<PAGE>
1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 1-983
NATIONAL STEEL CORPORATION
(Exact name of registrant as specified in its charter)
Incorporated under the Laws of the State of Delaware 25-0687210
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 219-273-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
Class B Common Stock New York Stock Exchange
First Mortgage Bonds, 8-3/8% New York Stock Exchange
Series due 2006
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 3, 1997, there were 43,288,240 shares of the registrant's common
stock outstanding.
Aggregate market value of voting stock held by non-affiliates: $177,348,615.
The amount shown is based on the closing price of National Steel
Corporation's Common Stock on the New York Stock Exchange on March 3, 1997.
Voting stock held by officers and directors is not included in the computation.
However, National Steel Corporation has made no determination that such
individuals are "affiliates" within the meaning of Rule 405 under the Securities
Act of 1933.
Documents Incorporated By Reference:
Selected portions of the Annual Report to Stockholders for the year ended
December 31, 1996 are incorporated by reference into Part II and IV of the
Report on Form 10-K.
Selected portions of the 1997 Proxy Statement of National Steel Corporation
are incorporated by reference into Part III of this Report on Form 10-K.
1
<PAGE>
Exhibit 13 to Registrant's Form 10-K for the Fiscal Year Ended December 31, 1996
is hereby amended as follows:
In the table of Pension Expense which appears at page 30 in Note D -
PENSIONS, the Interest Cost for 1996 is changed from "11,364" to
"111,364".
A complete copy of Exhibit 13, including this correction, is attached as an
exhibit to this Form 10-K/A.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NATIONAL STEEL CORPORATION
By: /s/ William E. McDonough
--------------------------------------------
William E. McDonough
Acting Chief Financial Officer and Treasurer
<PAGE>
EXHIBIT 13
<TABLE>
<CAPTION>
National Steel Corporation
Financial Report
- - --------------------------------------------------------------------------------
<S> <C>
Five Year Selected Financial and
Operating Information............................ 16
Management's Discussion and Analysis.............. 17
Statements of Consolidated Income................. 22
Consolidated Balance Sheets....................... 23
Statements of Consolidated Cash Flows............. 24
Statements of Changes in Consolidated
Stockholders' Equity and
Redeemable Preferred Stock--Series B............. 25
Notes to Consolidated Financial Statements........ 26
Report of Ernst & Young LLP Independent Auditors.. 40
Management's Responsibility
for Financial Statements......................... 40
</TABLE>
- - --------------------------------------------------------------------------------
<PAGE>
FIVE YEAR SELECTED FINANCIAL AND OPERATING INFORMATION
Dollars in Millions, Except Per Share Data
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
Year Ended December 31,
1996 1995 1994 1993 1992
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $ 2,955 $ 2,954 $ 2,700 $ 2,419 $ 2,373
Cost of products sold 2,619 2,528 2,354 2,254 2,107
Depreciation, depletion and amortization 144 145 142 137 115
- - ----------------------------------------------------------------------------------------------------------
Gross profit 191 281 204 27 152
Selling, general and administrative 139 154 138 137 133
Unusual charges (credits) -- 5 (25) 111 37
Income (loss) from operations 61 131 97 (218) (12)
Financing costs (net) 36 39 56 62 62
Income (loss) before income taxes, extraordinary
items and cumulative effect of accounting changes 29 92 152 (280) (75)
Extraordinary items -- 5 -- -- (50)
Cumulative effect of accounting changes -- -- -- (16) 76
Net income (loss) applicable to common stock 34 100 157 (272) (66)
Per share data applicable to common stock:
Income (loss) before extraordinary items
and cumulative effect of accounting changes .78 2.21 4.33 (7.55) (3.61)
Net income (loss) .78 2.34 4.33 (8.04) (2.58)
Cash dividends -- -- -- -- --
- - ----------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Cash and cash equivalents 109 128 162 5 55
Working capital 251 224 225 27 74
Net property, plant and equipment 1,456 1,469 1,394 1,399 1,395
Total assets 2,547 2,668 2,499 2,304 2,189
Current maturities of long term obligations 38 36 36 28 33
Long term obligations 470 502 671 674 662
Redeemable Preferred Stock--Series B 64 65 67 68 138
Stockholders' equity 592 557 354 190 327
- - ----------------------------------------------------------------------------------------------------------
OTHER DATA
Shipments (net tons, in thousands) 5,895 5,564 5,208 5,005 4,974
Raw steel production (net tons, in thousands) 6,557 6,081 5,763 5,551 5,380
Effective capacity utilization 93.7% 96.5% 96.1% 100.0% 100.5%
Number of employees (year end) 9,579 9,474 9,711 10,069 10,299
Capital investments $ 129 $ 215 $ 138 $ 161 $ 284
Total debt and redeemable preferred stock as
a percent of total capitalization 49.1% 52.0% 68.6% 80.2% 71.8%
Common shares outstanding at year end (in thousands) 43,288 43,288 36,376 36,361 25,500
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
16
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS--COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Sales
Net sales for 1996 and 1995 for National Steel Corporation (the "Company") each
totaled $ 3.0 billion. Despite an increase in volume, net sales remained
essentially unchanged primarily as a result of a decline in average selling
prices sustained earlier in the year, as well as lower outside pellet sales.
Steel shipments for 1996 were a rec-ord 5,895,000 tons, representing a 5.9%
increase compared to the 5,564,000 tons shipped in 1995. Productivity
improvements as well as additional capacity provided by the new Triple G coating
line at the Granite City Division contributed to this increase.
Cost of Products Sold
The Company's cost of products sold totaled $2.6 billion in 1996, an increase of
$91.9 million, or 3.6%, compared to 1995. Some of the major factors contributing
to this increase include the 331,000 net ton increase in steel shipments,
unplanned blast furnace and kiln outages at the Granite City Division and
National Steel Pellet Company, respectively, as well as a shift in product mix
to more costly but higher value-added products. Higher natural gas prices due to
extreme cold weather earlier in the year also increased costs. These increases
were partially offset by a reduction in costs associated with the decline in
outside pellet sales, along with the Company's cost reduction programs.
Raw steel production increased to 6,557,000 tons in 1996, a 7.8% increase from
the 6,081,000 tons produced in 1995.
Selling, General and Administrative Expense
Selling, general and administrative expense of $138.6 million in 1996 represents
a $15.1 million decrease compared to 1995. This decrease is a result of the
favorable settlement of a lawsuit earlier in the year, along with a reduction in
the level of spending for professional services.
Financing Costs
Net financing costs of $36.2 million in 1996 represents a $3.0 million decrease
compared to net financing costs of $39.2 million for 1995. This decrease is a
result of the prepayment of $133.3 million of debt in August 1995, offset by a
reduction in interest income as a result of lower average cash balances.
Income Taxes
During 1996 and 1995, the Company recognized income tax credits and additional
deferred tax assets of $21.6 million and $28.6 million, respectively, based upon
future projections of income. In 1996 and 1995, these credits were offset by
$5.2 million and $8.6 million of federal income tax expense and $.7 million and
$6.4 million of state income tax expense, respectively.
The Company's effective tax rate was lower than the federal statutory rate
primarily because of the continued utilization of available operating loss
carryforwards. As such, the Company's effective alternative minimum tax rate was
18.0% and 4.0% for 1996 and 1995, respectively.
Settlement of Legal Proceedings
During the third quarter of 1996, the Company settled two disputes that resulted
in aggregate gains totaling $11.2 million.
On September 12, 1996, following the closing of the settlement agreement between
the Company and Bakers Port, Inc., the Company sold 213 acres out of a total of
2,338 acres of land received in connection with this settlement. The sale
generated a net gain of $3.7 million, which was recorded as other income.
On August 15, 1996, the Company finalized the settlement agreement with the
Pension Benefit Guaranty Corporation (the "PBGC") relating to the Donner-Hanna
Joint Venture pension plans. As a part of the settlement, the Company paid $8.5
million to the PBGC. Since the Company had estimated and accrued $16.0 million
for this liability, a gain of $7.5 million was recorded in connection with this
settlement. This gain reduced cost of goods sold during the third quarter of
1996.
17
Plan
Pace
Performance
Pride
-----------
<PAGE>
Subsequent Event
On January 31, 1997, the Company entered into a definitive agreement with North
Limited ("North") and Bethlehem Steel Corporation ("BSC"), pursuant to which the
Company and BSC will sell to North their respective minority equity interests in
the Iron Ore Company of Canada ("IOC"). The Company, which owns 21.73% of IOC,
will receive approximately $85 million in proceeds in exchange for its shares
and realize an after-tax gain of approximately $25 million. The Company expects
to record the gain during the first quarter of 1997 at the time of the closing
of the transaction.
Change in Pension Measurement Date and Discount Rate and Increase in Minimum
Contributions
During the third quarter of 1996, the Company changed the measurement date for
pensions and other postretirement benefit obligations ("OPEB") from December 31
to September 30 in order to provide for more timely information. The change in
measurement date had no effect on 1996 expense and had an immaterial impact on
the funded status of the plans at December 31, 1996.
As a result of recent federal legislation, the Company expects minimum pension
plan contributions to increase from $38.3 million in 1996 to approximately $93.0
million in 1997.
As a result of the increase in long term interest rates in the United States, at
September 30, 1996, the Company increased the discount rate used to calculate
the actuarial present value of its accumulated benefit obligation for pensions
and OPEB by 75 basis points to 8.0%, from the rate used at December 31, 1995.
The effect of these changes did not impact 1996 expense. However, the increase
in the discount rate used to calculate the pension obligation decreased the
minimum pension liability recorded on the Company's balance sheet from $108.8
million to $14.4 million at September 30, 1996, and at the same time resulted in
a $1.8 million increase to stockholders' equity.
Adoption of New Accounting Pronouncements
During the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying value. The adoption of SFAS 121 did not have an impact on the Company's
financial statements.
The Company also adopted Statement of Financial Accounting Standards No. 123
("SFAS 123") "Accounting for Stock-Based Compensation" during the first quarter
of 1996. SFAS 123 requires the Company to either adopt a fair value based method
of expense recognition for all stock compensation based awards, or provide pro
forma net income and earnings per share ("EPS") information as if the
recognition and measurement provisions of SFAS 123 had been adopted. The Company
decided to account for its stock based compensation awards following the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"). APB 25
requires compensation expense to be recognized only if the market price of the
underlying stock exceeds the exercise price on the date of grant. The Company's
stock based awards consist of stock options with an exercise price equal to
market price on the date of grant. As such, the Company has not recorded
compensation expense in connection with these awards. In addition, the effect of
applying the SFAS 123 fair value method to the Company's stock-based awards
results in net income and EPS that are not materially different from amounts
reported.
Labor Negotiations
In 1993, the Company and the United Steelworkers of America ("USWA") negotiated
a six year labor agreement continuing through July 1999, with a reopener
provision in 1996 for specified payroll items and employee benefits. Pursuant to
the terms of the reopener, if the parties could not reach a settlement, they
were to submit final offers to an arbitrator who would, after a hearing,
consider the information and determine an award. On October 30, 1996, the
arbitrator handed down an award regarding the arbitration of the reopener. The
arbitrator's award is comparable to the industry pattern for payroll and benefit
items under collective bargaining agreements between the USWA and other
integrated steel producers. Pursuant to the award, employees represented by the
USWA received an immediate wage increase of fifty cents per hour retroactive to
August 1, 1996, with increases of twenty five cents per hour on August 1, 1997
and 1998. In addition, $500 lump sum bonuses will be paid to each employee
represented by the USWA on May 1, 1998 and 1999.
18
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT
<PAGE>
The Company estimates that these items, along with certain other provisions in
the agreement, will increase employee related expenses by approximately $7
million, $15 million and $18 million for 1997, 1998 and 1999, respectively. The
Company's 1996 labor costs increased by approximately $4 million as a result of
the arbitrator's award.
RESULTS OF OPERATIONS--COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Sales
Net sales for 1995 totaled $3.0 billion, a 9.4% increase compared to 1994. This
increase was attributable to an increase in volume as well as an increase in
realized selling prices. Steel shipments for 1995 were 5,564,000 tons,
representing a 6.8% increase compared to the 5,208,000 tons shipped in 1994. Raw
steel production increased to 6,081,000 tons, a 5.5% increase from the 5,763,000
tons produced in 1994.
Cost of Products Sold
Cost of products sold as a percentage of sales declined from 87.2% in 1994 to
85.6% in 1995. This improvement was the result of an increased level of
shipments, higher average selling prices and various cost reduction programs,
and was achieved despite a major blast furnace reline.
Selling, General and Administrative Expense
Selling, general and administrative expenses of $153.7 million in 1995
represented an increase of $15.5 million compared to 1994. This increase was
largely attributable to nonrecurring outside professional fees associated with
various strategic initiatives.
Unusual Charges (Credits)
Reduction in Workforce--During the fourth quarter of 1994, the Company finalized
and implemented a plan that resulted in a workforce reduction of approximately
400 salaried nonrepresented employees, and a restructuring charge of $34.2
million, or $25.6 million net of tax. During the first quarter of 1995, the
Company recorded an additional restructuring charge of $5.3 million, or $3.6
million net of tax, as a result of the various elections made by the terminated
employees during the first quarter.
The aggregate restructuring charge of $39.5 million was comprised of OPEB--$26.5
million; severance--$12.5 million; pensions--($2.6) million and other charges--
$3.1 million. Substantially all of the amounts related to severance and other
charges were paid as of December 31, 1995. The remaining balance of $23.9
million related primarily to OPEB and pensions and will require the utilization
of cash over the retirement lives of the affected employees.
Financing Costs
Net financing costs of $39.2 million in 1995 represented a 29.6% decrease
compared to net financing costs of $55.7 million for 1994. This decrease was
attributable to higher short term investment earnings resulting from the receipt
of cash generated by the issuance of 6.9 million shares of Class B Common Stock
in February 1995, coupled with a decrease in interest expense as a result of
debt reduction.
Primary Offering of Class B Common Stock and Extraordinary Item
On February 1, 1995, the Company completed a primary offering of 6,900,000
shares of Class B Common Stock, bringing the total number of shares of Class B
Common Stock issued and outstanding to 21,176,156 at that time. Subsequent to
the offering, NKK Corporation, through its ownership of all 22,100,000 issued
and outstanding shares of Class A Common Stock, holds 67.6% of the combined
voting power of the Company. The remaining 32.4% of the combined voting power is
held by the public. The issuance of the additional shares of Class B Common
Stock generated net proceeds of approximately $104.7 million. On August 7, 1995,
the Company utilized these proceeds, along with an additional amount of $20.9
million funded from the Company's available cash, to prepay $133.3 million
principal amount of the outstanding $323.3 million related party debt associated
with the rebuild of the No. 5 Coke Oven Battery serving the Great Lakes
Division. This transaction resulted in an extra-ordinary item of $5.4 million,
net of related income tax expense of $.5 million, or $.13 per share.
19
Plan
Pace
Performance
Pride
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity needs arise primarily from capital investments, working
capital requirements, pension funding requirements and principal and interest
payments on its indebtedness. The Company has satisfied these liquidity needs
with funds provided by long term borrowings and cash provided by operations. One
source of liquidity consists of a Receivables Purchase Agreement (the
"Receivables Purchase Agreement") with commitments of up to $200.0 million.
During July 1996, the Company amended the Receivables Purchase Agreement
extending the expiration date to May 2001. Also during July 1996, the Company
entered into a new $100.0 million credit facility and a new $50.0 million credit
facility, which will expire in May 2000 and July 1997, respectively, both of
which are secured by the Company's inventories (the "Inventory Facilities").
The Company is currently in compliance with all material covenants of, and
obligations under, the Receivables Purchase Agreement, the Inventory Facilities
and other debt instruments. On December 31, 1996, there were no cash borrowings
outstanding under the Receivables Purchase Agreement or the Inventory
Facilities, and outstanding letters of credit under the Receivables Purchase
Agreement totaled $89.8 million. For 1996, the maximum availability under the
Receivables Purchase Agreement, after reduction for letters of credit
outstanding, varied from $59.3 million to $110.4 million and was $88.7 million
as of December 31, 1996.
At December 31, 1996, total debt and redeemable preferred stock as a percentage
of total capitalization decreased to 49.1% as compared to 52.0% at December 31,
1995. Cash and cash equivalents totaled $109.0 million and $127.6 million as of
December 31, 1996 and 1995, respectively. At December 31, 1996, obligations
guaranteed by the Company approximated $32.2 million, compared to $35.6 million
at December 31, 1995.
Cash Flows From Operating Activities
For 1996, cash provided from operating activities totaled $162.6 million, a
decrease of $102.5 million compared to 1995. This decrease is primarily
attributable to the $66.2 million decrease in net income as well as a higher
usage to fund working capital needs.
For 1995, cash provided from operating activities decreased by $51.7 million
compared to 1994. However, excluding the after tax effect of the 1994 Bessemer
and Lake Erie Railroad litigation gain of $107.9 million, cash provided by
operating activities increased by $56.2 million. The increase was primarily
attributable to increased sales and improvements in operating results.
Cash Flows From Investing Activities
Capital investments at December 31, 1996 and 1995 amounted to $128.6 million and
$215.4 million, respectively. The 1996 spending is primarily related to the 72
inch continuous galvanizing line upgrade and construction of the new coating
line, both at the Midwest Division, along with the completion of the coating
line at the Granite City Division. Capital expenditures during 1995 were
primarily for projects related to the Company's Granite City Division. These
projects included the construction of the Triple G coating line, the "B" blast
furnace reline and the hot strip mill modernization program.
Budgeted capital expenditures approximating $297.0 million, of which $99.4
million is committed at December 31, 1996, are expected to be made during 1997
and 1998. These budgeted capital expenditures relate primarily to the completion
of the new coating line and the completion of the 72 inch continuous galvanizing
line upgrade, both at the Midwest Division, as well as blast furnace repairs
scheduled at the Great Lakes Division.
Cash Flows From Financing Activities
During 1996, the Company utilized $56.7 million for financing activities, which
included scheduled repayments of debt, as well as dividend payments on the
Company's preferred stock. During the fourth quarter of 1996, a $6.5 million low
interest loan was issued to National Steel Pellet Company from the State of
Minnesota for the general upgrade of the mine's operations.
During the first quarter of 1995, the Company completed a primary offering of
6,900,000 million shares of Class B Common Stock. The issuance of this stock
generated net proceeds of $104.7 million, which was used along with cash from
operations during the third quarter of 1995 to prepay $133.3 million aggregate
principal amount of related party debt.
20
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT
<PAGE>
Weirton Liabilities and Preferred Stock
In connection with the Company's June 1990 recapitalization, the Company
received $146.6 million from FoxMeyer Health Corporation (collectively with its
subsidiaries "FOX"), which changed its name to Avatex Corporation in January
1997, in cash and recorded a net present value equivalent liability with respect
to certain released Weirton Benefit Liabilities, primarily retiree healthcare
and life insurance. As a result of this transaction, the Company's future cash
flow will decrease as the released Weirton Benefit Liabilities are paid. During
each of 1996 and 1995, such cash payments were $15.4 million.
The Series B Redeemable Preferred Stock is presently subject to mandatory
redemption by the Company on August 5, 2000 at a redemption price of $58.3
million and may be redeemed beginning January 1, 1998 without the consent of FOX
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
Redeemable Preferred Stock and, accordingly, such payments are expected to be
made in the form of releases of FOX from its obligations to indemnify the
Company for corresponding amounts of the remaining unreleased Weirton Benefit
Liabilities. Dividend and redemption payments with respect to the Series B
Redeemable Preferred Stock reduce the Company's cash flow, even though they are
paid in the form of a release of FOX 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 Redeemable Preferred Stock is less than the amount required to
satisfy FOX's then current indemnification obligation, FOX would be required to
pay such shortfall in cash to the Company. The Company's ability to fully
realize the benefits of FOX's indemnification obligations is necessarily
dependent upon FOX's financial condition at the time of any claim with respect
to such obligations.
On August 20, 1996, FOX filed a Form 10-Q for its quarter ended June 30, 1996 in
which it reported a writedown of $238.7 million in its investment in FoxMeyer
Drug Company, its principal operating subsidiary. Primarily as a result of this
writedown, the consolidated stockholders' equity of FOX was reported in its Form
10-Q for the quarter ended June 30, 1996 as a deficit of $88.4 million. At
December 31, 1996, this deficit was $83.0 million.
On August 27, 1996, most of FOX's operating subsidiaries (including FoxMeyer
Drug Company) filed for relief under Chapter 11 of the United States Bankruptcy
Code in the U.S. Bankruptcy Court in Delaware. Although FOX, the parent company,
was not included in the Chapter 11 filing, the Chapter 11 filing has caused the
Company to have increased concerns about FOX's ability to honor its remaining
indemnification obligations to the Company. FOX is subject to the informational
requirements of the Securities Exchange Act of 1934 and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission.
21
Plan
Pace
Performance
Pride
-----------
<PAGE>
National Steel Corporation and Subsidiaries
Statements of Consolidated Income
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------
Dollars in Thousands, Except Per Share Amounts Years Ended December 31,
1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $2,954,033 $2,954,218 $2,700,273
Cost of products sold 2,619,469 2,527,521 2,353,970
Selling, general and
administrative 138,568 153,690 138,223
Depreciation, depletion and
amortization 144,413 145,452 141,869
Equity income of affiliates (9,763) (8,767) (5,464)
Unusual charges (credits) ---------- 5,336 (24,888)
- - ---------------------------------------------------------------------------------------------------------------
Income from Operations 61,346 130,986 96,563
- - ---------------------------------------------------------------------------------------------------------------
Other (income) expense
Interest and other financial income (7,103) (11,736) (5,542)
Interest and other financial costs 43,352 50,950 61,241
Other (3,732) -------- (110,972)
- - ---------------------------------------------------------------------------------------------------------------
Income before Income Taxes and Extraordinary Item 28,829 91,772 151,836
- - ---------------------------------------------------------------------------------------------------------------
Income tax credit (15,728) (13,651) (16,676)
- - ---------------------------------------------------------------------------------------------------------------
Income before Extraordinary Item 44,557 105,423 168,512
Extraordinary item ---------- 5,373 --------
- - ---------------------------------------------------------------------------------------------------------------
Net Income 44,557 110,796 168,512
Less preferred stock dividends 10,959 10,958 11,038
- - ---------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 33,598 $ 99,838 $ 157,474
===============================================================================================================
Per Share Data Applicable to Common Stock
- - ---------------------------------------------------------------------------------------------------------------
Income before Extraordinary Item $ .78 $ 2.21 $ 4.33
Extraordinary Item ---------- .13 ----------
- - ---------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ .78 $ 2.34 $ 4.33
===============================================================================================================
Weighted average shares outstanding
(in thousands) 43,288 42,707 36,367
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
22
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------
<PAGE>
<TABLE>
<CAPTION>
National Steel Corporation and Subsidiaries
Consolidated Balance Sheets
- - ---------------------------------------------------------------------------------------------------------------
Dollars in Thousands, Except Per Share Amounts December 31,
1996 1995
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Current assets
Cash and cash equivalents $ 109,041 $ 127,616
Receivables, less allowances (1996--$21,320; 1995--$19,986) 279,889 316,662
Inventories 435,961 412,014
- - ---------------------------------------------------------------------------------------------------------------
Total current assets 824,891 856,292
- - ---------------------------------------------------------------------------------------------------------------
Investments in affiliated companies 65,399 59,885
Property, plant and equipment
Land and land improvements 241,576 234,693
Buildings 263,301 259,391
Machinery and equipment 3,159,720 3,046,130
- - ---------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 3,664,597 3,540,214
Less accumulated depreciation, depletion and amortization 2,209,079 2,071,511
- - ---------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 1,455,518 1,468,703
Deferred tax assets 151,500 129,900
Intangible pension asset 14,409 108,822
Other assets 35,338 44,277
- - ---------------------------------------------------------------------------------------------------------------
Total Assets $ 2,547,055 $ 2,667,879
===============================================================================================================
LIABILITIES, Current liabilities
REDEEMABLE Accounts payable $ 234,892 $ 255,574
PREFERRED Salaries and wages 69,764 89,987
STOCK AND Withheld and accrued taxes 86,079 82,076
STOCKHOLDERS' Pension and other employee benefits 79,808 96,894
EQUITY Other accrued liabilities 63,101 68,373
Income taxes 2,424 3,912
Current portion of long term obligations 37,731 35,750
- - ---------------------------------------------------------------------------------------------------------------
Total current liabilities 573,799 632,566
- - ---------------------------------------------------------------------------------------------------------------
Long term obligations 323,550 339,613
Long term obligations to related parties 146,744 161,912
Long term pension liabilities 248,403 326,151
Postretirement benefits other than pensions 249,771 221,627
Other long term liabilities 349,338 364,423
Redeemable Preferred Stock--Series B 63,530 65,030
- - ---------------------------------------------------------------------------------------------------------------
Stockholders' equity
Common Stock par value $.01:
Class A--authorized 30,000,000 shares; issued and outstanding
22,100,000 shares in 1996 and 1995 221 221
Class B--authorized 65,000,000 shares; issued and outstanding
21,188,240 shares in 1996 and 1995 212 212
Preferred Stock--Series A 36,650 36,650
Additional paid-in capital 465,359 465,359
Retained earnings 89,478 54,115
- - ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 591,920 556,557
- - ---------------------------------------------------------------------------------------------------------------
Total Liabilities, Redeemable Preferred Stock and
Stockholders' Equity $ 2,547,055 $ 2,667,879
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
23
Plan
Pace
Performance
Pride
-----------
<PAGE>
National Steel Corporation and Subsidiaries
Statements of Consolidated Cash Flows
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
Dollars in Thousands YEARS ENDED DECEMBER 31,
1996 1995 1994
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 44,557 $ 110,796 $ 168,512
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 144,413 145,452 141,869
Carrying charges related to facility sales
and plant closings 22,385 24,307 24,337
Equity income of affiliates (9,763) (8,767) (5,464)
Dividends from affiliates 4,375 6,332 6,252
Long term pension liability (net of change in
intangible pension asset) 18,430 24,763 36,707
Postretirement benefits 28,145 42,120 22,072
Extraordinary item -- (5,373) --
Deferred income taxes (21,600) (28,600) (20,700)
Changes in working capital items:
Receivables 36,773 (23,793) (68,160)
Inventories (23,947) (44,002) 3,085
Accounts payable (20,682) (17,012) 30,292
Accrued liabilities (40,426) 50,936 (28,441)
Other (20,023) (12,063) 6,481
- - -----------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 162,637 265,096 316,842
- - -----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of property, plant and equipment (128,621) (215,442) (137,519)
Proceeds from sale of assets 4,118 110 1,694
- - -----------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (124,503) (215,332) (135,825)
- - -----------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Exercise of stock options -- 169 211
Issuance of Class B Common Stock -- 104,734 --
Prepayment of related party debt -- (125,624) --
Debt repayments (35,750) (35,849) (83,845)
Borrowings 6,500 -- 87,950
Payment of released Weirton
Benefit Liabilities (15,360) (15,429) (16,614)
Payment of unreleased Weirton Liabilities
and their release in lieu of cash
dividends on Redeemable Preferred Stock--Series B (8,066) (7,099) (7,055)
Dividend payments on Preferred Stock--Series A (4,033) (4,032) (4,032)
Dividend payments on Redeemable Preferred Stock--Series B -- (964) (1,008)
- - -----------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (56,709) (84,094) (24,393)
- - -----------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (18,575) (34,330) 156,624
Cash and cash equivalents at beginning of the year 127,616 161,946 5,322
- - -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year $ 109,041 $ 127,616 $ 161,946
- - -----------------------------------------------------------------------------------------------
Supplemental Cash Payment Information
Interest and other financing costs paid $ 42,487 $ 45,627 $ 60,342
Income taxes paid 16,525 22,229 5,338
- - -----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
24
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT -------------------------------------
<PAGE>
National Steel Corporation and Subsidiaries
Statements of Changes in Consolidated Stockholders' Equity
and Redeemable Preferred Stock--Series B
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
Dollars in Thousands Common Common Preferred Additional Retained Total Redeemable
Stock-- Stock-- Stock-- Paid-In Earnings Stockholders' Preferred
Class A Class B Series A Capital (Deficit) Equity Stock--Series B
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $221 $143 $36,650 $360,314 $(207,366) $189,962 $68,030
Net Income 168,512 168,512
Amortization of excess of
book value over
redemption value of
Redeemable Preferred
Stock--Series B 1,500 1,500 (1,500)
Cumulative dividends on
Preferred Stock--
Series A and B (12,538) (12,538)
Exercise of stock options 211 211
Minimum pension liability 5,934 5,934
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 221 143 36,650 360,525 (43,958) 353,581 66,530
1994
Net Income 110,796 110,796
Amortization of excess of
book value over
redemption value of
Redeemable Preferred
Stock--Series B 1,500 1,500 (1,500)
Cumulative dividends on
Preferred Stock--
Series A and B (12,458) (12,458)
Issuance of Common
Stock--Class B 69 104,665 104,734
Exercise of stock options 169 169
Minimum pension liability (1,765) (1,765)
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 221 212 36,650 465,359 54,115 556,557 65,030
1995
Net Income 44,557 44,557
Amortization of excess of
book value over
redemption value of
Redeemable Preferred
Stock--Series B 1,500 1,500 (1,500)
Cumulative dividends on
Preferred Stock--
Series A and B (12,459) (12,459)
Minimum pension liability 1,765 1,765
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, $221 $212 $36,650 $465,359 $ 89,478 $591,920 $63,530
1996
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
25
Plan
Pace
Performance
Pride
-----------
<PAGE>
National Steel Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
Note A--Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of National Steel Corporation and its majority owned subsidiaries (the
"Company"). Intercompany accounts and transactions have been eliminated.
Nature of Operations. The Company is a domestic manufacturer engaged in a single
line of business, the production and processing of steel. The Company targets
high value-added applications of flat rolled carbon steel for sale primarily to
the automotive, construction 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 independent steel service centers. The Company's principal
markets are located throughout the United States.
In 1996 and 1995, no single customer accounted for more than 10% of net sales.
In 1994, a single customer accounted for approximately 10% of net sales. Sales
to the automotive market accounted for approximately 28% of total net sales in
1996 and 1995, and 29% in 1994. Concentration of credit risk related to trade
receivables is limited due to the large numbers of customers in differing
industries and geographic areas and management's credit practices.
Since 1986, the Company has had cooperative labor agreements with the United
Steelworkers of America (the "USWA") and other labor organizations, which
collectively represent 82.6% of the Company's employees. The Company entered
into a six year agreement with these labor organizations effective as of August
1, 1993 (the "1993 Settlement Agreement"). Additionally, the 1993 Settlement
Agreement contains a no-strike clause also effective through 1999. Scheduled
negotiations reopened in 1996, and were ultimately resolved utilizing the
arbitration provisions provided for in the 1993 Settlement Agreement without any
disruption to operations.
Cash Equivalents. Cash equivalents are short-term liquid investments which
consist principally of time deposits and commercial paper at cost which
approximates market. These investments 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.
Based on replacement cost, inventories would have been approximately $168.8 and
$146.0 million higher than reported at December 31, 1996 and 1995, respectively.
During each of the last three years certain inventory quantity reductions caused
liquidations of LIFO inventory values. These liquidations did not have a
material effect on net income.
The Company's inventory as of December 31 is as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------
Inventories 1996 1995
<S> <C> <C>
Dollars in thousands
- - --------------------------------------------------
Finished and semi-finished $387,216 $368,623
Raw materials and supplies 183,184 180,757
- - --------------------------------------------------
570,400 549,380
Less LIFO reserve 134,439 137,366
- - --------------------------------------------------
$435,961 $412,014
==================================================
</TABLE>
Investments in Affiliated Companies. 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 included in retained earnings at December 31, 1996 and
1995 amounted to $14.6 million and $8.9 million, respectively. (See Note M--
Investment in Iron Ore Company of Canada regarding its sale subsequent to year
end.)
Property, Plant and Equipment. Property, plant and equipment are stated at cost
and include certain expenditures for leased facilities. Interest costs
applicable to facilities under construction are capitalized. Capitalized
interest amounted to $4.0 million in 1996, $6.3 million in 1995 and $3.7 million
in 1994. Amortization of capitalized interest amounted to $5.5 million in 1996
and $5.6 million in 1995 and 1994.
Depreciation, Depletion and Amortization. Depreciation of production facilities
and amortization related to capitalized lease obligations are generally provided
by charges to income computed by the straight-line method. Depreciation and
depletion of certain raw material facilities and furnace relinings are computed
on the basis of tonnage produced in relation to estimated total production to be
obtained from such facilities.
26
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------
<PAGE>
Research and Development. Research and development costs are expensed when
incurred and are charged to cost of products sold. Expenses for 1996, 1995 and
1994 amounted to approximately $11.6 million, $9.8 million and $7.9 million,
respectively.
Financial Instruments. Financial instruments consist of cash and cash
equivalents, long term obligations (excluding capitalized lease obligations),
and the Series B Redeemable Preferred Stock. The fair value of these financial
instruments approximates their carrying amounts at December 31, 1996. At
December 31, 1996 and 1995, the Company had not invested in any derivative
financial instruments.
Earnings per Share. Earnings per share of common stock ("EPS") is computed by
dividing net income applicable to common stock by the sum of the weighted
average shares of common stock outstanding during the period plus common stock
equivalents, if dilutive.
Use of Estimates. Preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Reclassifications. Certain items in prior years have been reclassified to
conform with the current year presentation.
Note B -- Capital Structure and Primary Offering of Class B Common Stock
Ownership: On February 1, 1995, the Company completed a primary offering of
6,900,000 shares of Class B Common Stock, bringing the total number of shares of
Class B Common Stock issued and outstanding to 21,176,156 at that time. The
issuance of this stock generated net proceeds of $104.7 million, all of which
was used for related party debt reduction. Subsequent to the offering, NKK
Corporation (collectively with its subsidiaries "NKK"), through its ownership of
all 22,100,000 issued and outstanding shares of Class A Common Stock, holds
67.6% of the combined voting power of the Company. The remaining 32.4% of the
combined voting power is held by the public.
At December 31, 1996, the Company's capital structure was as follows:
Series A Preferred Stock
At December 31, 1996, 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
cumulative and payable quarterly. The Series A Preferred Stock is not subject to
mandatory redemption by the Company and is non-voting. All outstanding Shares of
Series A Preferred Stock are owned by NKK. In 1996 and 1995, cash dividends of
approximately $4.0 million were paid on the Series A Preferred Stock.
Series B Redeemable Preferred Stock
At December 31, 1996, there were 10,000 shares of Series B Redeemable Preferred
Stock issued and outstanding and held by FoxMeyer Health Corporation
(collectively with its subsidiaries "FOX"), which changed its name to Avatex
Corporation in January 1997. Annual dividends of $806.30 per share on the Series
B Redeemable 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 FOX from its indemnification obligations with respect to the remaining
unreleased liabilities for certain employee benefits of its former Weirton Steel
Division employees (the "Weirton Benefit Liabilities"). The Series B Redeemable
Preferred Stock dividend permitted release and payment of $8.1 million and $7.1
million, respectively, of previously unreleased Weirton Benefit Liabilities
during 1996 and 1995, and a cash payment of $1.0 million during 1995, to
reimburse FOX for an obligation previously incurred in connection with the
Weirton Benefit Liabilities. There were no cash payments during 1996 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 Redeemable Preferred Stock
final redemption, 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 dealt with in
the Series B Redeemable Preferred Stock redemption proceeds or otherwise
settled. If the Company does not meet its preferred stock dividend and
redemption obligations when due, FOX has the right to cause
27
Plan
Pace
Performance
Pride
-----------
6
<PAGE>
NKK to purchase the Company's preferred stock dividend and redemption
obligations. The Series B Redeemable Preferred Stock is nontransferable and
nonvoting. (See Note H--Weirton Liabilities.)
The Series B Redeemable 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 FOX. On January 1, 1998, the
redemption price for the Series B Redeemable Preferred Stock would be $62.2
million.
Periodic adjustments are made to retained earnings for the excess of the book
value of the Series B Redeemable Preferred Stock at the date of issuance over
the redemption value. 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 Redeemable
Preferred Stock, and accordingly, such payments are expected to be made in the
form of releases of FOX 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 Redeemable 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, 1996, 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
outstanding and owned by NKK. Each share of Class A Common Stock is entitled to
two votes. No cash dividends were paid on the Class A Common Stock in 1996, 1995
or 1994.
Class B Common Stock
At December 31, 1996, the Company had 65,000,000 shares of $.01 par value Class
B Common Stock authorized and 21,188,240 shares issued and outstanding. No cash
dividends were paid on the Class B Common Stock in 1996, 1995 or 1994. All of
the issued and outstanding shares of Class B Common Stock are publicly traded.
28
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------
<PAGE>
Note C--Long Term Obligations
Long term obligations were as follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1996 1995
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. $ 75,000 $ 75,000
Vacuum Degassing Facility Loan, 10.336% fixed rate due in semi-annual installments through
2000, with a first mortgage in favor of the lenders. 26,375 32,357
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. 113,920 119,428
Coke Battery Loan, 7.54% fixed rate with semi-annual payments due through 2008.
Lenders are wholly-owned subsidiaries of NKK and unsecured. 161,912 177,080
Pickle Line Loan, 7.726% fixed rate due in equal semi-annual installments through 2007,
with a first mortgage in favor of the lender. 83,526 87,901
Capitalized lease obligations 24,965 28,485
Other 22,327 17,024
- - ----------------------------------------------------------------------------------------------------------------------------------
Total long term obligations 508,025 537,275
Less long term obligations due within one year 37,731 35,750
- - ----------------------------------------------------------------------------------------------------------------------------------
Long term obligations $470,294 $501,525
==================================================================================================================================
</TABLE>
Future minimum payments for all long term obligations and leases as of December
31 1996 are as follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
CAPITALIZED OPERATING OTHER
LEASE LEASES LONG TERM
OBLIGATIONS
Dollars in thousands
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 6,712 $ 61,737 $ 33,792
1998 6,712 59,920 35,484
1999 6,712 52,006 38,797
2000 6,712 48,299 33,721
2001 6,712 37,273 33,729
Thereafter -------- 147,762 307,537
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Payments $33,560 $406,997 $483,060
===================================================================================================================================
Less amount representing interest 8,595
Less current portion of obligation under capitalized lease 3,939
- - ---------------------------------------------------------------------------------------------
Long term obligation under capitalized lease $21,026
=============================================================================================
</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
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 totaled $72.2 million in 1996, $71.8 million
in 1995 and $70.4 million in 1994.
The Company borrowed a total of $350.0 million over a three year period ended in
1993 from a United States subsidiary of NKK for the rebuild of the No. 5 coke
oven battery servicing the Great Lakes Division. During 1995, the Company
utilized proceeds from the 6.9 million share primary offering, along with other
cash funds, to prepay
- - --------------------------------------------------------------------------------
29
Plan
Pace
Performance
Pride
- - -----------
<PAGE>
$133.3 million aggregate principal amount of the forementioned loan. During
1996, the Company made principal payments of $15.2 million, and recorded $12.1
million in interest expenses, on the coke battery loan. During 1995, the
principal and interest payments on the coke battery loan totaled $152.9 million
and $19.7 million, respectively. The 1995 principal payments includes the $133.3
prepayment mentioned above. Accrued interest on the loan as of December 31, 1996
and 1995 was $4.7 million and $5.1 million, respectively. Additionally, deferred
financing costs related to the loan were $2.3 million and $2.5 million,
respectively, as of December 31, 1996 and 1995. (See Note I--Nonrecurring and
Extraordinary Items.)
CREDIT ARRANGEMENTS
During July 1996, the Company entered into a new $100.0 million credit facility
and a new $50.0 million credit facility, which will expire in May 2000 and July
1997, respectively, both of which are secured by the company's inventories (the
"Inventory Facilities"). No amounts have been borrowed against the Inventory
Facilities.
The Company's credit arrangements also consist of a Receivables Purchase
Agreement with commitments of up to $200.0 million. As of December 31, 1996, no
funded participation interests had been sold under the facility, although $89.8
million in letters of credit had been issued. With respect to the pool of
receivables at December 31, 1996, after reduction for letters of credit
outstanding, the amount of participating interest eligible for sale was $88.7
million. During 1996, the eligible amount ranged from $59.3 million to $110.4
million. During July 1996, the Company amended the Receivables Purchase
Agreement extending the expiration date May 2001.
Various debt and certain lease agreements include restrictions on the amount of
stockholders' equity available for the payment of dividends. Under the most
restrictive of these covenants, stockholders' equity in the amount of $124.7
million was free of such limitations at December 31, 1996. The Company is
currently in compliance with all material covenants of, and obligations under,
the Receivables Purchase Agreement, the Inventory Facilities and other debts
instruments.
NOTE D--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 sixty consecutive months 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 sixty consecutive months of pensionable earnings during the last
ten years preceding retirement, with a premium paid for years of service 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 prescribed by
applicable law. The Company increased the long term rate of return for funding
purposes from 8.5% in 1995 to 9.25% in 1996. The Company's contributions to the
pension trust for 1996 and 1995 were $59.9 million and $8.9 million,
respectively. As a result of recent federal legislation, the Company expects
minimum pension contributions for the 1997 plan year to increase to
approximately $93.0 million .
In 1996, the Company elected to change the measurement date for pension from
December 31 to September 30, in order to provide for more timely information.
The change in measurement date no effect on 1996 expense and had an immaterial
impact on the funded status of the plans at December 31, 1996.
Pension expense and related actuarial assumptions utilized are summarized below:
- - --------------------------------------------------------------------------------
1996 1995 1994
Dollars in thousands
- - --------------------------------------------------------------------------------
Assumptions:
Discount rate 7.25% 8.75% 7.50%
Return on assets 9.25% 8.50% 8.50%
Average rate of compensation
increase 4.70% 4.70% 4.55%
Pension expense:
Service cost $ 25,989 $ 19,143 $ 24,713
Interest cost 111,364 110,683 104,320
Actual return on plan assets (82,362) (234,792) 51,240
Net amortization and deferral 6,930 169,756 (114,855)
- - --------------------------------------------------------------------------------
Net pension expense 61,921 64,790 65,418
Special termination credits -- -- (17,372)
- - --------------------------------------------------------------------------------
TOTAL PENSION EXPENSE $ 61,921 $ 64,790 $ 48,046
================================================================================
30
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT -------------------------------------
<PAGE>
The funded status of the Company's plans at September 30, 1996 and December 31,
1995 along with the actuarial assumptions utilized are as follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
1996 1995
Dollars in thousands
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assumptions:
Discount rate 8.00% 7.25%
Average rate of compensation increase 4.70% 4.70%
- - ------------------------------------------------------------------------------------------------------------------
Funded Status:
Accumulated benefit obligation ("ABO") including vested benefits of
$1,249,551 and $1,328,302 for 1996 and 1995, respectively $1,364,742 $1,441,579
Effect of future pensionable earnings increases 99,502 116,474
- - ------------------------------------------------------------------------------------------------------------------
Projected benefit obligation ("PBO") 1,464,244 1,558,053
Plans' assets at fair market value 1,181,708 1,132,077
- - ------------------------------------------------------------------------------------------------------------------
PBO in excess of plan assets at fair market value 282,536 425,976
Unrecognized transition obligations (47,334) (56,770)
Unrecognized net gain (loss) 115,603 (16,613)
Unrecognized prior service cost (95,556) (106,694)
Pension contributions October through December 1996 (7,321) --
Adjustment required to recognize minimum pension liability 14,409 110,587
- - ------------------------------------------------------------------------------------------------------------------
Accrued pension liability 262,337 356,486
Less pension liability due within one year 13,934 30,335
- - ------------------------------------------------------------------------------------------------------------------
Long term pension liability at December 31 $ 248,403 $ 326,151
==================================================================================================================
</TABLE>
As a result of an increase in long term interest rates at September 30, 1996,
the Company increased the discount rate used to calculate the actuarial present
value of its ABO by 75 basis points to 8.0% from the rate used at December 31,
1995. This is the primary reason for the decrease in the ABO.
The adjustment required to recognize the minimum pension liability of $14.4
million and $110.6 million at December 31, 1996 and 1995, respectively,
represents the excess of the ABO over the fair value of plan assets, including
unfunded accrued pension cost, in underfunded plans. The decrease in the minimum
pension liability is primarily attributable to the increase in the discount
rate.
At September 30, 1996, the Company's pension plans' assets of $1.2 billion were
comprised of approximately 58% equity investments, 37% fixed income investments
and 5% in real estate investments.
Note E--Postretirement Benefits Other Than Pensions
The Company provides contributory healthcare and life insurance benefits for
certain retirees 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 after January 1, 1993 are not eligible to participate in the
plans. The Company has elected to amortize its transition obligation over 20
years, 16 of which remain at December 31, 1996.
In 1996, the Company elected to change the measurement date for OPEB from
December 31 to September 30, in order to provide for more timely information.
The change in measurement date had no effect on 1996 expense and had an
immaterial impact on the funded status of the plan at December 31, 1996.
- - --------------------------------------------------------------------------------
31
Plan
Pace
Performance
Pride
-----------
<PAGE>
The components of postretirement benefit cost and related actuarial assumptions
were as follows:
- - --------------------------------------------------------------------------------
1996 1995 1994
Dollars in thousands
- - --------------------------------------------------------------------------------
Assumptions:
Discount rate 7.25% 8.75% 7.75%
Health care trend rate 7.20% 7.80% 10.10%
Postretirement benefit cost:
Service cost $12,546 $10,573 $13,737
Interest cost 46,241 52,700 53,577
Amortization of
transition obligation 26,274 26,274 26,510
Other (4,887) (5,003) (2,162)
- - --------------------------------------------------------------------------------
Net periodic benefit cost 80,174 84,544 91,662
Special termination credits ------ ------ (4,081)
- - --------------------------------------------------------------------------------
The following represents the plans' funded status as of September 30, 1996 and
December 31, 1995, reconciled with amounts recognized in the consolidated
balance sheet and related actuarial assumptions:
- - --------------------------------------------------------------------------------
1996 1995
Dollars in thousands
- - --------------------------------------------------------------------------------
Assumptions:
Discount rate 8.00% 7.25%
Health care trend rate 6.60% 7.20%
Accumulated postretirement
benefit obligation ("APBO")
Retirees $408,228 $ 525,567
Fully eligible active participants 76,945 85,871
Other active participants 108,823 107,388
- - --------------------------------------------------------------------------------
Total 593,996 718,826
Plan assets at fair value 48,287 33,201
- - --------------------------------------------------------------------------------
APBO in excess of plan assets 545,709 685,625
Unrecognized transition obligation (420,381) (446,654)
Unrecognized net gain (loss) 148,583 (7,344)
Claims and contributions October
through December 1996 (14,140) -------
- - --------------------------------------------------------------------------------
Accrued postretirement
liability 259,771 231,627
Less postretirement benefit
liability due within one year 10,000 10,000
- - --------------------------------------------------------------------------------
Long term postretirement
benefit liability at December 31 $249,771 $ 221,627
- - --------------------------------------------------------------------------------
As a result of the increase in the long term interest rates at September 30,
1996, the Company increased the discount rate used to calculate the actuarial
present value of its APBO by 75 basis points to 8.0% from the rate used at
December 31, 1995. This is the primary reason for the decrease in the APBO. The
assumed healthcare cost trend rate of 5.0% in 2002 and thereafter. A 1.0%
increased the APBO at September 30, 1996, and postretirement benefit cost for
1996 by $55.3 million and $6.6 million, respectively.
In connection with the 1993 Settlement Agreement between the Company and the
USWA, the Company began prefunding the OPEB obligation with respect to USWA
represented employees beginning in 1994. Pursuant to the terms of the 1993
Settlement Agreement, a Voluntary Employee Benefit Association trust (the "VEBA
Trust") was established. Under the terms of the agreement, the Company agreed to
contribute a minimum of $10.0 million annually and, under certain circumstances,
additional amounts calculated as set forth in the 1993 Settlement Agreement. In
1996 and 1995, the Company contributed $15.5 million and $10.0 million,
respectively, to the VEBA Trust. VEBA Trust assets of $48.3 million at September
30, 1996, were comprised of 70.0% equity investments and 30.0% fixed income
investments.
Note F--Other Long Term Liabilities
Other long term liabilities at December 31 consisted of the following:
- - --------------------------------------------------------------------------------
1996 1995
Dollars in thousands
- - --------------------------------------------------------------------------------
Deferred gain on sale leasebacks $ 21,503 $ 24,179
Insurance and employee benefits
(excluding pensions and OPEB) 132,599 128,179
Plant Closings 52,681 61,521
Released Weirton Benefit Liabilities 122,697 121,373
Other 19,858 29,171
- - --------------------------------------------------------------------------------
Total other long term liabilities $349,338 $364,423
- - --------------------------------------------------------------------------------
32
[LOGO OF N NATIONAL STEEL] 1996 ANNUAL REPORT ---------------------------------
<PAGE>
Note G--Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of deferred
tax assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
1996 1995
Dollars in thousands
- - --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Reserves $152,000 $156,900
Employee benefits 209,500 198,400
Net operating loss ("NOL")
carryforwards 70,600 67,100
Leases 12,700 17,500
Federal tax credits 26,800 13,100
Other 28,000 22,600
- - --------------------------------------------------------------------------------
Total deferred tax assets 499,600 475,600
Valuation allowance (125,500) (159,400)
- - -------------------------------------------------------------------
Deferred tax assets net of
valuation allowance 374,100 316,200
- - --------------------------------------------------------------------------------
Deferred tax liabilities
Book basis of property in
excess of tax basis (168,200) (138,500)
Excess tax LIFO over book (40,400) (29,100)
Other (14,000) (18,700)
- - --------------------------------------------------------------------------------
Total deferred tax liabilities (222,600) (186,300)
- - --------------------------------------------------------------------------------
Net deferred tax assets after
valuation allowance $ 151,500 $129,900
================================================================================
</TABLE>
In 1996, 1995, and 1994, the Company determined that it was more likely than not
that sufficient future taxable income would be generated and tax planning
strategies are available to justify increasing the net deferred tax assets after
the valuation allowance. Accordingly, the Company recognized additional deferred
tax assets of $21.6 million, $28.6 million and $20.7 million in 1996, 1995 and
1994, respectively.
Significant components of the provision for income taxes are as follows:
<TABLE>
- - --------------------------------------------------------------------------------
1996 1995 1994
Dollars in thousands
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes payable:
Federal (alternative
minimum tax) $ 5,200 $ 8,584 $ 4,016
State and foreign 672 6,365 8
Deferred taxes (21,600) (28,600) (20,700)
- - --------------------------------------------------------------------------------
Total tax credit $(15,728) $(13,651) $(16,676)
================================================================================
</TABLE>
The reconciliation of income tax computed at the federal statutory tax rates to
the recorded total tax credit is as follows:
<TABLE>
- - --------------------------------------------------------------------------------
1996 1995 1994
Dollars in thousands
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at federal
statutory rates $ 10,100 $ 32,100 $ 53,100
Benefits of operating
loss carryforward
Temporary deductible ( 6,000) (58,400) (84,100)
differences for which
(benefit)
no benefit was
recognized (net) (27,800) 9,700 20,600
Depletion (1,900) (4,300) ------
Dividend exclusion (1,200) (1,800) (1,600)
Alternative minimum tax 5,200 8,584 4,016
Other 5,872 465 (8,692)
- - --------------------------------------------------------------------------------
Total tax credit $(15,728) $(13,651) $(16,676)
================================================================================
</TABLE>
At December 3, 1996, the Company had unused NOL carryforwards of approximately
$196.7 million, which expire as follows: $79.7 million in 2007 and $117.0
million in 2008.
At December 31, 1996, the Company had unused alternative minimum tax credit
carryforwards of approximately $17.9 million which may be applied to offset its
future regular federal income tax liabilities. These tax credits may be carried
forward indefinitely.
33
Plan
Pace
Performance
Pride
- - -----------
<PAGE>
Note H--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, pension, life and
health insurance benefits for the then retired employees and certain
environmental liabilities.
As part of the 1984 sale of a 50% interest in the Company to NKK, FOX agreed, as
between FOX and the Company, to provide in advance sufficient funds for payment
and discharge of, and to indemnify the Company against, all obligations and
liabilities of the Company, whether direct, indirect, absolute or contingent,
incurred or retained by the Company in connection with the sale of Weirton. As
part of the 1990 ownership transaction whereby NKK purchased an additional 20%
ownership in the Company, the Company released FOX from indemnification of
$146.6 million of certain defined Weirton Benefit Liabilities. FOX 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 FOX from an additional $67.8 million of
previously unreleased Weirton Benefit Liabilities in connection with an early
redemption of 10,000 shares of Series B Redeemable Preferred Stock.
During the first quarter of 1994, FOX sold all of its 3,400,000 shares of Class
B Common Stock. In connection with the initial public stock offering, the
Company entered into an agreement (the "Definitive Agreement") with FOX and NKK
which amends certain terms and conditions of the Recapitalization Agreement.
Pursuant to the Definitive Agreement, FOX paid the Company $10.0 million as an
unrestricted prepayment for environmental obligations which may arise after such
prepayment and for which FOX has previously agreed to indemnify the Company.
Such prepayment accrues interest at a variable interest rate which is based upon
the prime rate. The interest rate on such prepayment was 10.75% at December 31,
1996. The Company is required to repay to FOX portions of the $10.0 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. FOX retains
responsibility to indemnify the Company for remaining environmental liabilities
arising after such prepayment and in excess of $10.0 million (as reduced by any
above described repayments to FOX). At December 31, 1996 and 1995, the balance
of the prepayment recorded in accrued liabilities totaled $8.6 million and $7.2
million, respectively. The failure of FOX to satisfy its indemnity obligations
in excess of the $10.0 million prepayment could have a material adverse effect
on the Company's liquidity or results of operations. The Company's ability to
fully realize the benefits of FOX's indemnification beyond the $10 million
prepayment is necessarily dependent upon FOX's financial condition at the time
of any claim with respect to such obligations.
On August 20, 1996, FOX filed a Form 10-Q for its quarter ended June 30, 1996 in
which it reported a writedown of $238.7 million in its investment in FoxMeyer
Drug Company, its principal operating subsidiary. Primarily as a result of this
writedown, the consolidated stockholders' equity of FOX was reported as a
deficit of $88.4 million. At December 31, 1996, this deficit was $83.0 million.
On August 27, 1996, most of FOX's operating subsidiaries (including FoxMeyer
Drug Company) filed for relief under Chapter 11 of the United States Bankruptcy
Code in the U.S. Bankruptcy Court in Delaware. Although FOX, the parent company,
was not included in the Chapter 11 filing, the Chapter 11 filing has caused the
Company to have increased concerns about FOX's ability to honor its remaining
indemnification obligations to the Company. FOX is subject to the informational
requirements of the Securities Exchange Act of 1934 and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission.
At December 31, 1996, the net present value of the released Weirton Benefit
Liabilities, based upon a contractual discount factor of 12.0% per annum, is
$140.7 million. FOX continues to indemnify the Company for the remaining
unreleased Weirton Benefit Liabilities and other liabilities. The Company is
indemnified by FOX for such remaining liabilities and, therefore, they are not
recorded in the consolidated balance sheet. Such Weirton Liabilities are
comprised of (i) the unreleased Weirton Benefit Liabilities, the amount of
which, based on the Company's actuarial analysis, approximates the aggregate
remaining dividend and redemption payments of $88.6 million with respect to the
Series B Redeemable Preferred Stock and (ii) other contingent liabilities, such
as environmental liabilities, that are not currently estimable.
34
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------
<PAGE>
Note 1--Nonrecurring and
Extraordinary Items
1995--During 1995, the Company's Statement of Consolidated Income reflected two
nonrecurring items. An unusual charge of $5.3 million was recorded during the
first quarter pursuant to the finalization of a restructuring plan that the
Company began in 1994 related to the salaried nonrepresented workforce. In
addition, a $5.4 million extraordinary item was recorded during the third
quarter in connection with the prepayment of $133.3 million aggregate principal
amount of related party debt associated with the No. 5 coke oven battery serving
the Great Lakes Division.
1994--During 1994, the Company recorded a net unusual credit of $24.9 million.
An unusual charge of $34.2 million was recorded in connection with the
restructuring of the salaried nonrepresented workforce. This charge was
entirely offset by a $59.1 million credit recorded as a result of the reopening
of National Steel Pellet Company ("NSPC"). NSPC had previously been idled in
1993 following a strike by the USWA.
Additionally, during 1994 the United States Supreme Court denied the Bessemer
and Lake Erie Railroad (the "B&LE") petition to hear the appeal in the Iron Ore
Antitrust Litigation, thus sustaining a judgment in favor of the Company against
the B&LE. Accordingly, the Company received $111.0 million in satisfaction of
this judgment, which was recorded as other income.
Note J--Related Party Transactions
Summarized below are transactions between the Company and NKK, and the Company's
affiliated companies accounted for using the equity method.
The Company had U.S. dollar denominated borrowings outstanding with an NKK
affiliate totaling $161.9 million and $177.1 million as of December 31, 1996 and
1995, respectively. (See Note C--Long Term Obligations and Note I--Nonrecurring
and Extraordinary Items.) Accounts receivable with related parties totaled $3.2
million at December 31, 1995. Accounts payable with related parties totaled $2.5
million at December 31, 1995. There were no related party accounts receivable or
payable balances at December 31, 1996.
Effective May 1, 1995, the Company entered into an Agreement for the Transfer of
Employees (superseding a prior arrangement) with NKK Corporation. The agreement
was unanimously approved by all directors of the Company who were not then, and
never have been, employees of NKK. Pursuant to the terms of the agreement,
technical and business advice is provided through NKK employees who are
transferred to the employ of the Company. The Company has agreed to reimburse
NKK for the costs and expenses incurred by NKK in connection with the transfer
of the employees. The total amount of reimbursable expenses which the Company
is obligated to pay was capped at $11.7 million for the initial term of the
agreement, which ran from May 1, 1995 through December 31, 1996. The agreement
can be extended from year to year thereafter if approved by NKK and by a
majority of those directors of the Company who are not then, and have never
been, employees of NKK. The agreement has been extended for 1997, with the
total amount of reimbursable expenses capped at $7.0 million. The Company
expensed $4.2 million and $5.1 million under this contract in 1996 and 1995,
respectively.
In both 1996 and 1995, cash dividends of approximately $4.0 million were paid on
the Series A Preferred Stock. Accrued dividends of $0.6 million were recorded
as of December 31, 1996 and 1995 related to the Series A Preferred Stock.
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 $111.4 million in 1996, $86.5 million in 1995
and $87.0 million 1994. Additional expenses were incurred in connection with
the operation of a joint venture agreement. (See Note L--Other Commitments and
Contingencies and Note M--Investment in Iron Ore Company of Canada.) Accounts
payable at December 31, 1996 and 1995 included amounts with affiliated companies
accounted for by the equity method of $18.6 million and $19.0 million,
respectively.
Note K--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
environmental laws and regulations are quite stringent and are generally
becoming more stringent, the Company has expended, and can be expected to
expend in the future, substantial amounts for compliance with these laws and
regulations. Due to the possibility of future changes in circumstances or
regulatory requirements, the amount and timing of future environmental
expenditures could vary substantially from those currently anticipated.
<PAGE>
It is the Company's policy to expense or capitalize, as appropriate,
environmental expenditures that relate to current operating sites. Environmental
expenditures that relate to past operations and which do not contribute to
future or current revenue generation are expensed. With respect to costs for
environmental assessments or remediation activities, or penalties of fines that
may be imposed for noncompliance with such laws and regulations, such costs are
accrued when it is probable that liability for such costs will be incurred and
the amount of such costs can be reasonably estimated. The Company has accrued an
aggregate liability of approximately $4.4 million and $2.4 million for these
items at December 31, 1996 and 1995, respectively.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state superfund statutes generally
impose joint and several liability on present and former owners and operators,
transporters and generators for remediation of contaminated properties
regardless 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
incurred by the Company would constitute liabilities for which FOX is required
to indemnify the Company ("FOX Environmental Liabilities"--See Note H--Weirton
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 informatio to estimate its potential liability, the
Company has accrued an aggregate liability for CERCLA claims of approximately
$5.1 million and $4.6 million as of December 31, 1996 and 1995, respectively.
The Company has also recorded 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. The Company has
recorded an aggregate liability of approximately $12.1 million and $11.6 million
at December 31, 1996 and 1995, respectively, relating to these properties.
Since the Company has been conducting steel manufacturing and related operations
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
accrued. However, although the outcome of any of the matters described, to the
extent they exceed any applicable reserves, could have a material adverse effect
on the Company's results of operations and liquidity for the applicable period,
the Company has no reason to believe that such outcomes, whether considered
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition.
Note L--Other Commitments and Contingencies
The Company has an agreement providing for the availability of raw material
loading and docking facilities through 2002. Pursuant to this agreement, the
Company must make advance freight payments if shipments fall below the contract
requirements. At December 31, 1996, the maximum amount of such payments, before
giving effect to certain credits provided in the agreement, totaled
approximately $12 million, or $2 million per year. During the three years ended
December 31, 1996, no advance freight payments were made as the Company met all
of the contract requirements. The Company anticipates meeting the specified
contract requirements in 1997.
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 1993, 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 is committed 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.
The Company has a 50% interest in a joint venture with an unrelated third party.
The joint venture, Double G Coatings Company, L.P. ("Double G"), constructed a
$90 million steel coating facility near Jackson, Mississippi to produce
galvanized and Galvalume(R) steel sheet for the construction market, which
commenced production in May 1994. the Company is committed to utilize and pay a
tolling fee in
36
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------
<PAGE>
connection with 50% of the available line-time at the facility through May 10,
2004. Double G provided a first mortgage on its property, plant and equipment
and the Company has separately guaranteed $24.1 million of Double G's debt as of
December 31, 1996.
The Company has agreements to purchase 1.8 million gross tons of iron ore
pellets in 1997 from the Iron Ore Company of Canada ("IOC") for approximately
$65.5 million. Beginning in 1998, the Company's firm obligation to purchase
iron ore pellets from IOC is .9 million gross tons per year through the year
2004. Other potential commitments with IOC consist of the purchase of an
additional .5 million gross tons per year, based upon National Steel's
production requirements, and are effective through 1999. (See Note M-Investments
in Iron Ore Company of Canada.) The Company has also agreed to purchase its
proportionate share of the limestone production from another affiliated company,
which will approximate $2 million per year. These agreements contain pricing
provisions that are expected to approximate market price at the time of
purchase.
The Company has entered into certain commitments with suppliers which are of a
customary nature within the steel industry. Commitments have been entered into
relating to future expected requirements for such commodities as coal, coke,
natural and industrial gas, electricity and certain transportation and other
services. Commitments have also been made relating to the supply of pulverized
coal and coke briquettes. Certain commitments contain provisions which require
that the Company "take or pay" for specified quantities without regard to actual
usage for periods of up to 15 years. In 1997 and 1998 the Company has
commitments with "take or pay" or other similar commitment provisions for
approximately $200.0 million and $190.0 million, respectively.
The Company believes that production requirements will be such that consumption
of the products or services purchased under these commitments will occur in the
normal production process. The Company also believes that pricing mechanisms
in the contracts are such that the products or services will approximate the
market price at the time of purchase.
The Company is guarantor of specific obligations of ProCoil Corporation, an
affiliated company, approximating $8.1 million at December 31, 1996.
NOTE M--INVESTMENT IN IRON ORE COMPANY OF CANADA
Summarized financial information for IOC, an affiliated company accounted for by
the equity method, is presented below:
- - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
- - --------------------------------------------------------------------------------
1996 1995 1994
Dollars in thousands
- - --------------------------------------------------------------------------------
Current assets $160,440 $151,868 $151,480
Property, plant and
equipment and
other assets 337,812 331,881 354,857
Current liabilities 153,071 115,178 108,689
Long term obligations
and other liabilities 99,652 116,168 141,268
Sales and operating
revenues 461,917 434,357 444,519
Gross profit 112,479 111,367 87,729
Net income 41,923 44,869 30,668
Company's equity in:
Net assets 53,353 54,847 55,711
Net income 9,110 9,750 6,664
Ownership percentage 27.73% 21.73% 19.96%
- - --------------------------------------------------------------------------------
On January 31, 1997, the Company entered into a definitive agreement with North
Limited ("North") and Bethlehem Steel Corporation ("BSC"), pursuant to which the
Company and BSC will sell to North their respective minority interests in IOC.
The Company, which owns 21.73% of the shares of IOC, will receive approximately
$85 million in proceeds in exchange for its shares and realize an after-tax gain
of approximately $25 million. This transaction is subject to approval by the
other shareholders of IOC and customary governmental approvals and is expected
to occur late in the first quarter of 1997. The Company will continue to
purchase iron ore from IOC pursuant to long-term contracts. (See Note L--Other
Commitments and Contingencies).
37
Plan
Pace
Performance
Pride
-----------
<PAGE>
Note N--Long Term Incentive Plan
The Long Term Incentive Plan established in 1993 authorized the granting of
options for up to 3,400,000 shares of Class B Common Stock to certain executive
officers and other key employees of the Company. The Non-Employee Directors
Stock Option Plan, also established in 1993, has authorized the grant of options
for up to 100,000 shares of Class B Common Stock to certain non-employee
directors. The exercise price of the options equals the fair market value of the
Common Stock on the date of the 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 exercised in whole
or in part within 24 months of such occurrences.
The Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS
123") "Accounting for Stock-Based Compensation" during 1996. SFAS 123 required
the Company to either adopt a fair value based method of expense recognition for
all stock compensation based awards, or provide pro forma net income and
earnings per share information as if the recognition and measurement provisions
of SFAS 123 had been adopted. The Company decided to account for its stock based
compensation awards following the provisions of Accounting Principles Board
Opinion No. 25 ("APB 25"). APB 25 requires compensation expense to be recognized
only if the market price of the underlying stock exceeds the exercise price on
the date of grant. The Company's stock based awards consist of stock options
with an exercise price equal to market price on the date of grant. As such, the
Company has not recorded compensation expense in connection with these awards.
In addition, the effect of applying the SFAS 123 fair value method to the
Company's stock-based awards results in net income and EPS that are not
materially different from amounts reported.
A reconciliation of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------
Exercise Price
Number of (Weighted
Options Average)
- - --------------------------------------------------------
<S> <C> <C>
Balance outstanding at
January 1, 1994 584,168 $13.99
Granted 304,500 14.00
Exercised (15,056) 14.00
Forfeited (155,139)
- - --------------------------------------------------------
Balance outstanding at
December 31, 1994 718,473 14.00
- - --------------------------------------------------------
Granted 427,500 15.02
Exercised (12,084) 14.00
Forfeited (165,973)
- - --------------------------------------------------------
Balance outstanding at
December 31, 1995 967,916 14.38
- - --------------------------------------------------------
Granted 314,000 12.96
Exercised ----------
Forfeited (122,181)
- - --------------------------------------------------------
Balance outstanding at
December 31, 1996 1,159,735 $14.03
========================================================
</TABLE>
Exercisable stock options as of December 31, 1996, 1995 and 1994 were 457,401;
324,249; and 213,973, respectively.
Outstanding stock options did not enter into the determination of EPS in 1996,
1995, or 1994 as their dilutive effect was less than 3%.
38
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------
<PAGE>
Note O--Quarterly Results of Operations (Unaudited)
Following are the unaudited quarterly results of operations for the years 1996
and 1995. Reference should be made to Note I--Nonrecurring and Extraordinary
Items concerning adjustments affecting the first and third quarters of 1995.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
1996
- - ------------------------------------------------------------------------------------------------
Three Months Ended, March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
----------------------------------------------------------
Dollars in thousands, except per share amounts
- - ------------------------------------------------------------------------------------------------
Net Sales $682,143 $769,481 $735,858 $766,551
Gross Profit 16,935 45,405 62,351 65,460
Net Income (loss) (15,575) 10,391 24,289 25,452
- - ------------------------------------------------------------------------------------------------
Per share earnings applicable to
Common Stock
Net Income (loss) $ (.42) $ .18 $ .50 $ .52
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
1995
- - -----------------------------------------------------------------------------------------------
Three Months Ended, March 31 June 30 September 30 December 31
----------------------------------------------------------
<S> <C> <C> <C> <C>
Dollars in thousands, except per share amounts
- - ------------------------------------------------------------------------------------------------
Net Sales $752,676 $736,611 $724,798 $740,133
Gross Profit 97,127 80,459 53,632 50,027
Unusual charges 5,336 -------- -------- --------
Income before extraordinary item 44,694 30,317 15,608 14,804
Extraordinary item -------- -------- 5,373 --------
Net Income 44,694 30,317 20,981 14,804
- - ------------------------------------------------------------------------------------------------
Per share earnings applicable to
Common Stock
Income before extraordinary item $ 1.02 $ .64 $ .30 $ .28
Extraordinary item -------- -------- .12 --------
- - ------------------------------------------------------------------------------------------------
Net Income $ 1.02 $ .64 $ .42 $ .28
================================================================================================
</TABLE>
39
Plan
Pace
Performance
Pride
- - -----------
<PAGE>
Report of Ernst & Young LLP Independent Auditors to the 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, 1996 and 1995,
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, 1996. 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
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Fort Wayne, Indiana
January 23, 1997, except for Note M,
as to which the date is January 31, 1997.
Management's Responsibility for Financial Statements
Management is responsible for the reliability of the consolidated financial
statements and related notes, which have been prepared in conformity with
generally accepted accounting principles and include amounts based upon our
estimates and judgments, as required. The financial statements have been
audited in accordance with generally accepted auditing standards and reported
upon by our independent auditors, Ernst & Young LLP, who were given free access
to all financial records and related data, including minutes of the meetings of
the Board of Directors. We believe the representations made to the independent
auditors were valid and appropriate.
National Steel Corporation maintains a system of internal accounting controls
designed to provide reasonable assurance for the safeguarding of assets and
reliability of financial records. The system is subject to review through its
internal audit function, which monitors and reports on the adequacy of and
compliance with the internal control system and takes appropriate action to
address control deficiencies and other opportunities for improving the system as
they are identified. Although no cost effective internal control system will
preclude all errors and irregularities, management believes that through the
careful selection of employees, the division of responsibilities and the
application of formal policies and procedures, National Steel Corporation has an
effective and responsive system of internal accounting controls.
The Audit Committee of the Board of Directors, which is composed solely of
non-employee directors, provides oversight to the financial reporting process
through periodic meetings. The Audit Committee is responsible for recommending
to the Board of Directors, subject to approval by the Board and ratification by
stockholders, the independent auditors to perform audit and related work for the
Company, for reviewing with the independent auditors the scope of their audit of
the Company's financial statements, for reviewing with the Company's internal
auditors the scope of the plan of audit, for meeting with the independent
auditors and the Company's internal auditors to review the results of their
audits and the Company's internal accounting controls, and for reviewing other
professional services being performed for the Company by the independent
auditors. Both the independent auditors and the Company's internal auditors have
free access to the Audit Committee.
Management believes the system of internal accounting controls provides
reasonable assurance that business activities are conducted in a manner
consistent with the Company's high standards of business conduct, and the
Company's financial accounting system contains the integrity and objectivity
necessary to maintain accountability for assets and to prepare National Steel
Corporation's financial statements in accordance with generally accepted
accounting principles.
OSAMU SAWARAGI WILLIAM E. MCDONOUGH
Chairman of the Board and Acting Chief Financial
Chief Executive Officer Officer and Treasurer
40
[LOGO NATIONAL STEEL] 1996 ANNUAL REPORT --------------------------------------
<PAGE>
CORPORATE INFORMATION
HEADQUARTERS
4100 Edison Lakes Parkway
Mishawaka, Indiana 46545-3440
Telephone: (219) 273-7000
Telefax: (219) 273-7869
ANNUAL MEETING
The Annual Stockholders' Meeting of National Steel Corporation will be held
April 21, 1997. Formal notice of the meeting and proxy materials will be
mailed to stockholders.
LISTING OF COMMON STOCK
Class B Common Stock (NS)
New York Stock Exchange
INDEPENDENT AUDITORS
Ernst & Young LLP
TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholders Services
Pittsburgh, Pennsylvania
ADDITIONAL REPORTS
More detailed information on the Company's business is available in its Form
10-K filed annually with the Securities and Exchange Commission. Stockholders
desiring a copy of this report for the most recent fiscal year may obtain it,
without charge, by written request to the Director, Investor Relations, at the
Company's headquarters.
COMMON STOCK INFORMATION
The following table sets forth for the periods indicated the high and low
sales prices of the Class B Common Stock on a quarterly basis as reported on
the New York Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
PERIOD HIGH LOW
- - --------------------------------------------------------------------------------
1996
<S> <C> <C>
First Quarter $ 15-1/4 $ 12-1/4
Second Quarter 14-1/2 10-1/4
Third Quarter 11-7/8 8-1/2
Fourth Quarter 11-1/2 8
- - --------------------------------------------------------------------------------
1995
First Quarter $ 18-7/8 $ 14-5/8
Second Quarter 16-1/8 12-5/8
Third Quarter 17-5/8 14-1/2
Fourth Quarter 15-1/2 11-3/4
- - --------------------------------------------------------------------------------
</TABLE>
As of December 31, 1996, there were approximately 184 registered holders of
Class B Common Stock. (See Note B--Capital Structure and Primary Offering of
Class B Common Stock.) The Company has not paid dividends on its Common Stock
since 1984, with the exception of an aggregate dividend payment of $6.7 million
in 1989. The decision whether to pay dividends 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 outstanding series of Preferred Stock,
including the Series A Preferred Stock and Series B Redeemable Preferred Stock,
and must be matched by a payment into the VEBA Trust, the amount of which is
calculated under the terms of the 1993 Settlement Agreement between the Company
and the USWA, until the asset value of the VEBA Trust exceeds $100.0 million.
During 1997, the Company has the capability of declaring a Common Stock dividend
slightly in excess of $26 million without having to contribute any matching
amounts into the VEBA Trust. Various debt and certain lease agreements include
restrictions on the amount of stockholders' equity available for the payment of
dividends. Under the most restrictive of these covenants, stockholders' equity
in the amount of $124.7 million was free of such limitations at December 31,
1996.
- - --------------------------------------------------------------------------------
