice president and general
manager of the Great Lakes Division in 1993 and assumed his present duties in
June 1994.
Richard S. Brzenk, Vice President--Information Systems. Mr. Brzenk joined the
Company as a programmer at its Granite City Division in 1965. Following several
supervisory and management assignments at that division, he moved to corporate
headquarters as general manager--data center operations and program support, in
1976. He returned to the Granite City Division in 1982 as manager--process con-
trol and later was promoted to director--information systems of the division in
1983. He returned to headquarters and was promoted to his present position in
1987.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Summarized below are certain transactions and arrangements that exist among
the Company, NKK and NII.
As previously stated, on September 13, 1983, the Company became a wholly-owned
subsidiary of NII. On January 11, 1984, the Company sold the principal assets
of its Weirton Steel Division to Weirton Steel Corporation, a corporation
owned by an employee stock ownership trust. In connection with the sale, the
Company retained liability for the Weirton Liabilities, including certain ex-
isting and contingent environmental and other liabilities and liabilities for
certain employee benefits for Weirton employees, including, principally, pen-
sion benefits for active employees based on service prior to the sale and pen-
sion benefits, life insurance and health care obligations for the then retired
employees (the "Weirton Benefit Liabilities").
On August 31, 1984, NKK purchased 50% of the capital stock of the Company from
NII. Pursuant to the terms of that transaction, NII agreed with the Company to
provide funds to the Company for the payment of, and to indemnify the Company
against, the Weirton Liabilities. NII also agreed to indemnify the Company for
certain other environmental liabilities related to the former operations of
The Hanna Furnace Corporation, a subsidiary of the Company, and the Donner
Hanna Coke Joint Venture, a joint venture of The Hanna Furnace Corporation and
LTV Steel Company, Inc. See "Business--Legal Proceedings."
On June 26, 1990, NKK, NII and the Company executed a Stock Purchase and Re-
capitalization Agreement (the "Recapitalization Agreement") that resulted in
changes to the capital structure of the Company and the relative percentage
ownership positions of NKK and NII in the Company. Pursuant to the terms of
the Recapitalization Agreement, in exchange for a portion of the Common Stock
held by NII, the Company issued to NII the Series A Preferred Stock and the
Series B Preferred Stock. At that same time, NKK purchased from NII the Series
A Preferred Stock and additional shares of Common Stock held by NII, repre-
senting in the aggregate an additional 20% of the capital stock of the Compa-
ny, in exchange for $146.6 million in cash and the Put Right (as defined
below), resulting in NKK obtaining a 70% ownership and voting interest in the
Company and in NII's ownership and voting interest in the Company decreasing
to 30%. NII transferred to the Company the $146.6 million received from NKK in
this transaction in exchange for the Company releasing NII from a net present
value equivalent amount of NII's indemnification obligations with respect to a
portion of the Weirton Benefit Liabilities (the "released Weirton Benefit Lia-
bilities"). At December 31, 1993, the released Weirton Benefit Liabilities
(including current and long-term portions) totalled $140.1 million. NII con-
tinues to be obligated to indemnify the Company for all other Weirton Liabili-
ties, including the remaining unreleased Weirton Benefit Liabilities. Based
upon the Company's actuarial analysis, the amount of the unreleased Weirton
Benefit Liabilities at December 31, 1993 approximate the aggregate remaining
dividend and redemption payments applicable to the Series B Preferred Stock.
The remaining Weirton Liabilities, including possible environmental liabili-
ties relating to certain matters occurring or existing prior to the sale of
the Weirton Steel Division by the Company in January 1984, are not currently
estimable primarily due to the possibility of future factual or regulatory de-
velopments with respect to environmental matters. See, for example, "Manage-
ment's Discussion and Analysis of Financial Condition and Results of
Operations--Environmental" for a discussion of the proposed regulations estab-
lishing standards for corrective action under RCRA which may require indeter-
minable expenditures for environmental remediation in the future and
"Business--Environmental Matters" for a discussion of the difficulties associ-
ated with estimating remediation costs at certain of the sites for which NII
is required to indemnify the Company.
In October 1993 NII converted on a share for share basis all of its Class A
Common Stock to Class B Common Stock, resulting in NKK having a 75.6% voting
interest in the Company. NII sold all but 70,000 of its shares of Class B Com-
mon Stock in the market in January 1994.
Dividend payments on the Series B Preferred Stock are payable quarterly gener-
ally in the form of a release of NII from its obligation to indemnify the Com-
pany for a corresponding amount of the remaining unreleased portion of the
Weirton Benefit Liabilities to the extent such liabilities are due and owing,
with the balance, if any, payable in cash. For the period ending December 31,
1993, Series B Preferred Stock dividends totaling $12.0 million were paid
through the release of NII from and payment to the pension trustee of $10.6
million of previously unreleased Weirton Benefit Liabilities, and a cash divi-
dend of $1.4 million to reimburse NII for an obligation incurred in connection
with the Weirton Benefit Liabilities. Also in 1993, the Company used approxi-
mately $68 million of the net proceeds of the IPO to redeem 50% of the out-
standing shares of Series B Preferred Stock held by NII. Pursuant to the terms
of the Series B Preferred Stock and certain other agreements between the Com-
pany and NII, the Company paid the redemption amount directly to the pension
trustee referred to below and released NII from a corresponding portion of
NII's indemnification obligations with respect to certain Weirton Benefit Lia-
bilities.
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Ten thousand shares of Series B Preferred Stock are presently subject to man-
datory redemption by the Company in August 2000 at a redemption price of $58.3
million. At December 31, 1993, the redemption value for such shares was ap-
proximately $62.2 million. Based upon the Company's actuarial analysis, re-
demption of these shares will be made in the form of a release of NII from its
obligation to indemnify the Company for a corresponding amount of the remain-
ing unreleased Weirton Benefit Liabilities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Sources of Capital" and "Description of Capital Stock--Preferred Stock."
Dividend and redemption payments with respect to the Series B Preferred Stock
reduce the Company's cash flow, even though they are paid in the form of a re-
lease of NII from such obligations, because the Company is obligated, subject
to certain limited exceptions, to pay such amounts to the trustee of the pen-
sion plan included in the Weirton Benefit Liabilities.
If any dividend or redemption payment otherwise required pursuant to the terms
of the Series B Preferred Stock is less than the amount required to satisfy
NII's then current indemnification obligation, NII would be required to pay
such shortfall in cash to the Company. The Company's ability to fully realize
the benefits of NII's indemnification obligations is necessarily dependent
upon NII's financial condition at the time of any claim with respect to such
obligations. NII is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information with the
Commission. The Annual Report on Form 10-K for the fiscal year ended March 31,
1993 of NII and other reports and other information filed by NII with the Com-
mission can be inspected and copied at, and copies of such material can be ob-
tained from, the public reference facilities maintained by the Commission, and
such material can be inspected at the offices of the NYSE.
The Recapitalization Agreement also created the Series A Preferred Stock which
carries annual cumulative dividend rights of $806.30 per share, which equates
to an 11% yield. The Series A Preferred Stock is held by NKK and $36.7 million
was outstanding at December 31, 1993, 1992 and 1991. Dividends on the Series A
Preferred Stock are paid quarterly in cash and totalled $4 million in each of
the years ended December 31, 1993 and 1992.
Upon the occurrence of certain events detailed in the Recapitalization Agree-
ment, prior to or coincident with the final redemption of the Series B Pre-
ferred Stock, the released Weirton Benefit Liabilities will be recalculated by
an independent actuary. Any adjustment to bring the balances of the released
Weirton Benefit Liabilities to such recalculated amount will be reflected in
the Series B Preferred Stock redemption proceeds and, if necessary, additional
payment by NII. If the Company does not meet the Series B Preferred Stock div-
idend and redemption obligations when due, NII has the right to cause NKK to
purchase NII's Series B Preferred Stock dividend and redemption rights (the
"Put Right").
The Company has granted to NKK, pursuant to the Recapitalization Agreement,
the right, subject to certain conditions and exceptions, to include all or any
portion of each of its shares of Common Stock in certain registration state-
ments covering offerings of Common Stock by the Company. The Company has
agreed to pay all of the costs associated with the inclusion of any such
shares in the Company's registration statements, except underwriting discounts
and commissions. In any such case, the Company has agreed to indemnify NKK and
its subsidiaries and affiliates and its officers, directors and controlling
persons against certain liabilities in respect of any registration of its
shares covered by the above provisions.
As of February 3, 1993, NKK, NII and the Company entered into a definitive
agreement (the "Agreement") which amends in certain respects the terms and
conditions of the Recapitalization Agreement. Among other things, the Agree-
ment provides that NII must pay to the Company, from a portion of the proceeds
of any sale of its shares of Common Stock, up to $10 million as a prepayment
to the Company to pay environmental liabilities which may arise after such
prepayment and for which NII has previously agreed to indemnify the Company.
As described above, in January 1994, NII sold substantially all of its shares
of Class B Common Stock and, pursuant to the Agreement, paid to the Company
the $10 million prepayment. The Agreement provides that if the Company does
not have to make certain levels of expenditures by certain dates (up to $10
million over a 20 year period) to pay environmental liabilities indemnified by
NII, the difference between the amount spent by the Company and $10 million
will be paid by the Company to NII as provided by the terms of the Agreement.
Under the Agreement, NII would continue to be obligated to indemnify the Com-
pany for all other liabilities for which NII has previously agreed to indem-
nify the Company, including any environmental liabilities arising after such
prepayment and in excess of $10 million (as reduced by any above described re-
payments to NII). The Agreement also provides that the Company will not, prior
to 1998, exercise its option, without NII's consent, to redeem early the
10,000 shares of Series B Preferred Stock subject to mandatory redemption in
August 2000. In addition, the registration rights provisions contained in the
Recapitalization Agreement would continue to apply for the benefit of NKK but
with respect to Class B Common Stock.
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<PAGE>
The above descriptions of the Recapitalization Agreement and the Agreement pro-
vide a summary of the material terms of such agreements. The Recapitalization
Agreement and the Agreement have been filed with the Commission as exhibits to
the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
Natcoal, Inc., a wholly owned subsidiary of the Company, sold coal to and the
Company purchased coke from a subsidiary of NKK in 1991 in amounts totaling
$7.5 million and $22.5 million, respectively. There were no such coal sales or
coke purchases of this type subsequent to 1991. Accounts receivable and ac-
counts payable relating to these transactions totaled $3.2 million and $2.5
million, respectively, at June 30, 1994 and December 31, 1993 and 1992. During
the first six months of 1994, the Company purchased approximately $10 million
of slabs produced by NKK, with such purchases made from trading companies in
arms' length transactions.
The Company's selling, general and administrative expenses for the years ended
December 31, 1992 and 1991 included charges of $2.2 million and $3.9 million,
respectively, for facilities provided and direct services performed by NII for
the benefit of the Company, all of which arrangements have expired or have been
terminated.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Class A Common Stock, par value $.01 per share, 65,000,000 shares of Class B
Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred
Stock, par value $1.00 per share (the "Preferred Stock"), issuable in series.
The Board of Directors has designated a series of 5,000 shares as Series A Pre-
ferred Stock, and a series of 20,000 shares as Series B Preferred Stock. The
following summary description of the capital stock of the Company is qualified
in its entirety by reference to the Certificate of Incorporation and the Bylaws
of the Company, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
Dividends
The holders of Common Stock will be entitled to receive dividends when and as
dividends are declared by the Board of Directors of the Company out of funds
legally available therefor, provided that, if any shares of Preferred Stock are
at the time outstanding, the payment of dividends on the Common Stock or other
distributions may be subject to the declaration and payment of full cumulative
dividends on outstanding shares of Preferred Stock. Payment of dividends on the
Common Stock is currently prohibited by certain provisions in the Company's fi-
nancing arrangements. Holders of Class B Common Stock and Class A Common Stock
will be entitled to share ratably, as a single class, in any dividends paid on
the Common Stock. No dividend may be declared or paid in cash, property, Common
Stock or Preferred Stock convertible into Common Stock on either the Class A
Common Stock or Class B Common Stock unless a corresponding dividend is paid
simultaneously on the other class of Common Stock. If stock dividends are de-
clared, holders of Class A Common Stock will receive shares of Class A Common
Stock and holders of Class B Common Stock will receive shares of Class B Common
Stock. See "Dividend Policy."
Voting Rights
Except for matters where applicable law requires the approval of one or both
classes of Common Stock voting as separate classes and as otherwise described
below, holders of Class A Common Stock and Class B Common Stock vote as a sin-
gle class on all matters submitted to a vote of the stockholders, including the
election of directors. Holders of Class B Common Stock are entitled to one vote
per share and holders of Class A Common Stock are entitled to two votes per
share. Under Delaware law, the affirmative vote of the holders of a majority of
the outstanding shares of Class B Common Stock would be required to approve,
among other matters, an adverse change in the powers, preferences or special
rights of the shares of Class B Common Stock. For so long as NKK (including en-
tities in which NKK holds a majority of the economic and voting interest) owns
Common Stock representing a majority of the combined voting power of the out-
standing capital stock of the Company, any proposed amendment to the terms of
the Common Stock, in addition to any vote required by law (including the affir-
mative vote of the holders of a majority of the combined voting power of the
outstanding shares of Common Stock), will require the approval of the holders
of a majority of the shares of Class B Common Stock not owned by NKK or NII
(including entities in which NKK or NII, respectively, holds a majority of the
economic and voting interest) and voting on such proposed amendment provided
that a majority of the shares of Class B Common Stock not owned by NKK or NII
(including entities in which NKK or NII, respectively, holds a majority of the
economic and voting interest) vote on such proposed amendment.
Conversion Rights
Shares of Class A Common Stock are convertible into Class B Common Stock on a
one-to-one basis at any time at the option of the holders thereof. See "--
Transferability" and "Underwriting." In addition, in the event that any share
of Class A Common Stock ceases to be owned by NKK or entities in which NKK
holds a majority of the economic and voting interest, then, without any action
on the part of the holder thereof, each such share of Class A Common Stock will
automatically convert into a share of Class B Common Stock. In the event that,
at any time, NKK (including entities in which NKK holds a majority of the eco-
nomic and voting interest) shall own Common Stock representing less than a ma-
jority of the combined voting power of the then-outstanding capital stock of
the Company, then, without any action on the part of the holders thereof, each
outstanding share of Class A Common Stock will automatically convert into a
share of Class B Common Stock.
Liquidation Rights
Upon any liquidation, dissolution or winding up of the affairs of the Company,
whether voluntary or involuntary, any assets remaining after the satisfaction
in full of the prior rights of creditors, and the aggregate liquidation prefer-
ence of any Preferred Stock then outstanding will be distributed to the holders
of Class A Common Stock and Class B Common Stock, ratably as a single class in
proportion to the number of shares held by them.
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<PAGE>
Reorganization, Consolidation or Merger
In the event of a reorganization, consolidation or merger of the Company, each
holder of a share of Class A Common Stock shall be entitled to receive the same
kind and amount of property receivable by a holder of a share of Class B Common
Stock and each holder of a share of Class B Common Stock shall be entitled to
receive the same kind and amount of property receivable by a holder of Class A
Common Stock.
Repurchases of Common Stock
In the event the Company makes an offer to NKK to purchase any of its shares of
Class A Common Stock or to exchange shares of Class A Common Stock for other
securities of the Company, the Company is required to make an offer to purchase
or exchange Class B Common Stock on identical terms to holders of Class B Com-
mon Stock on a ratable basis.
No Preemptive Rights
The holders of Class B Common Stock and Class A Common Stock are not entitled
to preemptive or subscription rights.
Transferability
There is no restriction on the transfer of Class B Common Stock, subject to the
agreement of NKK with the Underwriters that, until 90 days from the date of
this Prospectus, NKK will not, without the prior written consent of J.P. Morgan
Securities Inc., sell or contract to sell or otherwise dispose of any shares of
capital stock of the Company, including the Common Stock. Shares of Class A
Common Stock may be converted into shares of Class B Common Stock and sold at
any time provided that either such shares have been registered in accordance
with the Securities Act or are sold pursuant to an applicable exemption from
the registration requirements of the Securities Act. See "Underwriting" and "--
Conversion Rights." The Company has granted NKK certain registration rights
with respect to their shares of Common Stock. See "Certain Relationships and
Related Transactions." NKK has informed the Company that NKK has no present in-
tention to dispose of any shares of its Common Stock.
Transfer Agent and Registrar of Class B Common Stock
The transfer agent and registrar for the Class B Common Stock is Mellon Securi-
ties Trust Company, a subsidiary of Mellon Bank Corporation.
PREFERRED STOCK
Pursuant to the Certificate of Incorporation, the Board of Directors is autho-
rized to establish and designate one or more series of Preferred Stock, without
further authorization of the Company's stockholders, and to fix the number of
shares, the dividend and the relative rights, preferences and limitations of
any such series. Thus, any series may, if so determined by the Board of Direc-
tors, have full voting rights with the Class A Common Stock or Class B Common
Stock or superior or limited voting rights, be convertible into Class A Common
Stock or Class B Common Stock or another security of the Company, and have such
other relative rights, preferences and limitations as the Board of Directors
shall determine. As a result, any class or series of Preferred Stock could have
rights which would adversely affect the voting power of the Class B Common
Stock. The shares of any class or series of Preferred Stock need not be identi-
cal. As of December 31, 1993, there were 5,000 shares of Series A Preferred
Stock and 10,000 shares of Series B Preferred Stock issued and outstanding.
The Series A Preferred Stock is entitled to annual cumulative cash dividends of
$806.30 per share, payable quarterly. At the option of the Company, the Series
A Preferred Stock is redeemable, in whole or in part, at any time or from time
to time, at a redemption price equal to $7,330.04 per share, together with ac-
crued and unpaid dividends; provided, however, that shares of Series A Pre-
ferred Stock may be redeemed only to the extent that a like percentage of
outstanding shares of Series B Preferred Stock are, or have been, redeemed. Ex-
cept as otherwise required by law, the Series A Preferred Stock does not have
any voting rights. Upon any voluntary or involuntary liquidation, dissolution
or winding up of the Company, holders of Series A Preferred Stock are entitled
to an amount equal to $7,330.04 for each share of Series A Preferred Stock then
outstanding, together with all accrued and unpaid dividends to the date of such
liquidation, dissolution or winding up. The Series A Preferred Stock ranks on a
parity with the Series B Preferred Stock with respect to dividends and distri-
butions, including the distribution of assets upon liquidation. Holders of the
Series A Preferred Stock are not entitled to preemptive rights. The Series A
Preferred Stock is transferable.
The Series B Preferred Stock is entitled to annual cumulative cash dividend
rights of $806.30 per share payable quarterly generally in the form of a re-
lease of NII from its obligation to indemnify the Company for a corresponding
amount of the remaining unreleased portion of the Weirton Benefit Liabilities
to the extent such liabilities are due and owing, with the balance, if any,
payable in cash. See "Certain Relationships and Related Transactions" for a
more complete description of the Series B Preferred Stock and the relationship
between the payment of dividends thereunder and the satisfaction of NII's in-
demnification obligations with respect to the unreleased Weirton Liabilities
and other unreleased obligations.
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The Series B Preferred Stock is subject to mandatory redemption on August 5,
2000, at a redemption price of $58.3 million. The Series B Preferred Stock is
also subject to optional redemption but may not be redeemed prior to January 1,
1998 without the consent of NII. See "Certain Relationships and Related Trans-
actions."
Except as otherwise required by law, the Series B Preferred Stock does not have
any voting rights. Upon any voluntary or involuntary liquidation, dissolution
or winding up of the Company, holders of Series B Preferred Stock are entitled
to an amount equal to the amount for which the Series B Preferred Stock could
be redeemed at the option of the Company on the date of such liquidation, dis-
solution or winding up, together with all accrued and unpaid dividends to such
date. The Series B Preferred Stock ranks on a parity with the Series A Pre-
ferred Stock with respect to dividends and distributions, including the distri-
bution of assets upon liquidation. Holders of the Series B Preferred Stock are
not entitled to preemptive rights. The Series B Preferred Stock is non-trans-
ferable.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION RELATING TO CORPORATE
OPPORTUNITIES
In order to address certain potential conflicts of interest between the Company
and NKK, the Certificate of Incorporation contains provisions regulating and
defining the conduct of certain affairs of the Company as they may involve NKK
and its officers and directors, and the powers, rights, duties and liabilities
of the Company and its officers, directors and stockholders in connection
therewith. In general, these provisions recognize that from time to time the
Company and NKK may engage in the same or similar activities or lines of busi-
ness and have an interest in the same areas of corporate opportunities. The
Certificate of Incorporation provides that NKK shall have no duty to refrain
from engaging in business activities or lines of business the same as or simi-
lar to those of the Company and neither NKK nor any officer or director of NKK
(except as provided in the following paragraph) will be liable to the Company
or to its stockholders for breach of any fiduciary duty by reason of any such
activities of NKK or of such persons' participation therein. The Certificate of
Incorporation provides that NKK is not under any duty to present any corporate
opportunity to the Company which may be a corporate opportunity for both NKK
and the Company and NKK will not be liable to the Company or its stockholders
for breach of any fiduciary duty as a stockholder of the Company by reason of
the fact that NKK pursues or acquires such corporate opportunity for itself,
directs such corporate opportunity to another person or does not present the
corporate opportunity to the Company.
Where corporate opportunities are offered to persons who are directors or offi-
cers of both the Company and NKK, the Certificate of Incorporation provides
that such director or officer of the Company shall have fully satisfied his or
her fiduciary duty to the Company and its stockholders with respect to such
corporate opportunity and will have no liability to the Company or its stock-
holders if such person acts in a manner consistent with the Company's policy.
Generally, a corporate opportunity belongs to NKK unless such person is an of-
ficer of the Company but not an officer of NKK, in which case such opportunity
belongs to the Company; provided that in any case when a corporate opportunity
is offered to a director or officer of the Company who is also a director or
officer of NKK, in writing, solely in his designated capacity with one of the
two companies, such opportunity shall belong to whichever company is so desig-
nated. Pursuant to the provisions of the Certificate of Incorporation, the
Chairman and Vice-Chairman of the Company are not deemed to be "officers" of
the Company for purposes of the foregoing provisions if they are not full-time
employees of the Company. Under the Certificate of Incorporation, any person
purchasing or otherwise acquiring any interest in shares of Common Stock will
be deemed to have notice of and to have consented to the provisions of the Cer-
tificate of Incorporation described above.
BUSINESS COMBINATION STATUTE
Section 203 of the Delaware General Corporation Law ("DGCL") prohibits certain
transactions between a Delaware corporation and an "interested stockholder,"
which is defined as a person who, together with any affiliates and/or associ-
ates of such person, beneficially owns, directly or indirectly, 15% or more of
the outstanding voting shares of a Delaware corporation. Because of the timing
of ownership of the Company's securities by NKK, NKK will not be an "interested
stockholder" under Section 203. This provision prohibits certain business com-
binations (defined broadly to include mergers, consolidations, sales or other
dispositions of assets having an aggregate value in excess of 10% of the con-
solidated assets of the corporation, and certain transactions that would in-
crease the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period
of three years after the date the interested stockholder acquired its stock,
unless (i) the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder acquired shares; (ii)
the interested stockholder acquired at least 85% of the voting stock of the
corporation in the transaction in which it became an interested stockholder; or
(iii) the business combination is approved by a majority of the board of direc-
tors and by the affirmative vote of two-thirds of the votes entitled to be cast
by disinterested stockholders at an annual or special meeting.
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CERTAIN UNITED STATES TAX CONSEQUENCES TO
NON-UNITED STATES HOLDERS
Skadden, Arps, Slate, Meagher & Flom, special counsel to the Company, is of the
opinion that the following discussion is an accurate description, under cur-
rently applicable law, of the material U.S. federal income and estate tax con-
sequences likely to apply to Non-U.S. purchasers of the Class B Common Stock.
The following is a discussion of certain U.S. federal income and estate tax
consequences of the acquisition, ownership and disposition of Class B Common
Stock by a holder that, for U.S. federal income tax purposes, is a "Non-U.S.
Holder." A "Non-U.S. Holder" is a person or entity that, for U.S. federal in-
come tax purposes, is a nonresident alien individual, a foreign corporation or
foreign partnership or a nonresident alien or foreign fiduciary of a foreign
estate or trust. The term Non-U.S. Holder does not include Holders who were
U.S. citizens within the ten year period immediately preceding the date of this
Prospectus and whose loss of U.S. citizenship had as one of its principal pur-
poses the avoidance of U.S. taxes. This discussion does not address all aspects
of U.S. federal income and estate tax that may be relevant to Non-U.S. Holders
in light of their specific circumstances and is based on the Code, as amended,
and administrative interpretations as of the date hereof, all of which may be
changed either retroactively or prospectively. Prospective investors are urged
to consult their own tax advisors with respect to the particular tax conse-
quences to them of acquiring, holding and disposing of Class B Common Stock, as
well as any tax consequences that may arise under the laws of any foreign,
state, local or other taxing jurisdiction.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder will be subject to U.S. with-
holding tax at a 30% rate (or a lower rate prescribed by an applicable tax
treaty). In determining the applicability of a tax treaty providing for a lower
rate of withholding, dividends paid to an address in a foreign country are pre-
sumed under current Treasury regulations to be paid to a resident of that coun-
try, absent definite knowledge that such presumption is not warranted. Treasury
regulations proposed in 1984, which have not been finally adopted, however,
would require Non-U.S. Holders to file certain forms to obtain the benefit of
any applicable tax treaty providing for a lower rate of withholding tax on div-
idends. Such forms would contain the holder's name and address and other perti-
nent information, to be certified by such holder under penalties of perjury,
and an official statement by the competent authority (as defined in the appli-
cable treaty) in the foreign country attesting to the holder's status as a res-
ident thereof. In general, dividends paid to a Non-U.S. Holder will not be
subject to U.S. withholding tax if the dividends are either (i) effectively
connected with a trade or business carried on by the Non-U.S. Holder within the
United States or (ii) if an income tax treaty applies, attributable to a U.S.
permanent establishment maintained by the Non-U.S. Holder. Dividends effec-
tively connected with such trade or business or attributable to such permanent
establishment generally will not be subject to withholding (if the Non-U.S.
Holder files certain forms, including Internal Revenue Service Form 4224, with
the payor of the dividend) and generally will be subject to U.S. federal income
tax at regular rates. In the case of a Non-U.S. Holder that is a corporation,
such effectively connected income may also be subject to an additional "branch
profits tax" at a rate of 30% (or such lower rate as may be specified by an ap-
plicable treaty) of its effectively connected earnings and profits, subject to
certain adjustments.
DISPOSITION OF CLASS B COMMON STOCK
Generally, a Non-U.S. Holder will not be subject to U.S. federal income tax on
any gain recognized upon the disposition of its Class B Common Stock unless (i)
the Company is or has been a "U.S. real property holding corporation" for fed-
eral income tax purposes (which the Company may be or become), and in the event
that the Class B Common Stock is considered "regularly traded" (within the
meaning of applicable Treasury regulations) (which the Company expects to be
the case), the Non-U.S. Holder held directly or indirectly at any time during
the five-year period ending on the date of disposition more than 5% of the
Class B Common Stock; (ii) the gain is effectively connected with a trade or
business carried on by the Non-U.S. Holder within the United States or,
alternatively, if a tax treaty applies, attributable to a United States perma-
nent establishment maintained by the Non-U.S. Holder; or (iii) in the case of a
Non-U.S. Holder who is a nonresident alien individual and holds shares of stock
as a capital asset, such individual is present in the United States for 183
days or more in the taxable year of disposition, and either (a) such individual
has a "tax home" (as defined for U.S. federal income tax purposes) in the
United States, or (b) the gain is attributable to an office or other fixed
place of business maintained by such individual in the United States.
FEDERAL ESTATE TAX
Class B Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for U.S. federal estate tax purposes) of the
United States at the time of death will be includible in the individual's gross
estate for U.S. federal estate tax purposes, unless an applicable tax treaty
provides otherwise. Such individual's estate may be subject to U.S. federal es-
tate tax on the property includible in the estate for U.S. federal estate tax
purposes.
50
<PAGE>
BACKUP WITHHOLDING, INFORMATION REPORTING AND OTHER REPORTING REQUIREMENTS
The Company must report annually to the Internal Revenue Service and to each
Non-U.S. Holder the amount of dividends paid to, and the tax withheld with re-
spect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced or eliminated by an applicable tax treaty.
These information returns may also be made available under the provisions of a
specific treaty or agreement with the tax authorities in the country in which
the Non-U.S. Holder resides. U.S. backup withholding tax (which generally is a
withholding tax imposed at the rate of 31% on certain payments to persons that
fail to furnish the information required under the U.S. information reporting
requirements) generally will not apply to dividends paid on Class B Common
Stock to a Non-U.S. Holder at an address outside the United States.
The payment of the proceeds from the disposition of Class B Common Stock to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding, at a rate of 31% of the gross proceeds, unless the owner
certifies under penalties of perjury, among other things, its status as a Non-
U.S. Holder or otherwise establishes an exemption. The payment of the proceeds
from the disposition of Class B Common Stock to or through a non-U.S. office of
a non-U.S. broker generally will not be subject to backup withholding and in-
formation reporting, except as noted below. In the case of proceeds from a dis-
position of Class B Common Stock paid to or through a non-U.S. office of a
broker that is (i) a U.S. person, (ii) a "controlled foreign corporation" for
U.S. federal income tax purposes or (iii) a foreign person 50% or more of whose
gross income for certain periods is effectively connected with a U.S. trade or
business, (a) backup withholding will apply if such broker has actual knowledge
that the owner is not a Non-U.S. Holder, and (b) information reporting will ap-
ply unless the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder (and the broker has no actual knowledge to the contrary).
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-U.S.
Holder's U.S. federal income tax liability, provided that the required informa-
tion is furnished to the Internal Revenue Service.
The backup withholding and information reporting rules are currently under re-
view by the Treasury Department, and their application to the Class B Common
Stock is subject to change.
51
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1994 (the "Underwriting Agreement"), the U.S. under-
writers named below (the "U.S. Underwriters"), for whom J.P. Morgan Securities
Inc., PaineWebber Incorporated and Salomon Brothers Inc are acting as repre-
sentatives (the "U.S. Representatives"), have severally agreed to purchase,
and the Company has agreed to sell to them, and the international managers
named below (the "International Managers"), for whom J.P. Morgan Securities
Ltd., PaineWebber International (U.K.) Ltd. and Salomon Brothers International
Limited are acting as representatives (the "International Representatives"),
have severally agreed to purchase, and the Company has agreed to sell to them,
the respective numbers of shares of Class B Common Stock set forth opposite
their names below. The U.S. Underwriters and the International Managers are
collectively referred to as the "Underwriters." Under the terms and conditions
of the Underwriting Agreement, the Underwriters are obligated to take and pay
for all such shares of Class B Common Stock if any are taken. Under certain
circumstances, the commitments of nondefaulting Underwriters may be increased
as set forth in the Underwriting Agreement.
<TABLE>
<S> <C>
---------
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
J.P. Morgan Securities Inc.
PaineWebber Incorporated
Salomon Brothers Inc
---------
Subtotal
---------
<CAPTION>
INTERNATIONAL MANAGERS
----------------------
<S> <C>
J.P. Morgan Securities Ltd.
PaineWebber International (U.K.) Ltd.
Salomon Brothers International Limited
---------
Subtotal
---------
Total
=========
</TABLE>
The U.S. Underwriters and the International Managers have entered into an
Intersyndicate Agreement which provides for the coordination of their
activities. Pursuant to the Intersyndicate Agreement, sales may be made
between the U.S. Underwriters and the International Managers of such number of
shares as they may mutually agree. The price of any shares so sold shall be
the offering price, less such amount as may be mutually agreed upon by the
U.S. Representatives and the International Representatives, but not exceeding
the selling concession to dealers applicable to such shares.
52
<PAGE>
Pursuant to the Intersyndicate Agreement, each U.S. Underwriter has represented
and agreed that (i) it is not purchasing any Class B Common Stock for the ac-
count of anyone other than a United States or Canadian Person and (ii) it has
not offered or sold, and will not offer or sell, directly or indirectly, any
Class B Common Stock or distribute any prospectus relating to the Offering in
the United States and Canada to any person outside the United States or Canada
or to anyone other than a United States or Canadian Person. Pursuant to the
Intersyndicate Agreement, each International Manager has represented and agreed
that (i) it is not purchasing Class B Common Stock for the account of any
United States or Canadian Person and (ii) it has not offered or sold, and will
not offer or sell, directly or indirectly, any Class B Common Stock or distrib-
ute any prospectus relating to the Offering outside the United States and Can-
ada to any person within the United States or Canada or to any United States or
Canadian Person. The foregoing limitations do not apply to certain transactions
specified in the Intersyndicate Agreement, including stabilization transactions
and transactions between the U.S. Underwriters and the International Managers
pursuant to the Intersyndicate Agreement. As used herein, "United States or Ca-
nadian Person" means any individual who is resident in the United States or
Canada, or any corporation, pension, profit-sharing or other trust or other en-
tity organized under or governed by the laws of the United States or Canada or
any political subdivision thereof (other than a branch located outside the
United States or Canada), and includes any United States or Canadian branch of
a person who is otherwise not a United States or Canadian Person.
Pursuant to the Intersyndicate Agreement, each U.S. Underwriter has represented
that it has not offered or sold, and agreed not to offer or sell, any Class B
Common Stock, directly or indirectly, in Canada in contravention of the securi-
ties laws of Canada or any province or territory thereof and, has represented
that any offer of Class B Common Stock in Canada will be made only pursuant to
an exemption from the requirement to file a prospectus in the province or ter-
ritory of Canada in which such offer is made. Each U.S. Underwriter has further
agreed to send to any dealer who purchases from it any of the Class B Common
Stock a notice stating in substance that, by purchasing such Class B Common
Stock, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, directly or indirectly, any of such Class B Common
Stock in Canada or to, or for the benefit of, any resident of Canada in contra-
vention of the securities laws of Canada or any province or territory thereof
and that any offer of Class B Common Stock in Canada will be made only pursuant
to an exemption from the requirement to file a prospectus in the province of
Canada in which such offer is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Class B Common Stock a notice con-
taining substantially the same statement as is contained in this sentence.
Pursuant to the Intersyndicate Agreement, each International Manager has also
represented and agreed that (i) it has not offered or sold and will not offer
or sell any Class B Common Stock in the United Kingdom, by means of any docu-
ment, other than to persons whose ordinary business it is to buy or sell shares
or debentures, whether as principal or agent, or in circumstances which do not
constitute an offer to the public within the meaning of the Companies Act 1985;
(ii) it has complied and will comply with all applicable provisions of the Fi-
nancial Services Act 1986 with respect to anything done by it in relation to
the Class B Common Stock in, from or otherwise involving the United Kingdom;
and (iii) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue of the
Class B Common Stock to any person who is of a kind described in Article 9(3)
of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Or-
der 1988 or is a person to whom the document may otherwise lawfully be issued
or passed on.
The Underwriters propose initially to offer the Class B Common Stock directly
to the public at the price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $. per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $. per share to certain other dealers.
The Company has granted to the U.S. Underwriters an option, expiring at the
close of business on the 30th day after the date of this Prospectus, to pur-
chase up to 720,000 additional shares of Class B Common Stock at the initial
public offering price, less the underwriting discount. The U.S. Underwriters
may exercise such option solely for the purpose of covering over-allotments, if
any. If the U.S. Underwriters exercise their option, each U.S. Underwriter will
have a firm commitment, subject to certain conditions, to purchase approxi-
mately the same number of option shares as the number of shares of Class B Com-
mon Stock to be purchased by that U.S. Underwriter shown in the foregoing table
bears to the total number of shares of Class B Common Stock initially offered
by the U.S. Underwriters hereby.
The Company has granted to the International Managers an option, expiring on
the 30th day after the date of this Prospectus, to purchase up to 180,000 addi-
tional shares of Class B Common Stock to cover over-allotments, if any, on
terms similar to those granted to the U.S. Underwriters.
The Company has agreed to indemnify the Underwriters against certain liabili-
ties, including liabilities under the Securities Act.
53
<PAGE>
Each of the Company, NKK and the Company's current directors and executive of-
ficers have agreed not to, for a period of 90 days after the date of this Pro-
spectus, offer, sell, contract to sell or otherwise dispose of, any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for any such shares, without the prior written consent of J.P. Morgan Securi-
ties Inc., with certain limited exceptions.
The Class B Common Stock is listed on the NYSE under the trading symbol "NS."
Each of the U.S. Representatives and the International Representatives and/or
certain of their affiliates maintain ongoing business relationships with the
Company and/or NKK and in connection therewith provide investment banking
and/or investment advisory services for which they receive customary fees. Af-
filiates of J.P. Morgan Securities Inc. provide commercial banking services to
the Company and NKK and an affiliate of J.P. Morgan Securities Inc. acts as
agent bank for the Company's Receivables Purchase Agreement.
LEGAL MATTERS
The validity of the Class B Common Stock and certain other legal matters in
connection with the Offering will be passed upon for the Company by Skadden,
Arps, Slate, Meagher & Flom, Chicago, Illinois. Certain legal matters in con-
nection with the Class B Common Stock offered hereby will be passed upon for
the Underwriters by Davis Polk & Wardwell, New York, New York. Skadden, Arps,
Slate, Meagher & Flom has from time to time represented, and continues to rep-
resent, the Company and/or NKK Corporation in connection with certain other
matters.
EXPERTS
The consolidated financial statements of the Company at December 31, 1993 and
1992, and for each of the three years in the period ended December 31, 1993,
appearing in this Prospectus and the Registration Statement, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein. The financial statements referred to above
are included in this Prospectus and the Registration Statement in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a Registration
Statement on Form S-3 under the Securities Act with respect to the Class B Com-
mon Stock to be sold in the Offering. For the purposes hereof, the term "Regis-
tration Statement" means the original Registration Statement and any and all
amendments thereto. This Prospectus, which constitutes a part of the Registra-
tion Statement, does not contain all the information set forth in the Registra-
tion Statement and the exhibits and schedules thereto, to which reference is
hereby made. Statements made in this Prospectus as to the contents of any con-
tract, agreement or other document are not necessarily complete; with respect
to each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved.
The Company is subject to the informational requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy and information statements
and other information with the Commission. The Registration Statement and ex-
hibits and schedules thereto and the reports, proxy and information statements
and other information filed by the Company with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, New York 10048 and the Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be ob-
tained from the Public Reference Section of the Commission at Room 1024, Judi-
ciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such reports, proxy and information statements and other information re-
garding the Company may also be inspected and copied at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
54
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Ernst & Young LLP Independent Auditors......................... F-2
Statements of Consolidated Income--Years Ended December 31, 1993, 1992
and 1991 and for the Six Months Ended June 30, 1994 and 1993 (unau-
dited)................................................................. F-3
Consolidated Balance Sheets--December 31, 1993 and 1992 and June 30, 1994
(unaudited)............................................................ F-4
Statements of Consolidated Cash Flows--Years Ended December 31, 1993,
1992 and 1991 and for the Six Months Ended June 30, 1994 and 1993 (un-
audited)............................................................... F-5
Statements of Changes in Consolidated Stockholders' Equity and Redeemable
Preferred Stock--Series B--Years Ended December 31, 1993, 1992 and 1991
and for the Six Months Ended June 30, 1994 (unaudited)................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
LOGO
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
Board of Directors
National Steel Corporation
We have audited the accompanying consolidated balance sheets of National Steel
Corporation and subsidiaries (the "Company") as of December 31, 1993 and 1992,
and the related statements of consolidated income, cash flows, and changes in
stockholders' equity and redeemable preferred stock--Series B for each of the
three years in the period ended December 31, 1993. 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 in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1993 and 1992, and the consolidated results of its op-
erations and its cash flows for each of the three years in the period ended De-
cember 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note A to the Consolidated Financial Statements, in 1993 the
Company changed its method of accounting for postretirement and postemployment
benefits, and in 1992 the Company changed its method of accounting for income
taxes.
Ernst & Young LLP
January 26, 1994, except for the first paragraph of Note K, as to which the
date is February 11, 1994
F-2
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
----------------------------------------------------------
FOR THE SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
(In Thousands of Dollars, 1993
Except 1994 (RESTATED) 1993 1992 1991
Per Share Amounts) ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES $1,273,420 $1,210,082 $2,418,800 $2,373,317 $2,329,815
Cost of products sold 1,145,578 1,126,370 2,253,972 2,106,743 2,102,520
Selling, general and ad-
ministrative 67,558 67,279 136,656 132,801 139,345
Depreciation, depletion
and amortization 69,690 68,060 137,500 114,880 117,008
Equity (income) loss of
affiliates 14 (918) (2,160) (5,600) (9,063)
Unusual items (110,972) - 110,966 36,984 110,700
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERA-
TIONS 101,552 (50,709) (218,134) (12,491) (130,695)
Financing costs
Interest and other fi-
nancial income (1,554) (972) (1,862) (1,995) (6,128)
Interest and other fi-
nancial expense 31,974 32,457 63,647 64,031 64,830
---------- ---------- ---------- ---------- ----------
30,420 31,485 61,785 62,036 58,702
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES,
EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 71,132 (82,194) (279,919) (74,527) (189,397)
Income tax provision
(credit) (7,720) (11,066) (37,511) 156 118
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 78,852 (71,128) (242,408) (74,683) (189,515)
Extraordinary item - - - (50,000) -
Cumulative effect of ac-
counting changes - (16,453) (16,453) 76,251 -
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) 78,852 (87,581) (258,861) (48,432) (189,515)
Less: preferred stock
dividends (5,480) (7,852) (13,364) (17,449) (17,257)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)
APPLICABLE TO COMMON
STOCK $ 73,372 $ (95,433) $ (272,225) $ (65,881) $ (206,772)
========== ========== ========== ========== ==========
PER SHARE DATA APPLICABLE TO COMMON STOCK:
INCOME (LOSS) BEFORE EX-
TRAORDINARY ITEM AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES $ 2.02 $ (2.52) $ (7.55) $ (3.61) $(8.11)
Extraordinary item - - - (1.96) -
Cumulative effect of ac-
counting changes - (.52) (.49) 2.99 -
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) APPLI-
CABLE TO COMMON STOCK $ 2.02 $ (3.04) $ (8.04) $ (2.58) $ (8.11)
========== ========== ========== ========== ==========
Weighted average shares
outstanding
(in thousands) 36,361 31,397 33,879 25,500 25,500
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------------------
(In Thousands of Dollars, Except Per Share
Amounts) JUNE 30, DECEMBER 31,
1994 1993 1992
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents $ 82,141 $ 5,322 $ 55,220
Receivables, less allowances
(1994--$18,652; 1993--$21,380; 1992--
$26,385) 262,073 224,709 218,082
Inventories:
Finished and semi-finished products 255,421 246,285 239,459
Raw materials and supplies 85,849 124,812 132,367
---------- ---------- ----------
341,270 371,097 371,826
---------- ---------- ----------
Total current assets 685,484 601,128 645,128
Investments in affiliated companies 57,753 58,278 56,409
Property, plant and equipment
Land and land improvements 179,312 221,224 219,593
Buildings 259,037 259,037 291,460
Machinery and equipment 2,928,660 2,816,531 2,775,090
---------- ---------- ----------
3,367,009 3,296,792 3,286,143
Less: Allowance for depreciation,
depletion and amortization 1,946,168 1,898,055 1,890,676
---------- ---------- ----------
Net property, plant and equipment 1,420,841 1,398,737 1,395,467
Deferred income taxes 91,400 80,600 43,000
Intangible pension asset 128,765 128,765 12,100
Other assets 39,026 36,692 36,412
---------- ---------- ----------
TOTAL ASSETS $2,423,269 $2,304,200 $2,188,516
========== ========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY:
Current liabilities
Accounts payable $ 190,642 $ 242,294 $ 257,217
Salaries and wages 47,376 49,602 47,950
Withheld and accrued taxes 65,357 74,444 72,672
Pension and other employee benefits 104,913 69,679 70,643
Other accrued liabilities 107,824 107,556 86,403
Income taxes 3,623 2,700 2,972
Long term obligations and related party
indebtedness due within one year 26,438 28,257 33,468
---------- ---------- ----------
Total current liabilities 546,173 574,532 571,325
Long term obligations 386,185 344,096 352,265
Long term indebtedness to related parties 323,327 329,995 309,500
Long term pension liability 309,954 288,793 120,219
Postretirement benefits other than pensions 184,173 157,435 66,116
Other long term liabilities 342,843 351,357 304,598
Commitments and contingencies
Redeemable Preferred Stock--Series B 67,280 68,030 137,802
Stockholders' equity
Common Stock, par value $.01:
Class A--authorized 30,000,000 shares;
issued and outstanding 22,100,000
shares in 1994 and 1993 and 25,500,000
shares in 1992 221 221 255
Class B--authorized 65,000,000 shares;
issued and outstanding 14,261,100
shares 143 143 -
Preferred Stock--Series A 36,650 36,650 36,650
Additional paid-in capital 360,314 360,314 218,991
Retained earnings (deficit) (133,994) (207,366) 70,795
---------- ---------- ----------
Total stockholders' equity 263,334 189,962 326,691
---------- ---------- ----------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY $2,423,269 $2,304,200 $2,188,516
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
---------------------------------------------------
<CAPTION>
FOR THE SIX MONTHS
ENDED
JUNE 30,
1993 YEARS ENDED DECEMBER 31,
1994 (RESTATED) 1993 1992 1991
(In Thousands of Dollars) --------- ---------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 78,852 $ (87,581) $(258,861) $ (48,432) $(189,515)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation,
depletion and
amortization 69,690 68,060 137,500 114,880 117,008
Carrying charges
related to facility
sales and plant
closings 14,781 17,730 35,597 30,832 21,511
Unusual items
(excluding pensions
and OPEB) - - 37,900 23,739 107,127
Equity (income) loss
of affiliates 14 (918) (2,160) (5,600) (9,063)
Dividends from
affiliates 900 900 5,765 6,738 10,144
Long-term pension
liability 21,161 (16,450) 51,909 17,443 14,624
Postretirement
benefits 27,590 29,600 97,562 - -
Extraordinary item - - - 50,000 -
Deferred income taxes (10,800) (11,100) (37,600) - -
Cumulative effect of
accounting changes - 16,453 16,453 (76,251) -
Cash provided (used) by
working capital
items:
Receivables (40,401) (29,565) (6,627) (4,239) (17,220)
Inventories 29,827 18,033 729 (8,120) 49,947
Accounts payable (51,652) (54,881) (14,923) 72,726 (28,071)
Accrued liabilities 23,517 22,186 (6,336) (24,365) (1,967)
Other (15,180) 6,409 2,063 (17,193) (4,367)
--------- --------- --------- --------- ---------
NET CASH PROVIDED
(USED) BY
OPERATING
ACTIVITIES 148,299 (21,124) 58,971 132,158 70,158
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property,
plant and equipment (90,770) (39,772) (160,708) (283,941) (178,225)
Proceeds from sale of
assets 665 7 7,182 860 486
--------- --------- --------- --------- ---------
NET CASH USED BY
INVESTING
ACTIVITIES (90,105) (39,765) (153,526) (283,081) (177,739)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of Class B
Common Stock - 141,432 141,432 - -
Redemption of Preferred
Stock--Series B - (67,804) (67,804) - -
Debt repayments (54,348) (12,403) (33,469) (32,450) (121,410)
Borrowings 87,950 41 84 12,150 4,513
Borrowings from related
parties - 40,500 40,500 197,500 162,000
Payment of released
Weirton Benefit
Liabilities (8,979) (11,530) (20,001) (15,340) (17,689)
Payment of unreleased
Weirton Liabilities
and their release in
lieu of cash
dividends on
Preferred Stock--
Series B (3,912) (6,567) (10,594) (15,356) (16,125)
Dividend payments on
Preferred Stock--
Series A (1,999) (1,998) (4,030) (4,033) (4,031)
Dividend payments on
Preferred Stock--
Series B (87) (1,422) (1,461) (777) -
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY
FINANCING
ACTIVITIES 18,625 80,249 44,657 141,694 7,258
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS 76,819 19,360 (49,898) (9,229) (100,323)
Cash and cash
equivalents, beginning
of the period 5,322 55,220 55,220 64,449 164,772
--------- --------- --------- --------- ---------
CASH AND CASH
EQUIVALENTS, END OF THE
PERIOD $ 82,141 $ 74,580 $ 5,322 $ 55,220 $ 64,449
========= ========= ========= ========= =========
SUPPLEMENTAL CASH PAYMENT
INFORMATION:
Interest and other
financing costs paid
(net of amounts
capitalized) $ 29,525 $ 26,131 $ 51,886 $ 32,224 $ 43,493
Income taxes paid 2,281 35 72 130 1,257
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY AND REDEEMABLE
PREFERRED STOCK--SERIES B
<TABLE>
<CAPTION>
REDEEM-
TOTAL ABLE
COMMON COMMON PREFERRED ADDITIONAL RETAINED STOCK- PREFERRED
STOCK -- STOCK-- STOCK-- PAID-IN EARNINGS HOLDERS' STOCK--
(In Thousands of CLASS A CLASS B SERIES A CAPITAL (DEFICIT) EQUITY SERIES B
Dollars) -------- -------- --------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1991 $ 75 $ - $ 36,650 $ 219,171 $ 343,448 $599,344 $144,802
Restatement for 340 for
1 stock split effected
in the form of a stock
dividend 180 (180)
Net loss (189,515) (189,515)
Amortization of excess
of book value over
redemption value of
Redeemable Preferred
Stock--Series B 3,500 3,500 (3,500)
Cumulative dividends on
Preferred Stocks--
Series A and B (20,757) (20,757)
-------- -------- -------- -------- --------- -------- --------
BALANCE AT DECEMBER 31,
1991 255 - 36,650 218,991 136,676 392,572 141,302
Net loss (48,432) (48,432)
Amortization of excess
of book value over
redemption value of
Redeemable Preferred
Stock--Series B 3,500 3,500 (3,500)
Cumulative dividends on
Preferred Stocks--
Series A and B (20,949) (20,949)
-------- -------- -------- -------- --------- -------- --------
BALANCE AT DECEMBER 31,
1992 255 - 36,650 218,991 70,795 326,691 137,802
Net loss (258,861) (258,861)
Redemption of Redeemable
Preferred Stock--
Series B (67,804)
Amortization of excess
of book value over
redemption value of
Redeemable Preferred
Stock--Series B 1,968 1,968 (1,968)
Cumulative dividends on
Preferred Stocks--
Series A and B (15,332) (15,332)
Issuance of Common
Stock--
Class B 109 141,323 141,432
Conversion of 3,400,000
shares of NII Common
Stock--Class A to
Common Stock--Class B (34) 34
Minimum pension
liability (5,936) (5,936)
-------- -------- -------- -------- --------- -------- --------
BALANCE AT DECEMBER 31,
1993 221 143 36,650 360,314 (207,366) 189,962 68,030
Net income (unaudited) 78,852 78,852
Amortization of excess
of book value over
redemption value of
Redeemable Preferred
Stock--Series B
(unaudited) 750 750 (750)
Cumulative dividends on
Preferred Stocks--
Series A and B
(unaudited) (6,230) (6,230)
-------- -------- -------- -------- --------- -------- --------
BALANCE AT JUNE 30, 1994
(UNAUDITED) $ 221 $ 143 $ 36,650 $ 360,314 $(133,994) $263,334 $ 67,280
======== ======== ======== ======== ========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993 IS
UNAUDITED)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements: The consolidated financial statements for the six
months ended June 30, 1994 and 1993 are unaudited. However, in the opinion of
management, such statements include all adjustments necessary for a fair pre-
sentation of the results for the periods indicated. All such adjustments made,
except for the unusual gain which is discussed in Note K, were of a normal re-
curring nature. The financial results presented for the six months ended June
30, 1994 and 1993 are not necessarily indicative of results of operations for
the full year. The following footnotes to the financial statements have been
updated to reflect significant unaudited interim events, after January 26,
1994, except for the first paragraph of Note K, as to which the date is Febru-
ary 11, 1994, reported in the Company's June 30, 1994 and March 31, 1994 re-
ports on Form 10-Q and, therefore, do not represent full financial statement
disclosures for the interim periods presented.
Financial information for the first six months of 1993 has been retroactively
restated to reflect the implementation of Statement of Financial Accounting
Standards No. 112, "Employer's Accounting for Postemployment Benefits," which
the Company adopted during the fourth quarter of 1993.
Principles of Consolidation: The consolidated financial statements include the
accounts of National Steel Corporation and its majority owned subsidiaries (the
"Company").
Cash Equivalents: Cash equivalents are short-term investments which consist
principally of time deposits at cost which approximates market. These invest-
ments have maturities of three months or less at the time of purchase.
Inventories: Inventories are stated at the lower of last-in, first-out ("LIFO")
cost or market. If the first-in, first-out ("FIFO") cost method of inventory
accounting had been used, inventories would have been approximately $169.5 mil-
lion and $141.3 million higher than reported at December 31, 1993 and 1992, re-
spectively. During each of the last three years certain inventory quantity
reductions caused liquidations of LIFO inventory values. These liquidations de-
creased net income for the quarters and years ended December 31, 1993 and 1992,
by $3.0 million and $3.4 million, respectively, and increased net income for
the quarter and year ended December 31, 1991 by approximately $10.9 million.
Investments: Investments in affiliated companies (corporate joint ventures and
20% to 50% owned companies) are stated at cost plus equity in undistributed
earnings since acquisition. Undistributed earnings of affiliated companies in-
cluded in retained earnings at December 31, 1993 and 1992 amounted to $7.2 mil-
lion and $11.3 million, respectively.
Property, Plant and Equipment: Property, plant and equipment are stated at cost
and include certain expenditures for leased facilities. Interest costs applica-
ble to facilities under construction are capitalized. Capitalized interest
amounted to $5.8 million in 1993, $14.4 million in 1992 and $4.5 million in
1991. Amortization of capitalized interest amounted to $5.7 million in 1993,
$4.6 million in 1992 and $4.5 million in 1991.
Depreciation, Depletion and Amortization: Depreciation of production facilities
and amortization related to capitalized lease obligations are generally pro-
vided by charges to income computed by the straight-line method. Provisions for
depreciation and depletion of certain raw material facilities and furnace
relinings are computed on the basis of tonnage produced in relation to esti-
mated total production to be obtained from such facilities.
Environmental: Estimated losses from environmental contingencies are accrued
and charged to income when it is probable that a liability has been incurred
and the amount of loss can be reasonably estimated. (See Note M--Environmental
Liabilities.)
Research and Development: Research and development costs are expensed when in-
curred and are charged to cost of products sold. Expenses for 1993, 1992 and
1991 amounted to approximately $9.4 million, $9.5 million and $8.8 million, re-
spectively.
Income Taxes: Effective January 1, 1992, the Company adopted Statement of Fi-
nancial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"), whereby deferred items are determined based on differences between the
financial reporting and tax basis of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differ-
ences are expected to reverse. Prior to 1992, the Company accounted for income
taxes under Accounting Principles Board Opinion No. 11 ("APB 11").
F-7
<PAGE>
Financial Instruments: The Company's financial instruments, as defined by
Statement of Financial Accounting Standards No. 107, consist of cash and cash
equivalents, long-term obligations (excluding capitalized lease obligations),
and the Series B Preferred Stock (defined below). The Company's estimate of the
fair value of these financial instruments approximates their carrying amounts
at December 31, 1993.
Accounting Changes: During 1993, the Company adopted two new Financial Account-
ing Standards Board Statements, "Accounting for Postretirement Benefits Other
Than Pensions" ("SFAS 106" or "OPEB") and SFAS 112. (See Note F--Postretirement
Benefits Other Than Pensions and Note G--Postemployment Benefits.)
Earnings per Share: Earnings (loss) per share of Common Stock ("EPS") is com-
puted by dividing net income or loss applicable to common stockholders by the
sum of the weighted average of the shares of common stock outstanding during
the period plus common stock equivalents, if dilutive.
Business Segment: The Company is engaged in a single line of business, the pro-
duction and processing of steel. The Company targets high value added applica-
tions of flat rolled carbon steel for sale to the automotive, metal buildings
and container markets. The Company also sells hot and cold rolled steel to a
wide variety of other users including the pipe and tube industry and indepen-
dent steel service centers. In 1993, a single customer accounted for approxi-
mately 11% of net sales and approximately 12% of net sales in 1992 and 1991.
Sales of the Company's products to the automotive market accounted for approxi-
mately 29%, 27% and 26% of the Company's total net sales in 1993, 1992 and
1991, respectively. Concentration of credit risk related to the Company's trade
receivables is limited due to the large numbers of customers in differing in-
dustries and geographic areas.
Reclassifications: Certain items in prior years have been reclassified to con-
form with the current year presentation.
NOTE B--CAPITAL STRUCTURE AND INITIAL PUBLIC OFFERING OF COMMON STOCK
In April 1993, the Company completed an initial public offering (the "IPO") of
10,861,100 shares of its Class B Common Stock, par value $.01 per share (the
"Class B Common Stock"), at an offering price of $14 per share, which generated
net proceeds to the Company of approximately $141.4 million.
In connection with the IPO, 30,000,000 shares of Class A Common Stock, par
value $.01 per share (the "Class A Common Stock"), were authorized and the then
outstanding 75,000 shares of existing Common Stock received a 340 for 1 stock
split effectuated in the form of a stock dividend and the common stock was au-
tomatically converted to Class A Common Stock. Stockholders' equity at December
31, 1991 has been retroactively adjusted to reflect this stock dividend. As a
result of the IPO, all preferred stock outstanding became non-voting.
On October 28, 1993, National Intergroup, Inc. (collectively with its subsidi-
aries, "NII") converted each of its 3,400,000 shares of Class A Common Stock to
3,400,000 shares of Class B Common Stock, bringing the total number of out-
standing shares of Class A and Class B Common Stock to 22,100,000 and
14,261,100, respectively, at December 31, 1993.
Ownership. At December 31, 1993, 75.6% of the combined voting power of the
Company's 36,361,100 outstanding shares of Common Stock was held by NKK Corpo-
ration (collectively with its subsidiaries "NKK"). The majority of this control
has been acquired since 1984 from NII which held 5.8% of the combined voting
power of the Company's Common Stock at December 31, 1993. During January 1994,
NII sold substantially all of its 3,400,000 shares of Class B Common Stock in
the market, increasing public ownership of the Company's common stock to 24.4%
of the combined voting power of the Common Stock.
At December 31, 1993 the Company's capital structure was as follows:
Series A Preferred Stock
At December 31, 1993, there were 5,000 shares of Series A Preferred Stock, par
value $1.00 per share (the "Series A Preferred Stock"), issued and outstanding.
Annual dividends of $806.30 per share on the Series A Preferred Stock are cumu-
lative and payable quarterly. The Series A Preferred Stock is not subject to
mandatory redemption by the Company and is non-voting.
F-8
<PAGE>
Series B Redeemable Preferred Stock
On May 4, 1993, the Company redeemed 10,000 shares of the Series B Redeemable
Preferred Stock, par value $1.00 per share (the "Series B Preferred Stock"),
held by NII. These shares were subject to mandatory redemption on August 5,
1995. The cost of the redemption totaled $67.8 million and was funded from pro-
ceeds received in connection with the IPO. If the redemption of these shares
had occurred at the beginning of the year, EPS for 1993 would have increased by
$.06. Pursuant to the terms of the Series B Preferred Stock and certain other
agreements between the Company and NII, the Company paid the redemption amount
directly to a pension trustee and released NII from a corresponding amount of
NII's indemnification obligations with respect to certain employee benefit lia-
bilities of the Company retained in connection with the sale of its Weirton
Steel Division. (See Note J--Weirton Liabilities.)
At December 31, 1993 there were 10,000 remaining shares of Series B Preferred
Stock issued and outstanding and held by NII. Annual dividends of $806.30 per
share on the Series B Preferred Stock are cumulative and payable quarterly.
Dividends and redemption proceeds, to the extent required by the Stock Purchase
and Recapitalization Agreement (the "Recapitalization Agreement"), are used to
release NII from its indemnification obligations with respect to the remaining
unreleased liabilities for certain employee benefits for the employees of its
former Weirton Steel Division ("Weirton") employees (the "Weirton Benefit Lia-
bilities"). (See Note J--Weirton Liabilities.) The Series B Preferred Stock
dividend permitted release and payment of $10.6 million and $15.3 million of
previously unreleased Weirton Benefit Liabilities during 1993 and 1992, respec-
tively, and a cash dividend of $1.4 million and $.8 million during 1993 and
1992, respectively, to reimburse NII for an obligation previously incurred in
connection with the Weirton Benefit Liabilities. Upon the occurrence of certain
events detailed in the Recapitalization Agreement, prior to or coincident with
the Series B Preferred Stock final redemption, the released Weirton Benefit Li-
abilities will be recalculated by an independent actuary. Any adjustment to
bring the balances of the released Weirton Benefit Liabilities to such recalcu-
lated amount will be dealt with in the Series B Preferred Stock redemption pro-
ceeds or otherwise settled. If the Company does not meet its preferred stock
dividend and redemption obligations when due, NII has the right to cause NKK to
purchase the Company's preferred stock dividend and redemption obligations. The
Series B Preferred Stock is nontransferable and nonvoting.
The remaining Series B Preferred Stock is subject to mandatory redemption on
August 5, 2000 at a redemption price of $58.3 million and may not be redeemed
prior to January 1, 1998 without the consent of NII.
Periodic adjustments are made to consolidated retained earnings for the excess
of the book value of the Series B Preferred Stock at the date of issuance over
the redemption value. Based upon the Company's actuarial analysis, the unre-
leased Weirton Benefit Liabilities approximate the aggregate remaining dividend
and redemption payments with respect to the Series B Preferred Stock and ac-
cordingly, such payments are expected to be made in the form of releases of NII
from its obligations to indemnify the Company for corresponding amounts of the
remaining unreleased Weirton Benefit Liabilities. At that time, the Company
will be required to deposit cash equal to the redemption amount in the Weirton
Retirement Trust, thus leaving the Company's net liability position unchanged.
The Series B Preferred Stock, with respect to dividend rights and rights on
liquidation, ranks senior to the Company's common stock and equal to the Series
A Preferred Stock.
Class A Common Stock
At December 31, 1993, the Company had 30,000,000 shares of $.01 par value Class
A Common Stock authorized, of which 22,100,000 shares were issued and outstand-
ing and owned by NKK. Each share of Class A Common Stock is entitled to two
votes. No cash dividends were paid in 1993, 1992 or 1991.
Class B Common Stock
At December 31, 1993, the Company had 65,000,000 shares of $.01 par value Class
B Common Stock authorized. Of the 14,261,100 shares issued and outstanding,
3,400,000 were owned by NII and the remaining 10,861,100 shares were publicly
traded. No cash dividends were paid in 1993. Subsequent to NII's January 1994
sale of substantially all of its 3,400,000 shares of Class B Common Stock, sub-
stantially all of the issued and outstanding shares of Class B Common Stock be-
came publicly traded.
The Company is restricted from paying cash dividends on Common Stock by various
debt covenants. (See Note D--Long-Term Obligations and Related Party Indebted-
ness.)
F-9
<PAGE>
NOTE C--INVESTMENT IN IRON ORE COMPANY OF CANADA
Summarized financial information for Iron Ore Company of Canada, a 19.96% owned
affiliated company accounted for by the equity method is presented below:
<TABLE>
<S> <C> <C> <C>
--------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1992 1991
(U.S. dollars in thousands) --------- --------- ---------
<S> <C> <C> <C>
Current assets $ 132,663 $ 137,495 $ 130,843
Property, plant and equipment and other
assets 372,467 376,286 361,289
Current liabilities 95,336 98,725 81,048
Long term obligations and other liabil-
ities 157,273 149,280 138,099
Sales and operating revenues 382,465 399,582 476,518
Gross profit 53,892 72,274 107,721
Income before cumulative effect of ac-
counting changes 26,215 16,203 38,121
Cumulative effect of accounting changes (15,097) 5,836 -
Net income 11,118 22,039 38,121
Company's equity in:
Net assets 50,403 53,049 54,488
Net income 2,219 4,399 7,609
</TABLE>
NOTE D--LONG TERM OBLIGATIONS AND RELATED PARTY INDEBTEDNESS
Long term obligations and related party indebtedness at December 31, 1993 and
1992 were as follows:
<TABLE>
<S> <C> <C>
--------------------
<CAPTION>
1993 1992
(Dollars in thousands) --------- ---------
<S> <C> <C>
First Mortgage Bonds, 8.375% Series due August 1,
2006, with general first liens on principal
plants, properties, certain subsidiaries, and an
affiliated company $ 115,587 $ 115,587
Convertible Subordinated Debentures, 4.625% payable
annually through 1994, convertible into NII common
stock at $59.37 per share 2,311 3,977
Vacuum Degassing Facility Loan, 10.336% fixed rate
due in semi-annual installments through 2000, with
a first mortgage in favor of the lenders 42,661 47,090
Continuous Caster Facility Loan, 10.057% fixed rate
to 2000 when the rate will be reset to a current
rate. Equal semi-annual payments due through 2007,
with a first mortgage in favor of the lenders 128,859 132,946
Coke Battery Loan, 7.615% fixed rate with semi-
annual payments due through 2008. Lenders are
wholly-owned subsidiaries of NKK and are unsecured 343,332 309,500
Headquarters Building Loan, current interest rate
4.275%, reset semi-annually through 1999, with a
first mortgage in favor of the lender 8,923 10,000
Unsecured project financing -- 13,540
Capitalized lease obligations 32,806 34,371
Other 27,869 28,222
--------- ---------
Total long term obligations and related party in-
debtedness 702,348 695,233
Less long term obligations due within one year 28,257 33,468
--------- ---------
Long term obligations and related party indebted-
ness $ 674,091 $ 661,765
========= =========
</TABLE>
F-10
<PAGE>
Future minimum payments for all long-term obligations and leases as of December
31, 1993 are as follows:
<TABLE>
<S> <C> <C> <C>
--------------------------------
<CAPTION>
OTHER
CAPITALIZED OPERATING LONG-TERM
LEASES LEASES OBLIGATIONS
(Dollars in thousands) ----------- --------- -----------
<S> <C> <C> <C>
1994 $ 5,491 $ 58,577 $ 26,506
1995 6,101 58,087 40,143
1996 6,712 54,922 59,891
1997 6,712 52,090 47,093
1998 6,712 48,719 48,425
After 1998 20,136 263,548 447,484
--------- --------- ---------
Total payments 51,864 $ 535,943 $ 669,542
========= =========
Less amount representing interest 19,058
Less current portion of obligation
under capitalized lease 1,751
---------
Long-term obligation under capital-
ized lease $ 31,055
=========
</TABLE>
Operating leases include a coke battery facility which services the Granite
City Division and expires in 2004, a continuous caster and the related ladle
metallurgy facility which services the Great Lakes Division and expires in
2008, and an electrolytic galvanizing facility which services the Great Lakes
Division (the "EGL") and expires in 2001. Upon expiration, the Company has the
option to extend the leases or purchase the equipment at fair market value.
The Company's remaining operating leases cover various types of properties,
primarily machinery and equipment, which have lease terms generally for periods
of 2 to 20 years, and which are expected to be renewed or replaced by other
leases in the normal course of business. Rental expense under operating leases
totaled $70.7 million in 1993, $79.8 million in 1992 and $81.2 million in 1991.
During 1993, the Company borrowed $40.5 million from a United States subsidiary
of NKK, thereby completing the $350.0 million construction period financing for
the No. 5 coke oven battery rebuild at the Great Lakes Division. Later in 1993,
the Company paid $6.7 million in principal, and recorded $25.1 million in in-
terest expense on the coke battery loan. Accrued interest on the loan as of De-
cember 31, 1993 was $10.5 million. Additionally, deferred financing costs
related to the loan were $4.5 million and $4.2 million, respectively, as of De-
cember 31, 1993 and 1992.
In March 1992, a wholly-owned subsidiary of the Company finalized a turnkey
contract for the construction and permanent financing of a pickle line (the
"Pickle Line") servicing the Great Lakes Division. The total financing commit-
ment amounted to $110 million, of which $20 million was prepaid using proceeds
from the Company's 1993 initial public stock offering, reducing the amount of
construction borrowings outstanding and the total commitment to $90 million. As
of December 31, 1993, the construction period financing was being provided by
the contractor and was not a liability of the Company. In January 1994, upon
completion and acceptance of the Pickle Line, the permanent financing commenced
with repayment to occur over a fourteen-year period. The Pickle Line is not
subject to the lien securing the Company's First Mortgage Bonds, but is subject
to a first mortgage in favor of the lender.
On March 31, 1994, the Company utilized a portion of the proceeds from the
judgment in favor of the Company against the Bessemer & Lake Erie Railroad
("B&LE") to repurchase $25.2 million aggregate principal amount of its out-
standing 8.375% First Mortgage Bonds. See Note K--Unusual Items.
Credit Arrangements
At December 31, 1993 the Company's credit arrangements included a $100 million
revolving secured credit arrangement (the "Revolver"), a $150 million subordi-
nated loan agreement (the "Subordinated Loan Agreement") and $25 million in un-
committed, unsecured lines of credit (the "Uncommitted Lines of Credit"). The
Revolver and the Subordinated Loan Agreement were terminated on May 16, 1994 in
connection with the Receivables Purchase Agreement discussed below.
The Revolver was amended and restated in December 1992 to extend the expiration
date to December 31, 1994. The Revolver permitted the Company to borrow up to
$100 million on a short term basis, and provided the Company with the ability
to issue up to $150 million in letters of credit. The Revolver was secured by
the accounts receivable and inventories of the Company. This arrangement had
interest rates which approximated current market rates for periods of one, two,
three or six months. At December 31, 1993 and 1992, no borrowings were out-
standing and letters of credit outstanding amounted to $113.7 million and
$113.6 million, respectively, under the Revolver.
F-11
<PAGE>
The Subordinated Loan Agreement, which was entered into in May 1991 with a
United States subsidiary of NKK, was also extended in December 1992 to an expi-
ration date of April 1, 1995. This arrangement had interest rates which approx-
imated current market rates for periods from one month to six months and
permitted the Company to borrow up to $150 million on an unsecured, short term
basis. The Revolver required that the first $50 million in borrowings by the
Company in excess of thirty days must come from the Subordinated Loan Agree-
ment. Additional amounts borrowed would alternate between the Revolver and the
Subordinated Loan Agreement up to $25 million in each increment. There were no
borrowings under the Subordinated Loan Agreement during 1993 or 1992. In Febru-
ary 1994, the Company borrowed $20 million, all of which was repaid within the
same month.
The Uncommitted Lines of Credit permitted the Company to borrow up to $25 mil-
lion on an unsecured, short-term basis for periods of up to thirty days. One of
these arrangements ($10 million) expired on March 31, 1994, while the other
($15 million) has no fixed expiration date and may be withdrawn at any time
without notice. During 1993, the Company borrowed a maximum of $7.7 million un-
der its Uncommitted Lines of Credit, which was repaid the next day. No
borrowings were outstanding at June 30, 1994, December 31, 1993 or 1992.
Effective May 16, 1994, the Company entered into a Purchase and Sale Agreement
with National Steel Funding Corporation ("NSFC"), a newly created wholly-owned
subsidiary. Effective on that same date, NSFC entered into a Receivables Pur-
chase Agreement with a group of twelve banks. The total commitment of the banks
is $180 million, including up to $150 million in letters of credit. To imple-
ment the arrangement, the Company sold substantially all of its accounts re-
ceivable, and will sell additional receivables as they are generated, to NSFC.
NSFC will finance its ongoing purchase of receivables from a combination of
cash received from receivables already in the pool, short-term intercompany
notes and the cash proceeds derived from selling interests in the receivables
to the participating banks from time to time.
The Certificates of Participation sold to the banks by NSFC have been rated AAA
by Standard & Poor's Corporation, resulting in lower borrowing costs to the
Company. As of June 30, 1994 no funded participation interests had been sold
under the facility, although $89.4 million in letters of credit had been is-
sued. With respect to the pool of receivables at June 30, 1994, after reduction
for letters of credit outstanding, the amount of participating interests eligi-
ble for sale was $83.9 million. During the period May 16, 1994 through June 30,
1994, the eligible amount ranged from $79.6 million to $90.6 million. The
banks' commitments are currently scheduled to expire on May 16, 1997. The Com-
pany will continue to act as servicer of the assets sold into the program and
will continue to make billings and collections in the ordinary course of busi-
ness according to established practices.
At December 31, 1993 the Company was prohibited from paying cash dividends on
Common Stock by various common stock dividend covenants. The most restrictive
dividend covenant is contained in the EGL lease agreement. The Company is not
restricted from paying its annual Series A and B Preferred Stock dividend obli-
gations.
NOTE E--PENSIONS
The Company has various non-contributory defined benefit pension plans covering
substantially all employees. Benefit payments for salaried employees are based
upon a formula which utilizes employee age, years of credited service and the
highest five consecutive years of pensionable earnings during the last ten
years preceding normal retirement. Benefit payments to most hourly employees
are the greater of a benefit calculation utilizing fixed rates per year of
service or the highest five consecutive years of pensionable earnings during
the last ten years preceding retirement, with a premium paid for years of serv-
ice in excess of thirty years. The Company's funding policy is to contribute,
at a minimum, the amount necessary to meet minimum funding standards as pre-
scribed by applicable law. The Company utilizes a long-term rate of return of
9.0% for funding purposes. The Company's pension contributions for the 1993 and
1992 plan years were $30.8 million and $28.0 million, respectively.
F-12
<PAGE>
Pension cost and related actuarial assumptions utilized are summarized below:
<TABLE>
-----------------------------------
<CAPTION>
1993 1992 1991
(Dollars in thousands) --------- --------- ---------
<S> <C> <C> <C>
Assumptions:
Discount rate 8.75% 8.75% 8.75%
Return on assets 9.50% 9.50% 9.50%
Average rate of compensation in-
crease 5.50% 5.50% 5.50%
Pension cost:
Service cost $ 21,537 $ 18,924 $ 19,302
Interest cost 100,783 96,004 92,719
Actual return on plan assets (160,561) (58,772) (170,534)
Net amortization and deferral 89,567 (13,860) 108,196
--------- --------- ---------
Net pension expense 51,326 42,296 49,683
Curtailment and special termination
charges 35,005 12,656 1,627
Other 169 577 191
--------- --------- ---------
Total pension cost $ 86,500 $ 55,529 $ 51,501
========= ========= =========
</TABLE>
In connection with the temporary idling of National Steel Pellet Company
("NSPC"), a wholly-owned subsidiary of the Company, special termination bene-
fits of $31.9 million related to hourly NSPC plan participants were recorded at
December 31, 1993 and included in total pension cost above. (See Note P--Tempo-
rary Idling of National Steel Pellet Company.)
The funded status of the Company's plans at year end along with the actuarial
assumptions utilized are as follows:
<TABLE>
-------------------------
<CAPTION>
1993 1992
(Dollars in thousands) ---------- ----------
<S> <C> <C>
Assumptions:
Discount rate 7.50% 8.75%
Average rate of compensation increase 4.40% 5.50%
Funded status:
Accumulated benefit obligations ("ABO") includ-
ing vested benefits of $1,280,360 and $944,913
for 1993 and 1992, respectively $1,345,592 $1,006,769
Effect of future pensionable earnings increases 90,589 152,640
---------- ----------
Projected benefit obligations ("PBO") 1,436,181 1,159,409
Plans' assets at fair market value 1,089,273 990,217
---------- ----------
PBO in excess of plan assets at fair market
value 346,908 169,192
Unrecognized transition obligation (80,197) (85,415)
Unrecognized net gain 24,107 59,332
Unrecognized prior service cost (125,788) (28,479)
Adjustment required to recognize minimum pen-
sion liability 134,691 12,100
---------- ----------
Total pension liability 299,721 126,730
Less pension obligation due within one year 10,928 6,511
---------- ----------
Long-term pension liability $ 288,793 $ 120,219
========== ==========
</TABLE>
The adjustment required to recognize the minimum pension liability of $134.7
million in 1993 represents the excess of the ABO over the fair value of plan
assets in underfunded plans, and is primarily the result of the 1.25% decrease
in the discount rate, as well as increased pension benefits resulting from the
July 31, 1993 settlement agreement (the "1993 Settlement Agreement") between
the Company and the United Steelworkers of America ("USWA"). The unfunded lia-
bility in excess of the unrecognized prior service cost of $5.9 million was re-
corded as a reduction in stockholders' equity at December 31, 1993. The
remaining portion of the unfunded liability of $128.8 million was offset by an
intangible pension asset.
F-13
<PAGE>
At December 31, 1993, the Company's pension plans' assets were comprised of ap-
proximately 50.0% equity investments, 39.9% fixed income investments, 4.1% cash
and 6.0% in other investments including real estate and venture capital.
NOTE F--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company implemented SFAS 106 which requires ac-
crual of retiree medical and life insurance benefits as these benefits are
earned rather than recognition of these costs as claims are paid. In 1993, the
excess of total postretirement benefit expense recorded under SFAS 106 over the
Company's former method of accounting for these benefits was $97.6 million, or
$59.5 million excluding curtailment charges, or $1.77 and $1.08 per share net
of tax, respectively. In 1993 the Company's cash OPEB payments were approxi-
mately $32 million.
The Company provides health care and life insurance benefits for certain retir-
ees and their dependents. Generally, employees are eligible to participate in
the medical benefit plans if they retired under one of the Company's pension
plans on other than a deferred vested basis, and at the time of retirement had
at least 15 years of continuous service. However, salaried employees hired af-
ter January 1, 1993 are not eligible to participate in the plans. The Company's
medical benefit plans are contributory. Health care benefits are funded as
claims are paid; thus adoption of SFAS 106 has no impact on the cash flows of
the Company. However, as discussed below, the Company will begin prefunding the
OPEB obligation for USWA represented employees in 1994. The Company elected to
amortize the unrecognized transition obligation,
which was calculated to be $556.0 million at January 1, 1993, over a period of
20 years, in part to continually focus the attention of its employees on the
magnitude of its rising health care costs. Amortization of the transition obli-
gation will adversely impact EPS on an after tax basis by approximately $.45
per year for the next 19 years based upon shares of common stock outstanding at
December 31, 1993.
The components of postretirement benefit cost and related actuarial assumptions
for 1993 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Assumptions:
Discount rate 8.75%
Health care trend rate 11.20%
Postretirement benefit cost:
Service cost $ 12,912
Interest cost 52,811
Amortization of transition obligation 28,071
Gains (8,176)
---------
Net periodic benefit cost 85,618
Curtailment charges 38,061
---------
Total postretirement benefit cost $ 123,679
=========
</TABLE>
In connection with the temporary idling of NSPC, curtailment charges of $36.7
million related to hourly NSPC plan participants were recorded at December 31,
1993 and included in total postretirement benefit cost at December 31, 1993.
(See Note P--Temporary Idling of National Steel Pellet Company.)
F-14
<PAGE>
The following represents the plans' funded status reconciled with amounts rec-
ognized in the Company's balance sheet and related actuarial assumptions:
<TABLE>
<CAPTION>
----------------------
1993
DECEMBER 31 JANUARY 1
(Dollars in thousands) ----------- ---------
<S> <C> <C>
Assumptions:
Discount rate 7.75% 8.75%
Health care trend rate 10.30% 11.20%
Accumulated postretirement benefit obligation
("APBO"):
Retirees $ 457,295 $ 431,683
Fully eligible active participants 99,773 95,384
Other active participants 117,765 95,054
---------- ---------
Total 674,833 622,121
Plan assets at fair value - -
---------- ---------
APBO in excess of plan assets 674,833 622,121
Unrecognized transition obligation (503,683) (556,005)
Unrecognized net loss (13,715) -
---------- ---------
Postretirement benefit liability $ 157,435 $ 66,116
========== =========
</TABLE>
The assumed health care cost trend rate of 10.3% in 1994 decreases gradually to
the ultimate trend rate of 5.0% in 2002 and thereafter. A 1.0% increase in the
assumed health care cost trend rate would have increased the APBO at December
31, 1993 and postretirement benefit cost for 1993 by $26.7 million and $3.3
million, respectively.
Differences between January 1, 1993 SFAS 106 disclosures at December 31, 1993
and in the Company's March 31, 1993 Form 10-Q reflect the fact that the adop-
tion amounts disclosed in interim reports were based upon preliminary claims
data through December 31, 1992, whereas the year end disclosure was based upon
final data. In addition, the Company utilized a flat 8.75% discount rate at
January 1, 1993 versus an initial rate of 6.0% which was to gradually increase
to a 9.0% rate in 1996, as discussed in the March 31, 1993 Form 10-Q.
In connection with the 1993 Settlement Agreement between the Company and the
USWA, the Company will begin prefunding the OPEB obligation with respect to
USWA represented employees in 1994. Under the terms of the 1993 Settlement
Agreement, a Voluntary Employee Benefit Association trust (the "VEBA Trust")
will be established to which the Company has agreed to contribute a minimum of
$10 million annually and, under certain circumstances, additional amounts cal-
culated as set forth in the 1993 Settlement Agreement. The Company has granted
to the VEBA Trust a second mortgage on the No. 5 coke oven battery at the Great
Lakes Division.
NOTE G--POSTEMPLOYMENT BENEFITS
During the fourth quarter of 1993, the Company adopted SFAS 112 which requires
accrual accounting for benefits payable to inactive employees who are not re-
tired. Among the more significant benefits included are worker's compensation,
long-term disability and continued medical coverage for disabled employees and
surviving spouses. The Company previously followed the practice of accruing for
many of these benefits, but did not base these accruals on actuarial analyses.
Prior year financial statements have not been restated to reflect the change in
accounting method. The cumulative effect as of January 1, 1993 of this change
was to increase the net loss by $16.5 million or $.49 per share. The results of
operations for the first quarter have been restated to reflect the effect of
adopting SFAS 112 at January 1, 1993. The effect of the change on 1993 income
before the cumulative effect of the change was not material, therefore the re-
maining quarters of 1993 have not been restated.
F-15
<PAGE>
NOTE H--OTHER LONG TERM LIABILITIES
Other long term liabilities at December 31, 1993 and 1992 consisted of the fol-
lowing:
<TABLE>
-------------------------
<CAPTION>
1993 1992
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Deferred gain on sale leasebacks $ 29,032 $ 31,281
Insurance and employee benefits (excluding pensions
and OPEB) 97,442 88,925
Plant closings 74,127 45,780
Released Weirton Benefit Liabilities 122,137 125,981
Other 28,619 12,631
--------- ---------
Total other long term liabilities $ 351,357 $ 304,598
========= =========
</TABLE>
NOTE I--INCOME TAXES
Effective January 1, 1992, the Company changed its method of accounting for in-
come taxes from the deferred method to the liability method as required by SFAS
109. As permitted under the new pronouncement, prior years' financial state-
ments were not restated. The cumulative effect of adopting SFAS 109, as of Jan-
uary 1, 1992, was to decrease the net loss for 1992 by $76.3 million.
Deferred income taxes reflect the net tax effects of temporary differences be-
tween the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities at December 31, 1993 and
1992 are as follows:
<TABLE>
------------------------
<CAPTION>
1993 1992
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Reserves $ 180,600 $ 204,900
Employee benefits 120,600 44,200
Net operating loss carryforwards 189,600 138,100
Leases 24,200 23,500
Deferred gain 8,500 9,100
Federal tax credits 5,200 5,200
Other 18,400 4,700
--------- ---------
Total deferred tax assets 547,100 429,700
Valuation allowance (263,200) (189,100)
--------- ---------
Deferred tax assets net of valuation allowance 283,900 240,600
--------- ---------
Deferred tax liabilities:
Book basis of property in excess of tax basis (151,900) (148,100)
Excess tax LIFO over book (31,000) (29,400)
Other (20,400) (20,100)
--------- ---------
Total deferred tax liabilities (203,300) (197,600)
--------- ---------
Net deferred tax asset after valuation allow-
ance $ 80,600 $ 43,000
========= =========
</TABLE>
In 1992, available tax planning strategies served as the only basis for
determining the amount of the net deferred tax asset to be recognized. As a
result, a full valuation allowance was recorded, except for the $43.0 million
recognized pursuant to those tax planning strategies. In 1993, the Company
determined that it was more likely than not that sufficient future taxable
income would be generated to justify increasing the net deferred tax asset
after valuation allowance as presented above. Accordingly, the Company
recognized an additional deferred tax asset of $37.6 million in 1993, which had
the effect of decreasing the Company's net loss by a like amount, bringing the
net deferred tax asset to $80.6 million at December 31, 1993.
F-16
<PAGE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
--------------------------------
DEFERRED
LIABILITY METHOD METHOD
1993 1992 1991
(Dollars in thousands) --------- --------- ---------
<S> <C> <C> <C>
Current: state and foreign $ 89 $ 156 $ 118
Deferred (37,600) - -
--------- --------- ---------
Total tax provision (credit) $ (37,511) $ 156 $ 118
========= ========= =========
</TABLE>
The reconciliation of the income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
---------------------------------
DEFERRED
LIABILITY METHOD METHOD
1993 1992 1991
(Dollars in thousands) --------- --------- ---------
<S> <C> <C> <C>
Tax at U.S. statutory rates $(103,700) $ (25,300) $ (64,400)
Extraordinary item - (17,000) -
Net operating loss carryforward for
which no benefit was recognized 51,500 35,856 35,020
Temporary deductible differences for
which no benefit was recognized
(net) 22,600 10,400 33,798
State and foreign income taxes, net
of federal benefit 100 100 100
Depletion -- (2,300) (2,000)
Dividend exclusion (1,600) (1,600) (2,400)
Other (6,411) - -
--------- --------- ---------
Total tax provision $ (37,511) $ 156 $ 118
========= ========= =========
</TABLE>
At December 31, 1993, the Company had unused net operating loss ("NOL")
carryforwards of approximately $525.3 million which expire as follows: $30.7
million in 1998, $78.1 million in 2000, $71.3 million in 2001, $108.0 million
in 2006, $99.4 million in 2007 and $137.8 million in 2008. Tax benefits relat-
ing to NOL carryforwards were not recorded in 1991 in accordance with APB 11.
During the first quarter of 1994, the Company recorded an unusual gain of $111
million after receipt of the proceeds from a judgment in favor of the Company
against the B&LE. (See Note K--Unusual Items). The Company did not recognize
any income taxes associated with the receipt of these proceeds, other than al-
ternative minimum tax of $3.1 million, as the regular federal income tax lia-
bility was offset by the utilization of previously reserved tax assets.
To date, the Company believes that it has not undergone an ownership change for
federal income tax purposes, however, there can be no assurance that the Com-
pany will not undergo such a change in the future. Future events, some of which
may be beyond the Company's control, could cause an ownership change. An owner-
ship change may substantially limit the Company's ability to offset future tax-
able income with its net operating loss carryforwards.
At December 31, 1993, the Company had unused alternative minimum tax credit
carryforwards of approximately $3.2 million which may be applied to offset its
future regular federal income tax liabilities. These tax credits may be carried
forward indefinitely.
NOTE J--WEIRTON LIABILITIES
On January 11, 1984, the Company completed the sale of substantially all of the
assets of its Weirton Steel Division ("Weirton") to Weirton Steel Corporation.
In connection with the sale of Weirton, the Company retained certain existing
and contingent liabilities (the "Weirton Liabilities") including the Weirton
Benefit Liabilities, which consist of, among other things, pension benefits for
the then active employees based on service prior to the sale, and pension, life
and health insurance benefits for the then retired employees and certain envi-
ronmental liabilities.
As part of the 1984 sale of a 50% interest in the Company to NKK, NII agreed,
as between NII and the Company, to provide in advance sufficient funds for pay-
ment and discharge of, and to indemnify the Company against, all obligations
and liabilities of the Company, whether direct, indirect, absolute or contin-
gent, incurred or retained by the Company in connection with the sale of Weir-
ton. As part of the 1990 ownership transaction whereby NKK purchased an
additional 20% ownership in the Company, the Company released NII from indemni-
fication of $146.6 million of certain defined Weirton
F-17
<PAGE>
Benefit Liabilities. NII also reaffirmed its agreement to indemnify the Company
for Weirton environmental liabilities as to which the Company is obligated to
Weirton Steel Corporation. On May 4, 1993, the Company released NII from an ad-
ditional $67.8 million of previously unreleased Weirton Benefit Liabilities in
connection with the early redemption of 10,000 shares of Series B Preferred
Stock. During January 1994, NII sold substantially all of its 3,400,000 shares
of Class B Common Stock. In connection with the IPO, the Company entered into a
definitive agreement (the "Agreement") with NII and NKK which amends certain
terms and conditions of the Recapitalization Agreement. Pursuant to the Agree-
ment, NII paid the Company $10 million as an unrestricted prepayment for envi-
ronmental obligations which may arise after such prepayment and for which NII
has previously agreed to indemnify the Company. The Company is required to re-
pay to NII portions of $10 million to the extent the Company's expenditures for
such environmental liabilities do not reach specified levels by certain dates
over a twenty year period. NII retains responsibility to indemnify the Company
for remaining environmental liabilities arising after such prepayment and in
excess of $10 million (as reduced by any above described repayments to NII).
At December 31, 1993, the net present value of the released Weirton Benefit Li-
abilities, based upon a discount factor of 12.0% per annum, is $140.1 million.
NII continues to indemnify the Company for the remaining unreleased Weirton
Benefit Liabilities and other liabilities. Since the Company is indemnified by
NII for such remaining liabilities, they are not recorded in the Company's con-
solidated balance sheet. Such Weirton Liabilities are comprised of (i) the un-
released Weirton Benefit Liabilities, the amount of which, based on the
Company's actuarial analysis, approximates the aggregate remaining dividend and
redemption payments of $112.7 million with respect to the Series B Preferred
Stock and (ii) other contingent liabilities, such as environmental liabilities,
that are not currently estimable.
NOTE K--UNUSUAL ITEMS
On January 24, 1994, the United States Supreme Court denied the B&LE petition
to hear the appeal in the Iron Ore Antitrust Litigation, thus sustaining the
judgment in favor of the Company against the B&LE. On February 11, 1994, the
Company received $111.0 million, including interest, in satisfaction of this
judgment, which was recorded as an unusual gain during the first quarter of
1994. Pursuant to the terms of the 1993 Settlement Agreement, approximately $11
million of the proceeds will be deposited into a VEBA Trust established to
prefund the Company's retiree OPEB obligation with respect to USWA represented
employees.
During 1993, the Company recorded unusual charges which totaled $111.0 million,
primarily relating to the temporary idling of NSPC. (See Note P--Temporary
Idling of National Steel Pellet Company.) A fourth quarter charge of $108.6
million was recorded to recognize various liabilities incurred in connection
with the idling, most notably pensions and postemployment benefits. Addition-
ally, the Company recorded a charge of $4.5 million relating to the acceptance
by represented office and technical employees of a voluntary pension window of-
fered by the Company as a part of its functional consolidation and reorganiza-
tion plan.
In 1992, the Company recorded unusual charges aggregating $37.0 million relat-
ing principally to a pension window and the Company's decision to exit the coal
mining business. A charge of $13.3 million was recognized relating to a 1992
pension window as part of the consolidation of certain staff functions and the
relocation of its corporate office to Mishawaka, Indiana from Pittsburgh, Penn-
sylvania. As a result of management's decision to exit the coal mining busi-
ness, an unusual charge of $24.9 million was recognized during the fourth
quarter to reduce certain coal properties to net realizable value and record
postemployment, environmental and other liabilities.
During 1991, the Company recorded unusual charges which totalled $110.7 mil-
lion. A charge of $41.5 million was recorded for the estimated costs antici-
pated to be incurred in conjunction with the consolidation of certain staff
functions and relocation in 1992 of the corporate headquarters to Mishawaka,
Indiana from Pittsburgh, Pennsylvania. An unusual charge of $25.5 million re-
lated to the Company's decision to permanently idle its Mathies coal mine after
efforts to obtain third party financing to reopen the mine after a fire were
unsuccessful. Concurrently, the Company undertook an evaluation of its other
coal properties and operations and recorded an unusual charge of $43.7 million
to reduce certain coal properties to net realizable value and to recognize
postemployment, environmental and other liabilities.
NOTE L--RELATED PARTY TRANSACTIONS
Summarized below are transactions between the Company and NKK, NII and the
Company's affiliated companies accounted for under the equity method.
The Company had borrowings outstanding with an NKK affiliate totaling $343.3
million and $309.5 million as of December 31, 1993 and 1992, respectively. (See
Note D--Long-Term Obligations and Related Party Indebtedness.) Natcoal, Inc., a
wholly owned subsidiary of the Company, sold coal to and the Company purchased
coke from a subsidiary of NKK in 1991 totaling $7.5 million and $22.5 million,
respectively. There were no such coal sales or coke purchases of this type
subse-
F-18
<PAGE>
quent to 1991. Accounts receivable and accounts payable relating to these
transactions totalled $3.2 million and $2.5 million, respectively, at June 30,
1994 and December 31, 1993 and 1992. During the first six months of 1994, the
Company purchased approximately $10 million of slabs produced by NKK, with such
purchases made from trading companies in arms' length transactions.
The Company's selling, general and administrative expenses for 1992 and 1991
included charges of $2.2 million and $3.9 million, respectively, for facilities
provided and direct services performed by NII for the benefit of the Company,
all of which arrangements have expired or have been terminated. During January
1994, NII completed the sale of substantially all of its 3,400,000 shares of
Class B Common Stock.
In both 1993 and 1992, cash dividends of $4.0 million were paid on the Series A
Preferred Stock. Accrued dividends of $0.6 million were recorded as of December
31, 1993 and 1992 related to the Series A Preferred Stock. For 1993 and 1992,
Series B Preferred Stock dividend payments totaling $12.0 million and $16.1
million were made through the release and payment of $10.6 million and $15.3
million of previously unreleased Weirton Benefit Liabilities and $1.4 million
and $.8 million of cash to reimburse NII for an obligation previously incurred
in connection with certain Weirton Liabilities, respectively. At December 31,
1993 and 1992, accrued dividends related to the Series B Preferred Stock to-
talled $1.2 million and $2.4 million, respectively.
The Company is contractually required to purchase its proportionate share of
raw material production from certain affiliated companies. Such purchases of
raw materials and services aggregated $65.9 million in 1993, $63.3 million in
1992 and $65.3 million in 1991. Additional expenses were incurred in connection
with the operation of a joint venture agreement. (See Note N--Other Commitments
and Contingencies.) Accounts payable at December 31, 1993 and 1992 included
amounts with affiliated companies accounted for by the equity method of $29.1
million and $24.3 million, respectively.
NOTE M--ENVIRONMENTAL LIABILITIES
The Company's operations are subject to numerous laws and regulations relating
to the protection of human health and the environment. Because these environ-
mental laws and regulations are quite stringent and are generally becoming more
stringent, the Company has expended, and can be expected to expend in the fu-
ture, substantial amounts for compliance with these laws and regulations.
It is the Company's policy to expense or capitalize, as appropriate, environ-
mental expenditures that relate to current operating sites. Environmental ex-
penditures that relate to past operations and which do not contribute to future
or current revenue generation are expensed. With respect to costs for environ-
mental assessments or remediation activities, or penalties or fines that may be
imposed for noncompliance with such laws and regulations, such costs are ac-
crued when it is probable that liability for such costs will be incurred and
the amount of such costs can be reasonably estimated.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state superfund statutes generally im-
pose joint and several liability on present and former owners and operators,
transporters and generators for remediation of contaminated properties regard-
less of fault. The Company and certain of its subsidiaries are involved as a
potentially responsible party ("PRP") at a number of off-site CERCLA or state
superfund site proceedings. At some of these sites, any remediation costs in-
curred by the Company would constitute liabilities for which NII is required to
indemnify the Company ("NII Environmental Liabilities"). In addition, at some
of these sites, the Company does not have sufficient information regarding the
nature and extent of the contamination, the wastes contributed by other PRPs,
or the required remediation activity to estimate its potential liability. With
respect to those sites for which the Company has sufficient information to es-
timate its potential liability, excluding any site involving NII Environmental
Liabilities, the Company has recorded an aggregate liability of approximately
$2 million, which it anticipates paying over the next several years.
In connection with those sites involving NII Environmental Liabilities, in Jan-
uary, 1994, the Company received $10 million from NII as an unrestricted pre-
payment for such liabilities for which the Company recorded $10 million as a
liability in its consolidated balance sheet. The Company is required to repay
NII portions of the $10 million to the extent the Company's expenditures for
such NII Environmental Liabilities do not meet specified levels by certain
dates over a twenty year period. NII will continue to be obligated to indemnify
the Company for all other NII Environmental Liabilities (i) arising before such
prepayment or (ii) arising after such prepayment and exceeding the $10 million
prepayment. (See Note J--Weirton Liabilities.)
The Company has also recorded the reclamation and other costs to restore its
coal and iron ore mines at its shutdown locations to their original and natural
state, as required by various federal and state mining statutes. (See Note K--
Unusual Items.)
F-19
<PAGE>
Since the Company has been conducting steel manufacturing and related opera-
tions at numerous locations for over sixty years, the Company potentially may
be required to remediate or reclaim any contamination that may be present at
these sites. The Company does not have sufficient information to estimate its
potential liability in connection with any potential future remediation at such
sites. Accordingly, the Company has not accrued for such potential liabilities.
As these matters progress or the Company becomes aware of additional matters,
the Company may be required to accrue charges in excess of those previously ac-
crued. However, although the outcome of any of the matters described, to the
extent they exceed any applicable reserves, could have a material adverse ef-
fect on the Company's results of operations for the applicable period, the Com-
pany has no reason to believe that such outcome will have a material adverse
effect on the Company's financial condition.
In April 1993, the United States Environmental Protection Agency published a
proposed guidance document establishing minimum water quality standards and
other pollution control policies and procedures for the Great Lakes System. Un-
til such guidance document is finalized, the Company cannot estimate its poten-
tial costs for compliance, and there can be no assurances that such compliance
will not have a material adverse effect on the Company's financial condition.
NOTE N--OTHER COMMITMENTS AND CONTINGENCIES
The Company has an agreement providing for the availability of raw material
loading and docking facilities through 2002. Under this agreement, the Company
must make advance freight payments if shipments fall below specified minimum
tonnages. At December 31, 1993, the maximum amount of such payments, before
giving effect to certain credits provided in the agreement, totaled approxi-
mately $18 million or $2 million per year. During the three years ended Decem-
ber 31, 1993, no advance freight payments were made as the Company's shipments
exceeded the minimum tonnage requirements. The Company anticipates its ship-
ments will exceed the minimum tonnage requirements in 1994.
In September 1990, the Company entered into a joint venture agreement to build
a $240 million continuous galvanizing line to serve North American automakers.
This joint venture, which was completed in 1994, coats steel products for the
Company and an unrelated third party. The Company is a 10% equity owner of the
facility, an unrelated third party is a 50% owner, and a subsidiary of NKK owns
the remaining 40%. The Company has contributed $5.6 million in equity capital,
which represents its total equity requirement. In addition, the Company is com-
mitted to utilize and pay a tolling fee in connection with 50% of the available
line-time of the facility. The agreement extends for 20 years after the start
of production, which commenced in January 1993.
In March 1992, a wholly-owned subsidiary of the Company finalized a turnkey
contract for the construction and permanent financing of the Pickle Line ser-
vicing the Great Lakes Division. The total financing commitment amounts to $110
million. During 1993 the Company utilized $20 million of the proceeds from the
IPO to reduce the amount of construction borrowings outstanding and the total
commitment to $90 million. As of December 31, 1993 the construction period fi-
nancing was being provided by the contractor and was not a liability of the
Company. In January 1994, upon completion and acceptance of the Pickle Line,
the permanent financing commenced with repayment occurring over a fourteen-year
period. The Pickle Line is not subject to the lien securing the Company's First
Mortgage Bonds, but is subject to a first mortgage in favor of the lender.
In May 1992, the Company signed an agreement to enter into a joint venture with
an unrelated third party. The joint venture, Double G Coating Company, L.P.
("Double G"), of which the Company owns 50%, constructed a $90 million steel
coating facility near Jackson, Mississippi to produce galvanized and
Galvalume(R) steel sheet for the metal buildings market. Approximately 20% of
the total cost is financed equally through partners' capital contributions with
the remaining 80% financed by a group of third party lenders. The Company has
committed to invest capital contributions of approximately $9 million of which
$7.6 million had been contributed through December 31, 1993. The balance of ap-
proximately $1.4 million was paid during the first half of 1994. In addition,
the Company is committed to utilize and pay a tolling fee in connection with
50% of the available line time at the facility. This facility commenced produc-
tion in May 1994.
In August 1992, Double G entered into a loan agreement with a consortium of
lenders that provides up to $75 million in construction-period financing which
converts to a 10 year loan upon completion and acceptance of the facility by
Double G. Repayment of the permanent loan is scheduled to commence 18 months
after completion and acceptance of the facility and will be amortized over 10
years. Double G will provide a first mortgage on its property, plant and equip-
ment and the Company has separately guaranteed 50% of the debt. At December 31,
1993, outstanding borrowings on the construction loan were $60.4 million, of
which $30.2 million is separately guaranteed by the Company.
F-20
<PAGE>
The Company has agreements to purchase approximately 1.4 million gross tons of
iron ore pellets per year through 1999 from an affiliated company, and 5.4 mil-
lion gross tons in 1994 from various non-affiliated companies. In 1994, pur-
chases under such agreements will approximate $50 million and $145 million,
respectively. Additionally, the Company has agreed to purchase its proportion-
ate share of the limestone production of an affiliated company, which will ap-
proximate $2 million per year.
The Company is guarantor of specific obligations of ProCoil Corporation, an af-
filiated company, approximating $10.8 million and $9.5 million at December 31,
1993 and 1992, respectively.
NOTE O--EXTRAORDINARY ITEM
The Rockefeller Amendment, which became effective February 1, 1993, is designed
to provide funding for the United Mine Workers of America ("UMWA") retiree med-
ical and life insurance benefits programs by transferring funds from other
sources and imposing a liability on all signatories to certain UMWA collective
bargaining agreements for current fund deficits and present and future benefit
costs for qualifying UMWA retirees. The Company has subsidiaries that are sig-
natories of the 1988 UMWA Wage Agreement and thus falls within the Rockefeller
Amendment's provisions. The Rockefeller Amendment also extends, jointly and
severally, the liability for the cost of retiree medical and life insurance
benefits to any members of the signatory operator's control group, which would
include the Company.
During 1992, the Company recorded a charge of $50 million, representing manage-
ment's best estimate of its liability for UMWA beneficiaries. Based upon pre-
liminary assignments from the Secretary of Health and Human Services received
during 1993, the Company believes this reserve is adequate. However, the amount
is subject to future adjustment when additional information relating to benefi-
ciaries becomes available.
NOTE P--TEMPORARY IDLING OF NATIONAL STEEL PELLET COMPANY
NSPC was temporarily idled in October 1993, following a strike by the USWA on
August 1, 1993, and the subsequent decision to satisfy the Company's iron ore
pellet requirements from external sources. At December 31, 1993, it was the
previous management's intention to externally satisfy its iron ore pellet re-
quirements for a period in excess of two years, which would have caused NSPC to
remain idle for that period. The Company determined that in accordance with
Statement of Financial Accounting Standards No. 5, "Accounting for Contingen-
cies," a contingent liability of $108.6 million related to the idle period had
been incurred which was recorded as an unusual charge during the fourth quarter
of 1993. This charge was primarily comprised of employee benefits such as pen-
sions and OPEBs, along with expenses relating to the idling of the facility.
Effective June 1, 1994, the Company's Board of Directors appointed a new Chief
Operating Officer and President, a new Chief Financial Officer and Senior Vice
President and a new Vice President--Human Resources. Earlier in the year, new
USWA presidents were elected at both the international and local levels. In an
effort to reduce delivered iron ore pellet costs and improve pellet mix, as
well as to strengthen the cooperative partnership approach to labor relations,
management considered the feasibility of reopening the NSPC facility. They de-
termined that if a total reduction of $4 per gross ton in delivered pellet
costs from pre-strike costs could be achieved, NSPC could be reopened on a cost
effective basis. After a series of negotiations, a labor agreement (the "NSPC
Labor Agreement") was reached between the USWA and NSPC. The NSPC Labor Agree-
ment, which is pending Board approval, led to negotiations with other stake-
holders such as public utilities, transportation companies, property owners and
suppliers and resulted in the achievement of the requisite $4 per gross ton re-
duction in delivered pellet costs and the reopening of the facility in August
1994.
The reopening of NSPC resulted in the restoration of approximately $59 million
of the 1993 unusual charge, or $49 million net of the applicable income tax ef-
fect, related to the temporary idling. Additionally, start-up expenses and cer-
tain expenses related to the NSPC Labor Agreement totaled approximately $6.5
million and were charged to cost of products sold. Both of these adjustments
were recorded during the third quarter of 1994.
At December 31, 1993, the USWA had filed 19 unfair labor practice charges with
the National Labor Relations Board (the "NLRB") regarding the NSPC dispute. All
NLRB charges have subsequently been dropped.
NOTE Q--LONG TERM INCENTIVE PLAN
The Long Term Incentive Plan was established in 1993 in connection with the IPO
and has authorized the grant of options for up to 750,000 shares of Class B
Common Stock to certain executive officers, non-employee directors and other
employees of the Company. The exercise price of the options equals the fair
market value of the Common Stock on the date of grant. All options granted have
ten year terms and generally vest and become fully exercisable at the end of
three years of continued employment. However, in the event that termination is
by reason of retirement, permanent disability or death, the option must be ex-
ercised in whole or in part within 24 months of such occurrences.
F-21
<PAGE>
The Company currently follows the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which requires com-
pensation expense for the Company's options to be recognized only if the market
price of the underlying stock exceeds the exercise price on the date of grant.
Accordingly, the Company has not recognized compensation expense for its op-
tions granted in 1993 or during the first six months of 1994.
A reconciliation of the Company's stock option activity, and related informa-
tion, from January 1, 1993 through June 30, 1994 follows:
<TABLE>
<CAPTION>
---------------------
EXERCISE
PRICE
NUMBER (WEIGHTED
OF OPTIONS AVERAGE)
---------- ---------
<S> <C> <C>
Balance outstanding at January 1, 1993 - -
Granted 755,000 $ 13.99
Exercised -
Forfeited (170,832)
---------
Balance outstanding at December 31, 1993 584,168 $ 13.99
=========
Granted 303,500 $ 14.00
Exercised -
Forfeited (155,139)
---------
Balance outstanding at June 30, 1994 732,529 $ 14.00
=========
Exercisable at December 31, 1993 5,418
=========
Exercisable at June 30, 1994 229,029
=========
</TABLE>
Outstanding stock options did not enter into the determination of EPS in 1993
or during the first six months of 1994 as their effect was not dilutive.
NOTE R--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following are the unaudited quarterly results of operations for the years 1993
and 1992. The quarters ended March 31, 1993 and 1992 have each been restated to
reflect adoption of SFAS 112 and SFAS 109, respectively, retroactive to the be-
ginning of each of those years. The remaining quarters of 1993 and 1992 were
not impacted by the changes. Reference should be made to Note K--Unusual Items
concerning adjustments affecting the fourth quarters of 1993 and 1992.
<TABLE>
<CAPTION>
------------------------------------------------
1993
THREE MONTHS ENDED,
(RESTATED)
(Dollars in thousands, except MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
per share amounts) ---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
$
Net sales $ 587,398 $ 622,684 $ 623,272 585,446
Gross profit (loss) (3,737) 19,389 15,055 (3,379)
Unusual charges - - (3,294) (107,672)
Loss before cumulative effect
of accounting change (53,665) (17,463) (32,479) (138,801)
Cumulative effect of accounting
change (16,453) - - -
Net loss (70,118) (17,463) (32,479) (138,801)
Per share earnings applicable
to Common Stock:
Loss before cumulative effect
of accounting change $ (2.19) $ (.58) $ (.97) $ (3.89)
Net loss $ (2.81) $ (.58) $ (.97) $ (3.89)
</TABLE>
F-22
<PAGE>
<TABLE>
-----------------------------------
<CAPTION>
1992
THREE MONTHS ENDED,
(RESTATED)
(Dollars in thousands, MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
except per share amounts) ---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $564,076 $621,287 $615,205 $572,749
Gross profit 29,849 52,342 44,103 25,400
Unusual charges - (2,800) (9,000) (25,184)
Income (loss) before ex-
traordinary item and cumu-
lative effect of
accounting change (19,070) 4,493 (11,121) (48,985)
Extraordinary item - - - (50,000)
Cumulative effect of ac-
counting change 76,251 - - -
Net income (loss) 57,181 4,493 (11,121) (98,985)
Per share earnings applica-
ble to Common Stock:
Net income (loss) before
extraordinary item and
cumulative effect of
accounting change $ (.92) $.01 $(.61) $(2.09)
Net income (loss) $2.07 $.01 $(.61) $(4.05)
</TABLE>
NOTE S--SUBSEQUENT EVENTS
The Company is in the process of completing a Registration Statement on Form S-
3 in anticipation of a primary offering (the "Offering") of up to 6.9 million
shares of its Class B Common Stock, including 900,000 shares to cover the Un-
derwriters' over-allotment option. After completion of the Offering, NKK will
hold approximately 68.6% of the combined voting power of the Company's out-
standing common stock, assuming the Underwriters' over-allotment option is not
exercised.
F-23
<PAGE>
LOGO
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses payable by the Registrant
in connection with the sale and distribution of the securities being regis-
tered, other than underwriting discounts and commissions. All of the amounts
shown are estimated except the Securities and Exchange Commission registration
fee, the NASD filing fee and the NYSE listing fee.
<TABLE>
<S> <C>
SEC registration fee $46,248
NASD filing fee 13,912
NYSE listing fee *
Blue Sky fees and expenses *
Printing and engraving expenses *
Legal fees and expenses *
Accounting fees and expenses *
Transfer agent and registrar fees *
Miscellaneous *
-------
Total $ *
=======
</TABLE>
- -------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The form of Underwriting Agreement, filed as Exhibit 1.1 hereto, contains cer-
tain provisions relating to indemnification.
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
corporation, subject to certain limitations, to indemnify its directors and of-
ficers against expenses (including attorneys' fees, judgments, fines and cer-
tain settlements) actually and reasonably incurred by them in connection with
any suit or proceeding to which they are a party so long as they acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to a criminal action or pro-
ceeding, so long as they had no reasonable cause to believe their conduct to
have been unlawful. The By-laws of the Company provide that the Company shall
indemnify its directors and such of its officers, employees and agents as the
Board of Directors may determine from time to time, to the fullest extent per-
mitted by the DGCL.
Section 102 of the DGCL and Article Tenth of the Company's Restated Certificate
of Incorporation permit the Company to limit a director's liability to the Com-
pany or its stockholders for monetary damages for breaches of fiduciary duty
except with respect to liability for breaches of the duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct, or knowing vi-
olation of the law, and the unlawful purchase or redemption of stock or payment
of unlawful dividends or the receipt of improper personal benefits cannot be
eliminated or limited in this manner.
The DGCL authorizes the purchase of indemnification insurance by the Company.
The Company currently maintains a policy insuring, subject to certain excep-
tions, its directors and officers against liabilities which may be incurred by
such persons acting in such capacities.
In addition, the Board of Directors of the Company has entered into indemnifi-
cation agreements with the directors and certain officers of the Company.
Rights of directors and officers under such indemnification agreements are not
exclusive of other rights they may have under the Company's Restated Certifi-
cate of Incorporation, the Company's By-laws or Delaware law.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
2.1 Asset Purchase Agreement between Weirton Steel Corporation and the
Company, dated as of April 29, 1983, together with collateral agreements
incident to such Assets Purchase Agreement, filed as Exhibit 2 to the
report of National Intergroup, Inc. on Form 8-K dated January 10, 1984, is
incorporated herein by reference.
</TABLE>
- -------
*To be filed by amendment.
II-1
<PAGE>
<TABLE>
<S> <C>
2.2 Stock Purchase Agreement by and among NKK Corporation, National
Intergroup, Inc. and the Company, dated August 22, 1984, together with
certain collateral agreements incident to such Stock Purchase Agreement
and certain schedules to such agreements are incorporated by reference to
Exhibit (2) (sequential pages 5 to and including 248 to National
Intergroup, Inc.'s Form 8-K dated August 31, 1984, Commission File No. 1-
8549). Other schedules to such agreements identified therein have been
omitted, but any of such schedules will be furnished supplementally to the
Commission upon request.
2.3 Stock Purchase and Recapitalization Agreement by and among National
Intergroup, Inc., NII Capital Corporation, NKK Corporation, NKK U.S.A.
Corporation and the Company dated as of June 26, 1990, filed as Exhibit 2
to the current report of the Company on Form 8-K dated July 10, 1990, is
incorporated herein by reference.
2.4 Amendment to Stock Purchase and Recapitalization Agreement by and among
National Intergroup, Inc., NII Capital Corporation, NKK Corporation, NKK
U.S.A. Corporation and the Company, dated July 31, 1991, filed as Exhibit
2-F to the annual report of the Company on Form 10-K, for the year ended
December 31, 1991, is incorporated herein by reference.
4.1 Specimen of Class B Common Stock Certificate, filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-1, dated February 5, 1993, is
incorporated herein by reference.
4.2 NSC Stock Transfer Agreement between National Intergroup, Inc., the
Company, NKK Corporation and NII Capital Corporation, filed as Exhibit 4-M
to the quarterly report of the Company on Form 10-Q for the quarter ended
June 30, 1986, is incorporated herein by reference.
4.3 Form of Certificate of Designation of Series A Preferred Stock, filed as
Exhibit 4.3 to the Company's Registration Statement on Form S-1, dated
February 5, 1993, is incorporated herein by reference.
4.4 Form of Certificate of Designation of Series B Preferred Stock, filed as
Exhibit 4.4 to the Company's Registration Statement on Form S-1, dated
February 5, 1993, is incorporated herein by reference.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom regarding the legality of
the securities being registered.*
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom (included in their opinion
filed as Exhibit 5.1).
24.1 Powers of Attorney by directors and officers of the Company (included on
page II-5 of this Registration Statement).
</TABLE>
- -------
*To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of deter-
mining any liability under the Securities Act of 1933, each filing of the Reg-
istrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an em-
ployee benefit plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934), that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as
II-2
<PAGE>
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or control-
ling person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in con-
nection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling prece-
dent, submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(b) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRA-
TION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF MISHAWAKA, STATE OF INDIANA ON OCTOBER 11, 1994.
National Steel Corporation
/s/ V. John Goodwin
By: __________________________________
V. John Goodwin
President and Chief Operating
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON OCTOBER 11, 1994. EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS OSAMU SAWARAGI, V. JOHN GOODWIN AND ROBERT M.
GREER, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, EACH ACTING ALONE,
WITH FULL POWERS OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME,
PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS (IN-
CLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO FILE
THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THERE-
WITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTOR-
NEYS-IN-FACT AND AGENTS, EACH ACTING ALONE, FULL POWER AND AUTHORITY TO DO AND
PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND
ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD
DO IN PERSON, THEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT
AND AGENTS, EACH ACTING ALONE, OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY
DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Osamu Sawaragi
----------------------------------------------
Osamu Sawaragi Director and Chairman
/s/ V. John Goodwin
----------------------------------------------
V. John Goodwin Director, President and Chief
Operating Officer
/s/ Keisuke Murakami
----------------------------------------------
Keisuke Murakami Director and Vice President--
Administration
/s/ Hiroshi Matsumoto
----------------------------------------------
Hiroshi Matsumoto Director, Vice President and
Assistant to the President
/s/ Edwin V. Clarke, Jr.
----------------------------------------------
Edwin V. Clarke, Jr. Director
----------------------------------------------
Ronald H. Doerr Director
/s/ Masayuki Hanmyo
----------------------------------------------
Masayuki Hanmyo Director
/s/ Kenichiro Sekino
----------------------------------------------
Kenichiro Sekino Director
/s/ Robert J. Slater
----------------------------------------------
Robert J. Slater Director
/s/ Robert M. Greer
----------------------------------------------
Robert M. Greer Senior Vice President and
Chief Financial Officer
/s/ Carl M. Apel
----------------------------------------------
Carl M. Apel Corporate Controller,
Accounting and Assistant
Secretary
</TABLE>
II-4
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Summary Financial
Information," "Selected Financial Information" and "Experts" in the Registra-
tion Statement (Form S-3) and related Prospectus of National Steel Corporation
for the Registration of 6,900,000 shares of its Class B Common Stock and to
the incorporation by reference herein of our report dated January 26, 1994,
except for the last paragraph of Note S, as to which the date is February 11,
1994, with respect to the consolidated financial statements and schedules of
the Company included in its Annual Report on Form 10-K for the year ended De-
cember 31, 1993, filed with the Securities and Exchange Commission.
Ernst & Young LLP
Fort Wayne, Indiana
October 12, 1994
