<PAGE>
1 9 9 7
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - K
[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, 1997
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)
<TABLE>
<S> <C>
Incorporated under the Laws of the State of Delaware 25-0687210
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: 219-273-7000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
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% Series due 2006 New York Stock Exchange
</TABLE>
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 February 27, 1998, there were 43,288,240 shares of the registrant's
common stock outstanding.
Aggregate market value of voting stock held by non-affiliates: $328,286,621
The amount shown is based on the closing price of National Steel
Corporation's Common Stock on the New York Stock Exchange on February 27, 1998.
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, 1997 are incorporated by reference into Part II and IV of this
Report on Form 10-K.
Selected portions of the 1998 Proxy Statement of National Steel Corporation
are incorporated by reference into Part III of this Report on Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
National Steel Corporation, a Delaware corporation, (together with its
consolidated subsidiaries the "Company") is the fourth largest integrated steel
producer in the United States as measured by production and is engaged in the
manufacture and sale of a wide variety of flat rolled carbon steel products,
including hot rolled, cold rolled, galvanized, tin and chrome plated steels. The
Company targets high value-added applications of flat rolled carbon steel for
sale to the automotive, construction and container markets. The Company's
principal executive offices are located at 4100 Edison Lakes Parkway, Mishawaka,
Indiana 46545-3440; telephone (219) 273-7000.
The Company was formed through the merger of Great Lakes Steel Corporation,
Weirton Steel Corporation and Hanna Iron Ore Company and was incorporated in
Delaware on November 7, 1929. The Company built a finishing facility, now the
Midwest Division, in 1961, and in 1971 purchased Granite City Steel Corporation,
now the Granite City Division. On September 13, 1983, the Company became a
wholly-owned subsidiary of National Intergroup, Inc., (which subsequently
changed its name to FoxMeyer Health Corporation and then to Avatex Corporation
and is hereinafter referred to as "Avatex"). On January 11, 1984, the Company
sold the principal assets of its Weirton Steel Division and retained certain
liabilities related thereto. On August 31, 1984, NKK Corporation (collectively,
with its subsidiaries, "NKK") purchased a 50% equity interest in the Company
from Avatex. In connection with this purchase, Avatex agreed to indemnify the
Company for (i) certain environmental liabilities related to the Company's
former Weirton Steel Division and the Company's subsidiary, Hanna Furnace
Corporation and (ii) certain pension and employee benefit liabilities related to
the Weirton Steel Division (together, the "Indemnification Obligations"). On
June 26, 1990, NKK purchased an additional 20% equity interest in the Company
from Avatex. In connection with this purchase, Avatex was issued shares of the
Company's Series B Redeemable Preferred Stock and NKK was issued shares of the
Company's Series A Preferred Stock. In April 1993, the Company completed an
initial public offering of its Class B Common Stock. In October 1993, Avatex
converted all of its shares of Class A Common Stock to an equal number of shares
of Class B Common Stock and subsequently sold substantially all of its shares of
Class B Common Stock in the market in January 1994, resulting in NKK owning a
75.6% voting interest in the Company at December 31, 1994. On February 1, 1995,
the Company completed a primary offering of 6.9 million shares of Class B Common
Stock. Subsequent to that transaction, NKK's voting interest decreased to 67.6%.
Significant Developments in Company's Business During 1997
During 1997, the following significant developments in the Company's business
took place:
Sale of the Great Lakes Division No. 5 Coke Battery. On June 12, 1997, the
Company sold the machinery, equipment, improvements and other personal property
and fixtures constituting the Great Lakes Division No. 5 coke battery, together
with the related coal inventories, to a subsidiary of DTE Energy Company, and
received proceeds (net of taxes and expenses) of approximately $234 million. The
Company will continue to operate and maintain the coke battery on a contract
basis and will purchase the majority of the coke produced from the battery under
a requirements contract, with the price being adjusted during the term of the
contract, primarily to reflect changes in production costs. The Company utilized
a portion of the sale proceeds to prepay the $154.3 million remaining balance of
the indebtedness owed by the Company to an affiliate of NKK with respect to the
coke battery.
Sale of Shares of Iron Ore Company of Canada. In April of 1997, the Company sold
its 21.7% minority equity interest in Iron Ore Company of Canada ("IOC") to
North Limited and received proceeds (net of taxes and expenses) of approximately
$75.3 million. The Company will continue to purchase iron ore pellets at fair
market value from IOC pursuant to long term supply agreements.
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Redemption of Series B Preferred Stock and Other Related Transactions. In
November of 1997, the Company entered into an agreement with Avatex to redeem
all of the Series B Redeemable Preferred Stock held by Avatex and to release
Avatex from the Indemnification Obligations. Under this agreement, the Company
paid to Avatex approximately $59.0 million and agreed to pay an additional $10.0
million, without interest, in installments of $2.5 million each in the first and
second quarters of 1998 and a third installment of $5.0 million in November of
1998. In addition, under this agreement, the entire proceeds of approximately
$13.6 million (net of taxes and expenses) from the litigation brought by the
Company and Avatex against certain insurance carriers seeking coverage under
their comprehensive general liability insurance policies for environmental
liabilities were agreed to be paid to the Company, and Avatex agreed to release
all restrictions on the balance remaining of Avatex's $10 million prepayment to
the Company for environmental claims (approximately $9.2 million). [See
"Environmental Matters" in Item 1 "Business".]
Redemption of Series A Preferred Stock. In December 1997, the Company completed
the redemption of the Series A Preferred Stock held by NKK for a redemption
price of $36.7 million, plus accrued dividends of approximately $0.6 million.
Following this transaction, and the settlement with Avatex described above, the
Company no longer has any preferred stock outstanding.
Strategy
The Company's mission is to achieve sustained profitability, thereby enhancing
stockholder value, by reducing the costs of production, and improving
productivity and product quality and shifting its product mix to higher priced,
higher value products. Management has developed a number of strategic
initiatives designed to achieve the Company's goals.
Reduction in Production Costs. Management's primary focus is to reduce the costs
of producing hot rolled bands, the largest component of the Company's finished
product cost. However, reducing all costs associated with the production process
is essential to the Company's overall cost reduction program. Management has
reduced production costs by better utilizing existing equipment, improving
productivity, involving labor in improving operating practices and by the cost
efficient use of steelmaking inputs. In addition, the Company's facility
engineers, who have access to a wide range of NKK process technologies, analyze
and implement innovative steelmaking and processing methods on an ongoing basis.
Marketing Strategy. The Company's marketing strategy has concentrated on
increasing the level of sales of higher value-added products to the automotive,
construction and container markets. These segments demand high quality products,
on-time delivery and effective and efficient customer service. This strategy is
designed to increase margins, reduce competitive threats and maintain high
capacity utilization rates by shifting the Company's product mix to higher
quality products and providing superior customer service.
To enable the Company to more efficiently meet the needs of its target markets
and focus on higher value-added products, the Company has entered into two
separate joint ventures to operate hot dip galvanizing facilities. One joint
venture is with NKK and an unrelated third party and has been built to service
the automotive industry. The second joint venture has been built to service the
construction industry. [See "DNN Galvanizing Limited Partnership" and "Double G
Coatings, L.P." in Item 2 "Properties."] During the first quarter of 1996, the
Company completed construction of an additional coating line at the Granite City
Division which serves the construction market. A second line, currently under
construction at the Midwest Division, is scheduled to be completed during the
second quarter of 1998. In addition, during 1997, the Company completed an
expansion of the 72" galvanizing line at the Midwest Division to further enable
it to more effectively compete in the automotive market for critical exposed
applications.
Quality Improvement. An important element of the Company's strategy is to reduce
the cost of poor quality, which currently results in the sale of non-prime
products at lower prices and requires substantial reprocessing costs. The
Company has made improvements in this area by improving process control,
utilizing employee based problem solving methods, eliminating dependence on
final inspection and reducing internal rejections and extra processing. In
addition, the Company became ISO 9002/QS 9000 registered during 1996.
Predictive Maintenance Program. The Company is installing a predictive
maintenance program designed to maximize production and equipment life while
minimizing unscheduled equipment outages. This program
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should improve operations stability through improved equipment reliability,
which is expected to result in improved productivity and reduced costs.
Alliance with NKK
The Company has a strong alliance with its principal stockholder, NKK, the
second largest steel company in Japan and the eighth largest in the world as
measured by production. Since 1984, the Company has had access to a wide range
of NKK's steelmaking, processing and applications technology. The Company's
engineers include approximately 34 engineers transferred from NKK, who serve
primarily at the Company's Divisions. These engineers, as well as engineers and
technical support personnel at NKK's facilities in Japan, assist in improving
operating practices and developing new manufacturing processes. This support
also includes providing input on ways to improve raw steel production to
finished product yields. In addition, NKK has provided financial assistance to
the Company in the form of investments, loans and introductions to Japanese
financial institutions and trading companies; however, there can be no
assurances given as to the extent of NKK's future financial support beyond
existing contractual commitments.
This alliance with NKK was further strengthened by the Agreement for the
Transfer of Employees with NKK Corporation entered into by the Company and NKK
effective as of May 1, 1995 (superseding a prior arrangement). 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 this agreement,
technical and business advice is provided through NKK employees who are
transferred to the employ of the Company. The agreement further provides that
the initial term can be extended from year to year after expiration of the
initial term, if approved by NKK and a majority of the directors of the Company
who were not then, and never have been, employees of NKK. The agreement has been
extended through the calendar year 1998 in accordance with this provision.
Pursuant to the terms of the agreement, the Company is obligated to reimburse
NKK for the costs and expenses incurred by NKK in connection with the transfer
of these employees, subject to an agreed upon cap. The cap was $11.7 million
during the initial term and $7 million during each of 1997 and 1998. The Company
expensed $5.4 million and $4.2 million under this agreement, and for various
other engineering services provide by NKK, during 1997 and 1996, respectively.
Customer Partnership
The Company's customer partnership enables the Company to differentiate its
products through superior quality and service. Management believes it is able to
further differentiate the Company's products and to promote customer loyalty by
establishing close relationships through early customer involvement, providing
technical services and support and utilizing its Product Application Center and
Technical Research Center facilities.
The Company operates a research and development facility near its Great Lakes
Division to develop new products, improve existing products and develop more
efficient operating procedures to meet the constantly increasing demands of the
automotive, construction and container markets. The Company employs
approximately 55 chemists, physicists, metallurgists and engineers in connection
with its research activities. The research center is responsible for, among
other things, the development of five new high strength steels for automotive
weight reduction and a new galvanized steel for the construction market. In
addition, the Company operates a Product Application Center near Detroit
dedicated to providing product and technical support to customers. The Product
Application Center assists customers with application engineering (selecting
optimum metal and manufacturing methods), application technology (evaluating
product performance) and technical developments (performing problem solving at
plants). The Company spent $10.9 million, $11.1 million and $9.6 million for
research and development in 1997, 1996 and 1995, respectively. In addition, the
Company participates in various research efforts through the American Iron and
Steel Institute (the "AISI").
Capital Investment Program
Since 1984, the Company has invested over $2.6 billion in capital improvements
aimed at upgrading the Company's steelmaking and finishing operations to meet
its customers' demanding requirements for higher quality products and to reduce
production costs. As described above, one of the Company's strategic
4
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initiatives is to more effectively utilize these substantial capital
improvements. Major projects have included an electrolytic galvanizing line, a
continuous caster, a ladle metallurgy station, a vacuum degasser, a complete
rebuild of the No. 5 coke battery and a high speed pickle line, each of which
services the Great Lakes Division, and a continuous caster, a coating line and a
ladle metallurgy station, each of which services the Granite City Division.
Major improvements at the Midwest Division include the installation of process
control equipment to upgrade its finishing capabilities, expansion of the 72"
galvanizing line and construction of a new coating line scheduled for completion
in 1998. Capital investments for each of 1997 and 1996 were $151.8 million and
$128.6 million, respectively. Capital investments for 1998 are expected to total
approximately $222.0 million.
Customers
Automotive. The Company is a major supplier of hot and cold rolled steel and
galvanized coils to the automotive industry, one of the most demanding steel
consumers. Car and truck manufacturers require wide sheets of steel, rolled to
exact dimensions. In addition, formability and defect-free surfaces are
critical. The Company has been able to successfully meet these demands. Its
steel has been used in a variety of automotive applications including exposed
and unexposed panels, wheels and bumpers.
Construction. The Company is also a leading supplier of steel to the domestic
construction market. Roof and building panels are the principal applications for
galvanized and Galvalume(R) steel in this market. Management believes that
demand for Galvalume(R) steel will exhibit strong growth for the next several
years, partially as a result of a trend away from traditional building products,
and that the Company is well positioned to profit from this growth as a result
of both its position in this market and additional capacity referred to above.
Container. The Company produces chrome and tin plated steels to exacting
tolerances of gauge, shape, surface flatness and cleanliness for the container
industry. Tin and chrome plated steels are used to produce a wide variety of
food and non-food containers. In recent years, the market for tin and chrome
plated steels has been both stable and profitable for the Company.
Pipe and Tube. The Company supplies the pipe and tube market with hot rolled,
cold rolled and coated sheet. The Company is a key supplier to transmission
pipeline, downhole casing and structural pipe producers.
Service Centers. The Company also supplies the service center market with hot
rolled, cold rolled and coated sheet. Service centers generally purchase steel
coils from the Company and may process them further or sell them directly to
third parties without further processing.
The following table sets forth the percentage of the Company's revenues from
various markets for the past five years.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Automotive 27.0% 27.6% 27.8% 28.5% 28.9%
Construction 24.8 21.6 20.5 18.3 16.8
Containers 11.0 10.6 11.3 13.2 13.3
Pipe and Tube 7.3 6.5 7.4 6.9 8.2
Service Centers 21.3 20.2 15.4 17.9 15.5
All Other 8.6 13.5 17.6 15.2 17.3
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
No customer accounted for more than 10% of net sales in 1997, 1996 or 1995.
Export sales accounted for approximately 0.3% of revenues in 1997, 0.5% in 1996
and 2.6% in 1995.
The Company's products are sold through sales offices located in Chicago,
Detroit, Houston, Indianapolis, Kansas City, Pittsburgh and St. Louis.
Substantially all of the Company's net revenues are based on orders for short-
term delivery. Accordingly, backlog is not meaningful when assessing future
results of operations.
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Operations
The Company operates three principal facilities: two integrated steel plants,
the Great Lakes Division in Ecorse and River Rouge, Michigan, near Detroit, and
the Granite City Division in Granite City, Illinois, near St. Louis, and a
finishing facility, the Midwest Division in Portage, Indiana, near Chicago. In
January 1997, the Company consolidated the Great Lakes Division and the Midwest
Division into a single business enterprise in order to improve the planning and
coordination of production at both plants. In addition, this consolidation
enhances the ability of the Company to monitor its costs and utilize its
resources, thereby allowing the Company to more effectively meet customer needs.
The Company's centralized corporate structure, the close proximity of the
Company's principal steel facilities and the complementary balance of processing
equipment shared by them, will enable the Company to closely coordinate the
operations of these facilities in order to maintain high operating rates
throughout its processing facilities and to maximize the return on its capital
investments.
The following table details effective steelmaking capacity, actual production,
effective capacity utilization and percentage of steel continuously cast for the
Company and the domestic steel industry for the years indicated.
<TABLE>
<CAPTION>
RAW STEEL PRODUCTION DATA
Effective Percent
Effective Actual Capacity Continuously
Capacity Production Utilization Cast
--------- ---------- ----------- ------------
(000's of net tons) (%) (%)
<S> <C> <C> <C> <C>
The Company
1997 6,800 6,527 96.0 100.0
1996 7,000 6,557 93.7 100.0
1995 6,300 6,081 96.5 100.0
1994 6,000 5,763 96.1 100.0
1993 5,550 5,551 100.0 100.0
Domestic Steel Industry*
1997 121,400 107,488 88.5 94.7
1996 116,100 105,309 90.7 93.2
1995 112,500 104,930 93.3 91.1
1994 108,200 100,579 93.0 89.5
1993 109,900 97,877 89.1 85.7
</TABLE>
* Information as reported by the AISI. The 1997 industry information is
preliminary.
Effective capacity in 1997 was lowered from 1996 to reflect more realistic
operating levels based on the Company's operating practices in 1996. In 1996,
capacity increased to 7,000,000 net tons primarily due to successfully
negotiated environmental relief at the Granite City Division. Unanticipated
blast furnace outages at midyear were the primary reason actual steel production
fell short of capacity. In 1995, effective capacity increased to 6,300,000 net
tons due to improved operating efficiencies, primarily at the Great Lakes
Division. Effective capacity increased to 6,000,000 net tons in 1994 due to the
fact that the Company did not reline any blast furnaces during this period.
Raw Materials
Iron Ore. The metallic iron requirements of the Company are supplied primarily
from iron ore pellets that are produced from a concentration of low grade ores.
The Company, directly through its wholly owned subsidiary, National Steel Pellet
Company ("NSPC"), has reserves of iron ore adequate to produce approximately 357
million gross tons of iron ore pellets. The Company's iron ore reserves are
located in Minnesota and Michigan. Excluding the effects of the thirteen month
period from August 1, 1993 through
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August 28, 1994 when NSPC was idled, a significant portion of the Company's
average annual consumption of iron ore pellets was obtained from the deposits of
the Company during the last five years. The remaining iron ore pellets consumed
by the Company were purchased from third parties. Iron ore pellets available to
the Company from its own deposits and outside suppliers are expected to be
sufficient to meet the Company's total iron ore requirements at competitive
market prices for the foreseeable future.
The Company previously owned a minority equity interest in Iron Ore Company of
Canada ("IOC"). On April 1, 1997, the Company completed the sale of that equity
interest to North Limited. The Company plans to continue to purchase iron ore
at fair market value from IOC pursuant to long-term supply agreements.
Coal. In 1992, the Company decided to exit the coal mining business and sell or
dispose of its coal reserves and related assets. The remaining coal assets
constitute less than 0.4% of the Company's total assets. The Company believes
that supplies of coal, adequate to meet the Company's needs, are readily
available from third parties at competitive market prices.
Coke. On June 12, 1997, the Company sold the machinery, equipment, improvements
and other personal property and fixtures constituting the Great Lakes Division
No. 5 coke battery, together with the related coal inventories, to a subsidiary
of DTE Energy Company, and received proceeds (net of taxes and expenses) of
approximately $234 million. The Company will continue to operate and maintain
the coke battery on a contract basis and will purchase the majority of the coke
produced from the battery under a requirements contract, with the price being
adjusted during the term of the contract, primarily to reflect changes in
production costs.
The Company also operates two efficient coke batteries servicing the Granite
City Division. Approximately 60% of the Company's annual coke requirements can
be supplied by the Great Lakes and Granite City Coke batteries. The remaining
coke requirements are met through competitive market purchases.
The Company has also implemented a pulverized coal injection process at its
blast furnaces at the Great Lakes Division, which should further reduce the
Company's dependency on outside coke supplies.
Limestone. An affiliated company in which the Company holds a minority equity
interest has limestone reserves of approximately 72 million gross tons located
in Michigan. During the last five years, approximately 70% of the Company's
average annual consumption of limestone was derived from these reserves. The
Company's remaining limestone requirements were purchased at competitive market
prices from unaffiliated third parties.
Scrap and Other Materials. Supplies of steel scrap, tin, zinc and other
alloying and coating materials are readily available at competitive market
prices.
Patents and Trademarks
The Company has the patents and licenses necessary for the operation of its
business as now conducted. The Company does not consider its patents and
trademarks to be material to the business of the Company.
Employees
As of December 31, 1997, the Company employed 9,417 people. The Company has
labor agreements with the United Steelworkers of America ("USWA"), the
International Chemical Workers Council of the United Food and Commercial Workers
and other labor organizations which collectively represent approximately 82.3%
of the Company's employees. In 1993, the Company entered into labor agreements,
which expire in 1999, with these various labor organizations ("1993 Settlement
Agreement"). Scheduled negotiations reopened in 1996 and were ultimately
resolved utilizing the arbitration provisions provided for in the 1993
Settlement Agreement, without any disruption to the Company's operations.
Competition
The Company is in direct competition with domestic and foreign flat rolled
carbon steel producers and producers of plastics, aluminum and other materials
which can be used in place of flat rolled carbon steel in
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manufactured products. Price, service and quality are the primary types of
competition experienced by the Company. The Company believes it is able to
differentiate its products from those of its competitors by, among other things,
providing technical services and support, utilizing its Product Application
Center and Technical Research Center facilities, and by its focus on improving
product quality through, among other things, capital investment and research and
development, as previously described.
Imports. Domestic steel producers face significant competition from foreign
producers and have been adversely affected by what the Company believes to be
unfairly traded imports. Imports of finished steel products accounted for
approximately 19% of the domestic market over the past three years. Many foreign
steel producers are owned, controlled or subsidized by their governments.
Decisions by these foreign producers with respect to production and sales may be
influenced to a greater degree by political and economic policy considerations
than by prevailing market conditions.
Reorganized/Reconstituted Mills. The intensely competitive conditions within the
domestic steel industry have been exacerbated by the continued operation,
modernization and upgrading of marginal steel production facilities through
bankruptcy reorganization procedures, thereby perpetuating overcapacity in
certain industry product lines. Overcapacity is also caused by the continued
operation of marginal steel production facilities that have been sold by
integrated steel producers to new owners, who operate such facilities with a
lower cost structure.
Mini-mills. Domestic integrated producers, such as the Company, have lost market
share in recent years to domestic mini-mills. Mini-mills provide significant
competition in certain product lines, including hot rolled and cold rolled
sheets, which represented, in the aggregate, approximately 57% of the Company's
shipments in 1997. Mini-mills are relatively efficient, low-cost producers which
produce steel from scrap in electric furnaces, have lower employment and
environmental costs and target regional markets. Thin slab casting technologies
have allowed mini-mills to enter certain sheet markets which have traditionally
been supplied by integrated producers. Certain companies have announced plans
for, or have indicated that they are currently considering, additional mini-mill
plants for sheet products in the United States.
Steel Substitutes. In the case of many steel products, there is substantial
competition from manufacturers of other products, including plastics, aluminum,
ceramics, glass, wood and concrete. Conversely, the Company and certain other
manufacturers of steel products have begun to compete in recent years in markets
not traditionally served by steel producers.
Environmental Matters
The Company's operations are subject to numerous laws and regulations relating
to the protection of human health and the environment. The Company currently
estimates that it will incur capital expenditures in connection with matters
relating to environmental control of approximately $9.5 million and $25.8
million for 1998 and 1999, respectively. Major capital projects in 1999 will be
for air pollution control equipment at the Great Lakes Division and the NSPC
plant. In addition, the Company expects to record expenses for environmental
compliance, including depreciation, of approximately $62 million and $60 million
for 1998 and 1999, respectively. Since environmental laws and regulations are
becoming increasingly stringent, the Company's environmental capital
expenditures and costs for environmental compliance may increase in the future.
In addition, due to the possibility of future changes in circumstances or
regulatory requirements, the amount and timing of future environmental
expenditures could vary substantially from those currently anticipated. The
costs for environmental compliance may also place the Company at a competitive
disadvantage with respect to foreign steel producers, as well as manufacturers
of steel substitutes, that are subject to less stringent environmental
requirements.
In 1990, Congress passed amendments to the Clean Air Act which impose stringent
standards on air emissions. The Clean Air Act amendments will directly affect
the operations of many of the Company's facilities, including its coke ovens.
Under such amendments, coke ovens generally will be required to comply with
progressively more stringent standards over the next thirty years. The Company
believes that the costs for complying with the Clean Air Act amendments will not
have a material adverse effect, on an individual site basis or in the aggregate,
on the Company's financial position, results of operations or liquidity.
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In 1990, the United States Environmental Protection Agency ("EPA") released a
proposed rule which establishes standards for the implementation of a corrective
action program under the Resource Conservation Recovery Act of 1976, as amended
("RCRA"). The corrective action program requires facilities that are operating
under a permit, or are seeking a permit, to treat, store or dispose of hazardous
wastes to investigate and remediate environmental contamination. The Company has
conducted an investigation at its Midwest Division facility and is currently
waiting for comments from the EPA regarding the results of the investigation.
The Company estimates that the potential capital costs for implementing
corrective actions at such facility will be approximately $8.0 million payable
over the next several years. At the present time, the Company's other facilities
are not subject to corrective action.
The Company has recorded an aggregate liability of approximately $2.0 million at
December 31, 1997 for the reclamation costs to restore its coal and iron ore
mines at its shut down locations to their original and natural state, as
required by various federal and state mining statutes. This is a decrease of
approximately $10.1 million from December 31, 1996. Approximately $8.0 million
of the decrease is the result of the sale of a coal property in the third
quarter of 1997, where the buyer assumed the reclamation obligation.
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
potentially responsible parties ("PRPs") in a number of off-site CERCLA or state
superfund site proceedings. [See Item 3, "Legal Proceedings" for a discussion of
these sites.] With respect to those sites, the Company has accrued an aggregate
liability of $2.3 million as of December 31, 1997.
Avatex had previously agreed to indemnify the Company for liabilities incurred
by the Company at certain environmental sites. [These sites are discussed under
the caption "Former Avatex Sites" in Item 3, "Legal Proceedings".] In addition,
in January 1994, the Company received $10.0 million from Avatex as an
unrestricted prepayment for such liabilities for which the Company recorded
$10.0 million as a liability in its consolidated balance sheet. The Company was
required to repay Avatex portions of the $10.0 million to the extent the
Company's expenditures for such environmental liabilities did not meet specified
levels by certain dates over a twenty year period. In connection with the
redemption of the Series B Preferred Stock and other related transactions with
Avatex in November 1997, Avatex was released from this indemnity obligation, and
the Company was authorized to retain the remaining balance of the prepayment in
the amount of $9.2 million. As a result of this settlement, the Company has
recorded an aggregate liability of $10.0 million as of December 31, 1997 with
respect to those sites as to which Avatex was released from its indemnity
obligation. [See the discussion under the caption "Redemption of Series B
Preferred Stock and Other Related Transactions" in Item 1 "Business".]
During 1997, the Company settled substantially all of the claims it had
previously filed against certain of its insurance carriers seeking coverage
under its comprehensive general liability insurance policies for its
environmental liabilities. In connection with the transactions with Avatex
referred to above, it was agreed that all insurance proceeds from this
litigation would be paid to the Company, and the Company recognized insurance
proceeds (net of taxes and expenses) aggregating approximately $13.6 million.
The settlement with the insurance carriers also included an agreement by certain
carriers to provide partial insurance coverage for certain existing and future
major environmental liabilities.
Forward Looking Statements
Statements made by the Company in this Form 10-K that are not historical facts
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward looking statements, by their
nature, involve risk and uncertainty. A variety of factors could cause business
conditions and the Company's actual results and experience to differ materially
from those expected by the Company or expressed in the Company's forward looking
statements. These factors include, but are not limited to, (1) changes in market
prices and market demand for the Company's products; (2) changes in the costs or
availability of raw materials and other supplies used by the Company in the
manufacture of its products; (3) equipment failures or outages at the Company's
steelmaking, mining and processing facilities; (4) losses of customers; (5)
changes in the levels of the Company's operating costs and expenses; (6)
collective bargaining agreement negotiations, strikes, labor stoppages or other
labor difficulties; (7) actions by the
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Company's competitors, including domestic integrated steel producers, foreign
competitors, mini-mills and manufacturers of steel substitutes such as plastics,
aluminum, ceramics, glass, wood and concrete; (8) changes in industry capacity;
(9) changes in economic conditions in the United States and other major
international economies, including rates of economic growth and inflation; (10)
worldwide changes in trade, monetary or fiscal policies, including changes in
interest rates; (11) changes in the legal and regulatory requirements applicable
to the Company; and (12) the effects of extreme weather conditions.
ITEM 2. PROPERTIES
The Granite City Division.
The Granite City Division, located in Granite City, Illinois, has an effective
steelmaking capacity of approximately 3.0 million tons. All steel at this
Division is produced by continuous casting. The Granite City Division also uses
ladle metallurgy to refine the steel chemistry to enable it to meet the exacting
specifications of its customers. The Division's ironmaking facilities consist of
two coke batteries and two blast furnaces. Finishing facilities include an 80
inch hot strip mill, a continuous pickler and three hot dip galvanizing lines.
Construction of the third hot dip galvanizing line, a 270,000 ton coating
facility to serve the construction market, was completed in 1996. This facility,
known as Triple G, cost approximately $85.0 million. The Granite City Division
ships approximately 12% of its total production to the Midwest Division for
finishing. Principal products of the Granite City Division include hot rolled,
hot dipped galvanized and Galvalume(R) steel, grain bin and high strength, low
alloy steels.
The Granite City Division is located on 1,540 acres and employs 3,111 people.
The Division's proximity to the Mississippi River and other interstate transit
systems, both rail and highway, provides easy accessibility for receiving raw
materials and supplying finished steel products to customers.
The Great Lakes Division.
The Great Lakes Division, located in Ecorse and River Rouge, Michigan, is an
integrated facility engaged in steelmaking primarily for use in the automotive
market with an effective steelmaking capacity of approximately 3.8 million tons.
All steel at this Division is produced by continuous casting. The Division's
ironmaking facilities consist of three blast furnaces, and a rebuilt 85-oven
coke battery which was sold in 1997 to a subsidiary of DTE Energy Company. [See
the discussion under the caption "Significant Developments in the Company's
Business During 1997" in Item 1, "Business".] The Division also operates
steelmaking facilities consisting of two basic oxygen process vessels, a vacuum
degasser and a ladle metallurgy station. Finishing facilities include a hot
strip mill, a skinpass mill, a shear line, a high speed pickle line, a tandem
mill, a batch annealing station, two temper mills, two customer service lines,
and an electrolytic galvanizing line. The Great Lakes Division ships
approximately 44% of its production to the Midwest Division for finishing.
Principal products of the Great Lakes Division include hot rolled, cold rolled,
electrolytic galvanized, and high strength, low alloy steels.
The Great Lakes Division is located on 1,100 acres and employs 3,746 people.
The Division is strategically located with easy access to water, rail and
highway transit systems for receiving raw materials and supplying finished steel
products to customers.
The Midwest Division.
The Midwest Division, located in Portage, Indiana, finishes hot rolled bands
produced at the Granite City and Great Lakes Divisions primarily for use in the
automotive, construction and container markets. The Midwest Division's
facilities include a continuous pickling line, two cold reduction mills, two
continuous galvanizing lines, a 48 inch wide line which can produce galvanized
or Galvalume(R) steel products and which services the construction market, and a
72 inch wide line which services the automotive market; finishing facilities for
cold rolled products consisting of a batch annealing station, a sheet temper
mill and a continuous stretcher leveling line, an electrolytic cleaning line, a
continuous annealing line, two tin temper mills, two tin recoil lines, an
electrolytic tinning line and a chrome line which services the container
markets. In 1995, the Midwest Division commenced construction of a 270,000 ton
coating line to serve the construction market. The line will cost approximately
$70.0 million and is scheduled to be completed in the second quarter of 1998.
In addition, during 1997, the Company completed an expansion of the 72"
galvanizing line. Principal products of the
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Midwest Division include tin mill products, hot dipped galvanized and
Galvalume(R) steel, cold rolled, and electrical lamination steels.
The Midwest Division is located on 1,100 acres and employs 1,526 people. Its
location provides excellent access to rail, water and highway transit systems
for receiving raw materials and supplying finished steel products to customers.
In January 1997, the Company consolidated the Great Lakes Division and the
Midwest Division into a single business enterprise in order to improve the
planning and coordination of production at both plants.
National Steel Pellet Company
National Steel Pellet Company ("NSPC"), located on the western end of the Mesabi
Iron Ore Range in Keewatin, Minnesota, mines, crushes, concentrates and
pelletizes low grade taconite ore into iron ore pellets. NSPC operations include
two primary crushers, ten primary mills, five secondary mills, a concentrator
and a pelletizer. The facility has a current annual effective iron ore pellet
capacity of over 5 million gross tons and has a combination of rail and vessel
access to the Company's integrated steel mills.
Joint Ventures and Equity Investments
DNN Galvanizing Limited Partnership. As part of its strategy to focus its
marketing efforts on high quality steels for the automotive industry, the
Company entered into an agreement with NKK and Dofasco Inc., a large Canadian
steel producer ("Dofasco"), to build and operate DNN, a 400,000 ton per year,
hot dip galvanizing facility in Windsor, Ontario, Canada. This facility
incorporates state-of-the-art technology to galvanize steel for critically
exposed automotive applications. The facility is modeled after NKK's Fukuyama
Works Galvanizing Line that has provided high quality galvanized steel to the
Japanese automotive industry for several years. The Company is committed to
utilize 50% of the available line time of the facility and pay a tolling fee
designed to cover fixed and variable costs with respect to 50% of the available
line time, whether or not such line time is utilized. The plant began production
in January 1993 and is currently operating at full capacity. The Company's steel
substrate requirements are provided to DNN by the Great Lakes Division.
Double G Coatings, L.P. To continue to meet the needs of the growing
construction market, the Company and Bethlehem Steel Corporation formed a joint
venture to build and operate Double G Coatings, L.P. ("Double G"). Double G is a
270,000 ton per year hot dip galvanizing and Galvalume(R) steel facility near
Jackson, Mississippi. The facility is capable of coating 48 inch wide steel
coils with zinc to produce a product known as galvanized steel and with a zinc
and aluminum coating to produce a product known as Galvalume(R) steel. Double G
primarily serves the metal buildings segment of the construction market in the
south central United States. The Company is committed to utilize and pay a
tolling fee in connection with 50% of the available line time at the facility.
The joint venture commenced production in the second quarter of 1994 and reached
full operating capacity in 1995. The Company's steel substrate requirements are
provided to Double G by the Great Lakes Division.
ProCoil Corporation. ProCoil Corporation ("ProCoil") is a joint venture between
the Company and Marubeni Corporation, located in Canton, Michigan. ProCoil
operates a steel processing facility which began operations in 1988 and a
warehousing facility which began operations in 1992. The Company owns a 56%
equity interest in ProCoil, and Marubeni Corporation owns the remaining 44%.
ProCoil blanks, slits and cuts steel coils to desired lengths to service
automotive market customers. In addition, ProCoil warehouses material to assist
the Company in providing just-in-time delivery to customers. Effective as of
May 31, 1997, the consolidated financial statements of the Company include the
accounts of ProCoil.
Tinplate Holdings, Inc. In April 1997, a wholly owned subsidiary of the Company
purchased 25% of the outstanding common stock of Tinplate Holdings, Inc.
("Tinplate"). Tinplate operates a tin mill service center in Gary, Indiana. In
connection with this transaction, the Company also entered into a supply
agreement pursuant to which Tinplate will purchase certain minimum quantities of
tin mill products from the Company through 2001.
National Robinson LLC. In February 1998, the Company entered into an agreement
with Robinson Steel Co., Inc. ("Robinson") to form a joint venture company,
named National Robinson LLC. This new company
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will operate a temper mill, leveler and cut to length facility in Granite City,
Illinois to produce cut to length steel plates and sheets with superior quality,
flatness and dimensional tolerances. National Robinson LLC is expected to
process approximately 200,000 tons of hot rolled steel supplied by the Company.
Construction of the new facility is expected to be completed in early 1999.
Other Information With Respect to the Company's Properties
In addition to the properties described above, the Company owns its corporate
headquarters facility in Mishawaka, Indiana. Generally, the Company's properties
are well maintained, considered adequate and being utilized for their intended
purposes. The Company's steel production facilities are owned in fee by the
Company except for (i) a continuous caster and related ladle metallurgy facility
which service the Great Lakes Division, (ii) an electrolytic galvanizing line,
which services the Great Lakes Division, and (iii) a portion of the coke
battery, which services the Granite City Division, each of which are owned by
third parties and leased to the Company pursuant to the terms of operating
leases. The electrolytic galvanizing line lease, the coke battery lease and the
continuous caster and related metallurgy facility lease are scheduled to expire
in 2001, 2004, and 2008, respectively. Upon expiration, the Company has the
option to extend the respective lease or purchase the facility at fair market
value.
Substantially all of the land (excluding certain unimproved land), buildings and
equipment (excluding, generally, mobile equipment) that are owned in fee by the
Company at the Great Lakes Division, Granite City Division and Midwest Division
are subject to a lien securing the Company's First Mortgage Bonds, 8-3/8% Series
due 2006 ("First Mortgage Bonds"). Included among the items which are not
subject to this lien are a vacuum degassing facility and a pickle line which
service the Great Lakes Division and a continuous caster facility which services
the Granite City Division; however, each of these items is subject to a mortgage
granted to the respective lender who financed the construction of the facility.
The Company has also agreed to grant to the Voluntary Employee Benefit
Association Trust ("VEBA Trust") a second mortgage on that portion of the
property which is covered by the lien securing the First Mortgage Bonds and
which is located at the Great Lakes Division. The VEBA Trust was established in
connection with the 1993 Settlement Agreement for the purpose of prefunding
certain postretirement benefit obligations for USWA represented employees.
For a description of certain properties related to the Company's production of
raw materials, see the discussion under the caption "Raw Materials" in Item 1,
"Business".
ITEM 3. LEGAL PROCEEDINGS
In addition to the matters discussed below, the Company is involved in various
legal proceedings occurring in the normal course of its business. In the
opinion of the Company's management, adequate provision has been made for losses
which are likely to result from these actions.
Securities and Exchange Commission Investigation
In the third quarter of 1997, the Audit Committee of the Company's Board of
Directors was informed of allegations about managed earnings, including excess
reserves and the accretion of such reserves to income over multiple periods, as
well as allegations about deficiencies in the Company's system of internal
controls. The Audit Committee engaged legal counsel who, with the assistance of
an accounting firm, inquired into these matters. Based upon this inquiry, the
Company determined the need to restate its financial statements for certain
prior periods, On January 29, 1998, the Company filed an amended Form 10-K for
1996 and amended Forms 10-Q for the first, second and third quarters of 1997
reflecting the restatements. On December 15, 1997, the Board of Directors
approved the termination of the Company's Vice President - Finance in connection
with the Audit Committee inquiry. During January 1998, legal counsel to the
Audit Committee issued its report to the Audit Committee, and the Audit
Committee approved the report and concluded its inquiry. On January 21, 1998,
the Board of Directors accepted the report and approved the recommendations,
except for the recommendation to revise the Audit Committee Charter, which was
approved on February 9, 1998. The report found certain misapplications of
generally accepted accounting principles and accounting errors, including excess
reserves, which have been corrected by the restatements referred to above. The
report found that the accretion of excess reserves to income during the first,
second and third quarters of 1997, as described in the amended Forms 10-Q for
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those quarters, may have had the effect of management of earnings as the result
of errors in judgment and misapplication of generally accepted accounting
principles. However, these errors do not appear to have involved the intentional
misstatement of the Company's accounts. The report also found weaknesses in
internal controls and recommended various improvements in the Company's system
of internal control, a comprehensive review of such controls, a restructuring of
the Company's finance and accounting department, and expansion of the role of
the internal audit function, as well as corrective measures to be taken related
to the specific causes of the accounting errors. The Company has begun to
implement these recommendations with the involvement of the Audit Committee. The
Securities and Exchange Commission ("Commission") has authorized an
investigation pursuant to a formal order of investigation relating to the
matters described above. The Company has been cooperating with the Staff of the
Commission and intends to continue to do so.
Environmental Matters
CERCLA and State Superfund Proceedings
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. Currently, an inactive site located at the Great Lakes
Division facility is listed on the Michigan Environmental Response Act Site
List, but remediation activity has not been required by the Michigan Department
of Environmental Quality ("MDEQ"). In addition, the Company and certain of its
subsidiaries are involved as potentially responsible parties ("PRPs") in a
number of off-site CERCLA or state superfund site proceedings. The outcome of
these CERCLA and state superfund proceedings is not expected to have a material
adverse effect on the financial position, results of operations or liquidity of
the Company. The more significant of these matters are described below:
Ilada Energy Company Site. The Company and certain other PRPs have performed a
removal action pursuant to an order issued by the U.S. Environmental Protection
Agency ("EPA") under Section 106 of CERCLA at this waste oil/solvent reclamation
site located in East Cape Girardeau, Illinois. The Company received a special
notice of liability with respect to this site on December 21, 1988. The Company
believes that there are approximately sixty-three PRPs identified at this site.
Pursuant to an Administrative Order of Consent ("AOC"), the Company and other
PRPs performed a remedial investigation and feasibility study ("RI/FS") at this
site to determine whether the residual levels of contamination of soil and
groundwater remaining after the removal action pose any threat to either human
health or the environment and therefore whether or not the site will require
further remediation. The PRPs submitted a draft RI/FS to the EPA and the
Illinois Environmental Protection Agency ("IEPA") and responded to the agencies'
comments on that document. Discussions between the PRPs and the agencies are
ongoing. In the course of performance of the RI/FS, a floating layer of
material was discovered above the groundwater. The Company's position, which
was sustained by both the EPA and the IEPA, is that this material is bulk
aviation fuel and is not considered to be a hazardous substance as defined under
CERCLA. To date, the Company has paid approximately $2 million for work and
oversight costs.
Buck Mine Complex. This is a proceeding involving a large site in Iron County,
Michigan, called the Buck Mine Complex, two discrete portions of which were
formerly owned or operated by a subsidiary of the Company. This subsidiary was
subsequently merged into the Company. The Company received a notice of potential
liability from the MDEQ with respect to this site on June 24, 1992. A subsidiary
of the Company had conducted mining operations at only one of these two parcels
and had leased the other parcel to a mining company for numerous years. The MDEQ
alleges that this site discharged and continues to discharge heavy metals into
the environment, including the Iron River. Because the Company and approximately
eight other PRPs have declined to undertake an RI/FS, the MDEQ has advised the
Company that it will undertake the investigation at this site and charge the
costs thereof to those parties ultimately held responsible for the cleanup. By
letter dated April 29, 1997, the MDEQ advised the Company that it had selected a
remedy for the acid mine drainage and offered the Company the opportunity to
perform the work to implement the remedy. This letter was also sent to other
PRPs, none of whom responded. Informally, the MDEQ has advised that it believes
that the cost of the remedy, including past costs, as well as future operating
and maintenance costs, but excluding natural resource
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damages, will be approximately $750,000, which cost will be allocated among the
parties ultimately held responsible. The Company has advised the MDEQ that it is
interested in pursuing a "cash-out" settlement of this matter; however, the MDEQ
has advised that it is not prepared to discuss settlement at this time.
Port of Monroe Site. In February 1992, the Company received a notice of
potential liability from the MDEQ as a generator of waste materials at this
landfill located near the Port of Monroe in Michigan. The Company believes that
there are approximately 80 other PRPs identified at this site. The Company's
records indicate that it sent some material to the landfill. A draft RI/FS for
remediation work has been prepared by the owner/operator PRPs and submitted to
the MDEQ for its approval. The cost of this RI/FS was approximately $280,000. In
March 1994, the MDEQ demanded reimbursement from the PRPs for its past and
future response costs. The MDEQ has since agreed to accept $500,000 as
reimbursement for its past response costs incurred through October 1993. This
settlement has been embodied in a consent decree. The owner/operators of this
site and certain of the generator/transporter PRPs (including the Company) have
reached an agreement regarding an interim allocation that will generate
sufficient funds to satisfy the PRPs' obligations under the above-described
settlement with the MDEQ. The Company's share under this interim allocation is
approximately $50,000, which amount has been paid to the State. The
owner/operator PRPs have advised the Company orally that the overall cost of the
remedy for the site is expected to be less than $10 million; however, the
Company does not have sufficient information to determine whether the $10
million estimate is accurate. Based on currently available information, the
Company believes that its proportionate share of the ultimate liability at this
site will be no more than 10% of the total costs.
Springfield Township Site. This is a proceeding involving a disposal site
located in Springfield Township, Davisburg, Michigan in which approximately 22
PRPs have been identified. The Company received a general notice of liability
with respect to this site on January 23, 1990. The Company and 11 other PRPs
have entered into AOCs with the EPA for the performance of partial removal
actions at the site and reimbursement of past response costs to the EPA. The
Company's share of costs under the AOCs was $48,000. Additionally, in response
to a demand letter from the MDEQ, the PRP steering committee and the MDEQ have
negotiated an AOC pursuant to which the MDEQ will be reimbursed approximately
$700,000 for its past response costs incurred through July 1993. The Company has
paid its share of this settlement amount, which was approximately $11,000. The
PRPs are currently negotiating with the EPA regarding the final remedial action
at this site. The EPA and the PRP steering committee had originally estimated
the cost to implement the final remedy at approximately $33 million and $20
million, respectively. A proposed amendment to the Record of Decision (the
"ROD") has been submitted to the EPA which would allow greater post-remediation
concentrations of PCBs to remain in the subsurface soil. If approved by the EPA,
the cost range for implementation of the final remedy would decrease to between
$3.3 million and $12.2 million. In December 1997, the Company executed a Consent
Decree for the Remedial Design and Remedial Action ("RD/RA") at the site. At the
same time, the Company also executed a Settlement Agreement among the PRPs
pursuant to which another PRP agreed to perform the RD/RA, and the Company
agreed to pay approximately $126,000 in full satisfaction of its share of the
RD/RA costs. Both the Consent Decree and Settlement Agreement are contingent
upon EPA's approval of the above-mentioned amendment to the ROD. The Company's
commitment to perform the RD/RA work is also contingent upon execution of the
Consent Decree by EPA and the other PRPs party thereto.
Rasmussen Site. The Company and nine other PRPs have entered into a Consent
Decree with the EPA in connection with this disposal site located in Livingston,
Michigan. The Company received a general notice of liability with respect to
this site on September 27, 1988. The Company believes that there are
approximately 23 PRPs at this site. A record of decision selecting the final
remedial action for this site was issued by the EPA in March 1991. The PRP
steering committee has estimated that remediation costs are approximately $19.7
million. Pursuant to a participation agreement among the PRPs, the Company's
share of such costs is 2.25%. Therefore, the Company's share of liability is
estimated to be $443,000. To date, the Company has paid approximately $275,000
of that amount.
Iron River (Dober Mine) Site. On July 15, 1994, the State of Michigan served M.
A. Hanna Company ("Hanna") with a complaint seeking response costs in the amount
of approximately $365,000, natural resource damages in the amount of
approximately $2 million and implementation of additional response activities
related to an alleged discharge to the Iron and Brule Rivers of acid mine
drainage from the Dober Mine in Iron County, Michigan. The State subsequently
increased its response costs claim to
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approximately $487,000 and its natural resources damages claim to $4.6 million.
Under the applicable statute, the State is also entitled to recover its
attorneys' fees and litigation costs if it prevails. Hanna operated the Dober
Mine pursuant to a management agreement with the Company. Hanna has requested
that the Company defend and indemnify it and the Company has undertaken the
defense of the State's claim. The Company, however, reserved the right to
terminate such defense. The Company filed on behalf of Hanna an answer to the
complaint denying liability at this site. On September 21, 1994 and November 9,
1994, respectively, the Company filed a third party complaint and an amended
third party complaint naming a total of seven additional defendants.
Additionally, on November 15, 1994, the Company negotiated a case management
order with the State pursuant to which the court must rule on liability issues
prior to addressing other aspects of the case. That order also stays the third
party actions pending the court's decision regarding the liability issues.
Subsequently, the court denied the Company's motion for summary disposition of
the liability issues in the case. After some discovery, the court entered an
order in November 1996 staying any further proceedings in this case while the
State and the Company engage in settlement negotiations. Additionally,
settlement discussions with some of the third party defendants are ongoing.
Other Sites. The Company has been notified that it may be a PRP at five other
CERCLA or state superfund sites. At these sites, either (i) 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 or (ii) the Company's liability is
not expected to be material.
Former Avatex Sites
The Company is a PRP at certain other sites, primarily associated with the
Company's former Weirton Steel Division, as to which the Company had the right
to seek indemnification from Avatex. In connection with a redemption of the
Series B Preferred Stock and other related transactions entered into with Avatex
in November 1997, the Company released Avatex from its obligation to indemnify
the Company for any liabilities with respect to these sites. [See the discussion
under the caption "Redemption of Series B Preferred Stock and Other Related
Transactions" in Item 1 "Business".] Accordingly, the Company will now be
responsible for payment of any liabilities imposed on the Company in connection
with these sites, without any right to indemnification from Avatex. A
description of each of these sites follows:
Buckeye Site. Effective as of February 10, 1992, the Company and thirteen other
PRPs entered into an AOC with the EPA to perform the remedial design at the
Buckeye site located in Belmont County, Ohio. In March 1994, the Company was
served with a copy of a complaint filed by Consolidation Coal Company, a former
owner and operator of the site. Among other claims, the complaint seeks
participation from the Federal Abandoned Mine Reclamation Fund, joinder of
certain public entities, one of which delivered waste to the site, and damages
and indemnity from current owners of the site. One count of the complaint names
the Company and nine other industrial PRPs and seeks a determination of the
allocation of responsibility among the alleged industrial generators involved
with the site. On June 27, 1996 the Company entered into a Settlement Agreement
with Consolidation Coal Company and certain of the other industrial PRPs
(collectively, the "Settling Parties") which resolved the litigation brought by
Consolidation Coal Company. Under the terms of the settlement, the Company has
agreed to pay 2.8 percent of the response costs associated with the site. The
Settlement Agreement was contingent upon the Court's approval and entry of a
Consent Decree with EPA. The Company and the Settling Parties signed the
Consent Decree with EPA on June 18, 1997. Non-settling parties continue to take
discovery in the Consolidation Coal Company litigation, including discovery
directed to the Company. Total response costs for the Buckeye site are
estimated to be approximately $35.0 million. Approximately $10.0 million of
that total has already been paid by the settling PRPs, with the Company having
paid approximately $200,000. The Company's share of the projected future costs
is expected to be approximately $700,000, which amount is expected to be paid by
the Company over the next two to three years.
Weirton Steel - Brown's Island. In January 1993, the Company was notified that
the West Virginia Division of Environmental Projection ("WVDEP") had conducted
an investigation on Brown's Island, Weirton, West Virginia, which was formerly
owned by the Company's Weirton Steel Division and is currently owned by Weirton
Steel Company ("Weirton Steel"). The WVDEP alleged that samples taken from four
groundwater monitoring wells located at this site contained elevated levels of
contamination. WVDEP informed Weirton Steel that additional investigation,
possible groundwater and soil remediation,
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and on-site housecleaning were required at the site. Weirton Steel has spent
approximately $210,000 to date on remediation of an emergency wastewater lagoon
located on Brown's Island. The Company has reimbursed Weirton Steel for that
amount pursuant to certain indemnity provisions contained in the agreements
between Weirton Steel and the Company which were entered into at the time that
the Company sold the assets of its former Weirton Steel Division to Weirton
Steel ("Weirton Indemnification"). It is likely that Weirton Steel will seek
reimbursement of any additional investigation and remediation costs involving
this lagoon from the Company pursuant to the Weirton Indemnification. The
Company can not yet determine whether WVDEP will require any additional
investigation or remediation at the Brown's Island facility. Weirton Steel
agreed to a three-year groundwater monitoring program at the facility; however,
no groundwater remediation has been required to date.
Weirton Steel - EPA Order. On September 16, 1996, EPA issued a unilateral
administrative order under the Resource Conservation and Recovery Act ("RCRA"),
requiring Weirton Steel to undertake certain investigative activities with
regard to cleanup of possible environmental contamination on Weirton Steel
property. Weirton Steel has informed the Company that the Mainland Coke Plant,
Brown's Island, and the Avenue H Disposal Site are likely to be included within
the areas of investigation required by EPA and that Weirton Steel considers
these areas to be within the scope of the Weirton Indemnification. Weirton
Steel has forwarded to the Company an initial claim for reimbursement of costs
which it incurred in the remediation of environmental hazards during the
demolition of the Mainland Coke Plant and by-products area totaling $1.812
million. The Company is currently evaluating the documentation submitted by
Weirton Steel in support of this claim. Additional costs are likely to be
incurred by Weirton Steel as a result of the unilateral administrative order
under RCRA. In that event, it is also likely that Weirton Steel will make
additional claims against the Company for reimbursement pursuant to the Weirton
Indemnification.
Tex-Tin Site. On or about August 12, 1996, Amoco Chemical Company ("Amoco")
filed a cost recovery and contribution suit pursuant to (S)107 and (S)113(f) of
CERCLA in the United States District Court for the Southern District of Texas.
Amoco has been involved in investigations of the contamination at the Tex-Tin
Superfund Site in Texas City, Texas, pursuant to an AOC entered into with the
EPA. In its suit, Amoco alleges that the Company is one of approximately 100
defendants jointly and severally liable under (S)107 of CERCLA for Amoco's costs
of those investigations and future response costs. Amoco has spent
approximately $12 million pursuant to the AOC at the Tex-Tin site. The Company
is unable to ascertain the extent of its liability at the Tex-Tin site at this
time, although waste-in lists indicate that the Company's former Weirton Steel
Division sent less than one percent of waste identified at the site.
Donner Hanna Coke Plant. The Donner Hanna coke plant consisted of six batteries
of coke ovens that were used to convert coal to metallurgical grade coke. A by-
product portion of the plant removed useful, resalable organic by-products from
the gases produced by the coke ovens. The plant was operated from approximately
1920 to 1982, and for the majority of that time was a part of a joint venture
between the Company and LTV Steel Company (or its predecessor). In 1989 and
1990, the plant was demolished. The City of Buffalo, in partnership with the
City of Lackawanna, Erie County and the Erie County Industrial Development
Agency, has developed a conceptual plan for redevelopment of over 1,200 acres of
inactive industrial properties in South Buffalo, including the Donner Hanna coke
plant. The Company, through its subsidiary, The Hanna Furnace Corporation, is
participating in a voluntary effort with LTV to perform a site assessment and
cleanup at Donner Hanna, with a goal of eventually transferring ownership of the
property to either the City of Buffalo or a third party. Preliminary cost
estimates for the voluntary site assessment and cleanup are approximately $12.0
million over a two year period. Hanna Furnace's share of these costs would be
approximately $6.0 million, as a result of LTV's equal contribution to the costs
of the cleanup.
Other Sites. The Company has been notified that it may be a PRP at three other
CERCLA or state superfund sites as to which the Company previously had the right
to seek indemnification from Avatex. At these sites, either (i) 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 or (ii) the Company's liability is
not expected to be material. As a result of the release of Avatex described
above, the Company will now be responsible for payment of any liabilities
imposed on the Company in connection with these sites, without any right to
indemnification from Avatex.
16
<PAGE>
Other Environmental Matters
The Company and its subsidiaries have been conducting steel manufacturing and
related operations at numerous locations, including their present facilities,
for over sixty years. Although the Company believes that it has utilized
operating practices that were standard in the industry at the time, hazardous
materials may have been released on or under these currently or previously owned
sites. Consequently, the Company potentially may also be required to remediate
contamination at some of these sites. However, based on its past experience and
the nature of environmental remediation proceedings, the Company believes that
if any such remediation is required, it will occur over an extended period of
time.
In addition to the aforementioned proceedings, the Company is or may be involved
in proceedings with various regulatory authorities which may require the Company
to pay various fines and penalties relating to violations of environmental laws
and regulations, comply with applicable standards or other requirements or incur
capital expenditures to add or change certain pollution control equipment or
processes. These proceedings are described below:
Granite City Division - Alleged Air Violations. On or about March 2, 1995, the
Company received Notices of Violation ("NOVs") and Findings of Violation
("FOVs") issued by the EPA covering alleged violations of various air emission
requirements at the Granite City Division basic oxygen furnace shop, coke oven
batteries and by-products plant. The Company has agreed to a settlement of this
matter pursuant to which it would pay a civil penalty of $546,700, perform a
paving program for the control of fugitive dust at a cost of approximately
$2,340,000 and contribute $50,000 toward a household hazardous waste reduction
program.
Great Lakes Division - Federal Clean Air Act FOV. On or about February 18,
1997, the EPA issued an FOV under the Clean Air Act alleging violations of
certain monitoring and performance standards at the Company's Great Lakes
Division By-Products Recovery Plant. An informal conference was held on March
20, 1997 at which the EPA requested certain information, which has since been
provided by the Company. The Company believes it is currently in full
compliance with all regulations cited in the FOV. The EPA has not made a demand
for penalties. Some, but not all, of these violations were included within the
scope of the settlement of the Great Lakes Division Multimedia Inspection
referred to below.
Great Lakes Division - Multimedia Inspection. Representatives from the EPA
National Enforcement Investigation Center ("NEIC") conducted a two-week,
multimedia inspection of the Company's Great Lakes facility in April 1996. On
September 24, 1997, the EPA filed a complaint against the Company alleging air,
release reporting, hazardous waste, underground storage tank and PCB violations
found during the multimedia inspection. An initial civil penalty assessment of
approximately $270,000 was proposed. Following settlement negotiations, the EPA
has agreed on a preliminary basis to settle this matter for a total penalty
amount of $215,767, consisting of payment by the Company of a cash penalty of
$53,942 and the performance by the Company of supplemental environmental
projects which are valued, for settlement purposes, at $161,825.
Great Lakes Division - Opacity NOV. The EPA issued an NOV to the Company's
Great Lakes Division on or about August 28,1995, alleging violations of
specified opacity regulations at the Division's A blast furnace and basic oxygen
furnace shop. The alleged violations set forth in the NOV were incorporated by
reference into a Consent Order which the Company entered into with Wayne County
dated December 15, 1996. While the EPA was not a signatory to that Consent
Order, it has indicated that it will accept this settlement as a resolution of
the matters covered by the NOV.
Great Lakes Division - Outfalls Proceedings. The United States Coast Guard
("USCG") has issued or proposes to issue a number of penalty assessments with
respect to alleged oil discharges at certain outfalls at the Company's Great
Lakes Division facility. The Company has appealed many of the USCG's
determinations, has paid amounts in settlement of a few, and is engaged in
settlement discussions with respect to the others. The Company believes that
its aggregate exposure with respect to these proposed penalty assessments will
not exceed $500,000.
The MDEQ, in April 1992, notified the Company of a potential enforcement action
alleging approximately 63 exceedances of limitations at the outfall at the 80-
inch hot strip mill. By letter of May 28, 1996, the
17
<PAGE>
MDEQ sent the Company a draft consent order to address compliance issues at the
80-inch hot strip mill. Subsequently, on June 17, 1996, representatives of the
Company, the MDEQ and the USCG met to discuss settlement. At that meeting, the
Company presented evidence that no further control equipment is necessary at the
80-inch hot strip mill. Additionally, at that meeting, the MDEQ made an initial
penalty demand of $350,000. The MDEQ has since provided the Company with a
revised draft AOC which included, among other things, a proposed $200,000 civil
penalty and a demand for $16,664 to cover MDEQ costs. The parties are currently
engaged in discussions concerning what the triggering events would be for the
mandatory implementation of enhanced controls to address future oil discharges
should they occur.
On February 5, 1997, the State of Michigan filed a complaint in state court
against the Company's Great Lakes Division, alleging approximately 75 violations
of limitations contained in two National Pollutant Discharge Elimination System
("NPDES") water discharge permits covering the Zug Island and main plant
facilities. The parties have executed a Consent Decree pursuant to which the
Company paid $45,000 in settlement of all reported violations through October
1997 for the two facilities.
Great Lakes Division - Wayne County Air Pollution Control Department Proceeding.
During 1997, the Wayne County Air Quality Management Division ("Wayne County")
issued a total of 28 NOVs to the Company's Great Lakes Division. Wayne County
made an initial demand for penalties in the amount of $1,542,000, and the
Company made a counteroffer of $200,000. Wayne County subsequently reduced its
penalty demand to $950,000. Settlement discussions are ongoing.
Great Lakes Division - Particulate Standards NOV. On March 9, 1998, the
Company's Great Lakes Division received an NOV from the EPA which alleged eight
days on which the particulate standards at the No. 2 Basic Oxygen Furnace Shop
and the D-4 Blast Furnace Casthouse were exceeded. Six of the days on which
exceedances allegedly occurred are covered by the Wayne County NOVs described
immediately above. EPA has provided an opportunity for a conference to discuss
this NOV, and the Company intends to request such a conference.
National Mines Corporation - Isabella Mine. National Mines Corporation ("NMC"),
a wholly-owned subsidiary of the Company, previously owned and operated a coal
mine and coal refuse disposal area in Pennsylvania commonly known as the
Isabella Mine. The area covered under NMC's mining permit was approximately 140
acres. A reclamation bond in the amount of $1,200,000 was held by the
Pennsylvania Department of Environmental Protection ("DEP") for that area. NMC
subsequently ceased coal refuse disposal and mining operations at the site and
reclaimed the disposal areas. In June 1993, NMC sold the Isabella property to
Global Coal Recovery, Inc. ("Global"), a coal refuse reprocessor. Global
applied for and received a new mining permit from DEP for a total area of about
375 acres, including acreage previously covered under NMC's permit. As part of
the terms of sale, NMC agreed to allow Global to use NMC's $1,200,000
reclamation bond as security to obtain the new permit from the DEP. Global was
obligated to repay NMC the $1,200,000. Global assumed all environmental
liability associated with the Isabella Mine as part of the transaction.
Subsequent to the sale of the Isabella Mine to Global, Global extracted coal
from a refuse pile at the mine, and in doing so, disturbed reclamation work NMC
had previously performed. Global was ultimately unable to operate the Isabella
Mine at a profit and subsequently defaulted on its agreements with NMC. Global
and its contractors abandoned the site in October 1995. The DEP subsequently
took enforcement actions against Global and its contractors for unabated
discharges of mine drainage as well as other violations associated with
reclamation obligations at the Isabella site. The enforcement actions were
unsuccessful in eliminating the environmental violations at the site. On August
13, 1996, the DEP revoked the mining permit for the Isabella Mine held by
Global. Additionally, on November 1, 1996, the DEP issued a notice of
forfeiture with respect to the $1,200,000 reclamation bond posted by NMC. NMC
has appealed this forfeiture to the Environmental Hearing Board. NMC has
presented DEP with a plan pursuant to which NMC would perform reclamation of the
site, in lieu of the forfeiture of the bond. Negotiations are ongoing.
Granite City Division - IEPA Violation Notice. On October 18, 1996, the IEPA
issued a Violation Notice alleging (1) releases to the environment between 1990
and 1996; (2) violations of solid waste requirements; and (3) violations of the
NPDES water permit limitations, at the Company's Granite City Division. No
demand or proposal for penalties or other sanctions was contained in the Notice;
however,
18
<PAGE>
the Notice does contain a recommendation by IEPA that the Company conduct an
investigation of these releases and, if necessary, remediate any contamination
discovered during that investigation. The Company responded to the Notice on
December 4, 1996. Discussions with IEPA are ongoing.
Granite City Division - IEPA NOV - Beaching of Iron. On or about April 24,
1997, the Company's Granite City Division received an NOV from the IEPA in which
it is alleged that the Company poured molten iron into a "beaching pit" at least
34 times in 1996, allegedly in violation of various state air pollution
requirements related to particulate matter emissions and permitting. The
Company has responded to the NOV by agreeing to minimize the beaching of iron
and requesting a modification to its blast furnace operating permits that would
recognize beaching as a malfunction under certain circumstances.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1997.
Executive Officers of the Registrant
The following sets forth certain information with respect to the executive
officers of the Company. Executive officers are elected by the Board of
Directors of the Company, generally at the first meeting of the Board after each
annual meeting of stockholders. Officers of the Company serve at the discretion
of the Board of Directors and are subject to removal at any time.
Osamu Sawaragi, Chairman of the Board and Chief Executive Officer. Mr.
Sawaragi, age 69, has been a Director of the Company since June 1990 and was
elected Chairman in 1994. In August 1996, Mr. Sawaragi was appointed to the
position of Chief Executive Officer. Prior thereto he was employed by NKK as a
Director beginning in 1984, Managing Director in 1986, Senior Managing Director
in 1989, Executive Vice President from 1990 to 1994 and Senior Counsel from 1994
to 1996.
John A. Maczuzak, President and Chief Operating Officer. Mr. Maczuzak, age 56,
joined the Company as Vice President and General Manager - Granite City Division
in May 1996. He was appointed Executive Vice President and Acting Chief
Operating Officer in August 1996. On December 10, 1996, Mr. Maczuzak was
appointed to his present position. Mr. Maczuzak was formerly employed by ProTec
Coating Company as General Manager and USS/Kobe Steel Company as Vice President
of Operations and has more than 31 years of broad based experience in the steel
industry.
Bernard D. Henely, Senior Vice President and General Counsel. Mr. Henely, age
53, joined the Company as Vice President and General Counsel in September 1995.
He was appointed to his present position in February 1996. Mr. Henely was
formerly employed by Clark Equipment Company for over twenty-five years, where
he served as Vice President and General Counsel from 1984 to 1995.
George D. Lukes, Jr., Senior Vice President - Quality Assurance, Technology and
Production Planning. Mr. Lukes, age 52, joined the Company in June 1994 to fill
the newly created position of Vice President-Quality Assurance and Customer
Satisfaction. He was appointed to his present position in February 1996. Mr.
Lukes had previously been employed by U.S. Steel since 1968. He served in a
succession of process, product and administrative metallurgical posts before
being appointed Manager-Quality Assurance at U.S. Steel's Fairless Works in
1983.
David A. Pryzbylski, Senior Vice President - Administration and Secretary. Mr.
Pryzbylski, age 48, joined the Company in June 1994 as Vice President-Human
Resources and Secretary. He was appointed to his present position in February
1996. Mr. Pryzbylski had previously been employed by U.S. Steel since 1979. He
held a number of management positions at steel and mining operations, serving
since 1987 as Senior Human Resource Manager at its Gary Works facility.
David L. Peterson, Group Vice President - Regional Operations. Mr. Peterson,
age 48, joined the Company in June 1994 as Vice President and General Manager -
Great Lakes Division. In January 1997 he was appointed to the position of Group
Vice President - Regional Operations which includes the Great Lakes and the
Midwest Divisions. Mr. Peterson had formerly been employed by U.S. Steel since
1971.
19
<PAGE>
He was promoted to the plant manager level at U.S. Steel in 1988 and directed
all operating functions from cokemaking to sheet and tin products. In 1988 he
was named Plant Manager - Primary Operations at U.S. Steel's Gary Works
facility.
Robert G. Pheanis, Vice President and General Manager - Midwest Division. Mr.
Pheanis, age 64, joined the Company in June 1994 as Vice President and General
Manager - Midwest Division. Mr. Pheanis formerly served in various management
positions at U.S. Steel at the Gary Works facility for 35 years and in 1992 was
named its Plant Manager - Finishing Operations, with responsibility for its
total hot rolled, sheet and tin operations.
James H. Squires, Vice President and General Manager - Granite City Division.
Mr. Squires, age 59, began his career with the Company in 1956 as a laborer in
the blast furnace area and went on to hold numerous positions as an hourly
worker. In 1964, he accepted a salaried position and advanced through the
operating organization. In October 1996, Mr. Squires was appointed to his
current position.
Joseph R. Dudak, Vice President, Strategic Sourcing. Mr. Dudak, age 50, began
his career with the Company as an engineer at the Midwest Division in 1970. In
1973, he moved to the Granite City Division and served as Superintendent of
Energy Management & Utilities from 1977 until moving to corporate headquarters
in 1981. He served as Director of Energy & Environmental Affairs from 1981 to
1994, when he was appointed to his present position.
Carole J. Corey, Vice President, Marketing and Sales. Ms. Corey, age 55, joined
the Company as General Manger - Sheet Sales in June 1996. She was appointed to
her present position in March 1997. Prior to joining the Company, she held
numerous senior marketing and sales positions with U.S. Steel, serving as
General Manager Tin Mill Products from January 1993 to March 1996.
William E. McDonough, Treasurer. Mr. McDonough, age 39, began his career with
the Company in 1985 in the Financial Department. He has held various positions
of increasing responsibility including Assistant Treasurer and Manager, Treasury
Operations and was promoted to Treasurer in December 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is included on page 50 of the Company's
Annual Report to the Shareholders for the fiscal year ended December 31, 1997
and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included on page 17 of the Company's
Annual Report to the Shareholders for the fiscal year ended December 31, 1997
and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is included on pages 18 through 26 of the
Company's Annual Report to the Shareholders for the fiscal year ended December
31, 1997 and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included on pages 27 through 49 of the
Company's Annual Report to the Shareholders for the fiscal year ended December
31, 1997 and is incorporated herein by reference.
20
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from the
section captioned "Executive Officers" in Part I of this report and from the
sections captioned "Information Concerning Nominees for Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders. With the exception of
the information specifically incorporated by reference, the Company's Proxy
Statement is not to be deemed filed as part of this report for purposes of this
Item.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
sections captioned "Executive Compensation", "Summary Compensation Table",
"Stock Option/SAR Tables", "Option/SAR Grants in 1997", "Aggregated Option/SAR
Exercises in 1997 and December 31, 1997 Option/SAR Values", "Pension Plans",
"Pension Plan Table", "Employment Contracts" and "Compensation of Directors" in
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. With
the exception of the information specifically incorporated by reference, the
Company's Proxy Statement is not to be deemed filed as part of this report for
purposes of this Item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
sections captioned "Security Ownership of Directors and Management" and
"Additional Information Relating to Voting Securities" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders. With the exception of
the information specifically incorporated by reference, the Company's Proxy
Statement is not to be deemed filed as part of this report for purposes of this
Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
section captioned "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. With the
exception of the information specifically incorporated by reference, the
Company's Proxy Statement is not to be deemed filed as part of this report for
purposes of this Item.
21
<PAGE>
PART IV
ITEMS 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
The following is an index of the financial statements, schedules and exhibits
included in this Report or incorporated herein by reference.
(1) Financial Statements
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Income for the years ended December 31, 1997, 1996
and 1995 .......................................................................... *
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 ......... *
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995 .......................................................................... *
Consolidated Statements of Shareholders' Equity and Redeemable Preferred Stock -
Series B for the years ended December 31, 1997, 1996 and 1995 ..................... *
Notes to Consolidated Financial Statements (Including Quarterly Financial Data) ... *
</TABLE>
(2) Consolidated Financial Statement Schedule
The following consolidated financial statement schedule of National Steel
Corporation and Subsidiaries is filed as a part of this Report:
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts and Reserves, years ended
December 31, 1997, 1996 and 1995 .................................................. F-1
</TABLE>
*Incorporated in Item 8 of this Report by reference from pages 27 to 49
inclusive, of the Company's 1997 Annual Report to Stockholders, which pages are
filed with this Report as Exhibit 13. With the exception of those pages, the
1997 Annual Report to Stockholders is not to be deemed filed as part of this
Report for purposes of this Item. The Schedule listed above should be read in
conjunction with the consolidated financial statements in such 1997 Annual
Report to Stockholders.
Schedules not included have been omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
Separate financial statements of subsidiaries not consolidated and 50 percent or
less owned persons accounted for by the equity method have been omitted because
considered in the aggregate as a single subsidiary they do not constitute a
significant subsidiary.
(3) Exhibits
See the attached Exhibit Index. Items 10-S through 10-FF are management
contracts or compensatory plans or arrangements.
22
<PAGE>
(b) Reports on Form 8-K:
During the quarter ended December 31, 1997, the Company filed the following
reports on Form 8-K:
(i) The Company filed a Form 8-K dated December 1, 1997, reporting on
Item 5, Other Events, and Item 7, Financial Statements and Exhibits.
(ii) The Company filed a Form 8-K dated December 18, 1997, reporting
on Item 5, Other Events, and Item 7, Financial Statements and
Exhibits.
(iii) The Company filed a Form 8-K dated December 22, 1997, reporting
on Item 5, Other Events, and Item 7, Financial Statements and
Exhibits.
(iv) The Company filed a Form 8-K dated December 30, 1997, reporting
on Item 5, Other Events, and Item 7, Financial Statements and
Exhibits.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Mishawaka, State
of Indiana, on March 23, 1997.
NATIONAL STEEL CORPORATION
By: /s/ John A. Maczuzak
------------------------------
John A. Maczuzak
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company in the
capacities indicated on March 23, 1998.
Name Title
---- -----
/s/ Osamu Sawaragi Director; Chairman of the Board and
------------------------ Chief Executive Officer
Osamu Sawaragi
/s/ Charles A. Bowsher Director
------------------------
Charles A. Bowsher
/s/ Frank J. Lucchino Director
------------------------
Frank J. Lucchino
/s/ Bruce K. MacLaury Director
------------------------
Bruce K. MacLaury
/s/ Yoshinosuke Noma Director
------------------------
Yoshinosuke Noma
/s/ Yoshiharu Onuma Director
------------------------
Yoshiharu Onuma
/s/ Keiichiro Sakata Director
------------------------
Keiichiro Sakata
/s/ Mineo Shimura Director
------------------------
Mineo Shimura
/s/ Michael D. Gibbons Acting Chief Financial Officer
------------------------
Michael D. Gibbons
24
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Thousands of Dollars)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- ------------------------------------ -------- --------
ADDITIONS
------------------------------------
Balance at Charged to
Beginning Charged to Other Accounts - Deductions - Balance at
Description of Period Costs and Expense Describe Describe End of Period
- ----------- ---------- ------------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
- ------------------------------------
RESERVES DEDUCTED FROM ASSETS
Allowances and discounts on trade
notes and accounts receivable $ 19,320 $29,363 (1) $ -- $31,039 (3) $ 17,644
Valuation allowance on deferred
tax assets 106,200 -- (22,900) (2) -- 83,300
Year Ended December 31, 1996
- ----------------------------
RESERVES DEDUCTED FROM ASSETS
Allowances and discounts on trade
notes and accounts receivable $ 19,986 $21,560 (1) $ -- $22,226 (3) $ 19,320
Valuation allowance on deferred
tax assets 135,600 -- (29,400) (2) -- 106,200
Year Ended December 31, 1995
- ----------------------------
RESERVES DEDUCTED FROM ASSETS
Allowances and discounts on trade
notes and accounts receivable $ 15,185 $21,046 (1) $ -- $16,245 (3) $ 19,986
Valuation allowance on deferred
tax assets 189,500 -- (53,900) (2) -- 135,600
</TABLE>
NOTE 1 - Provision for doubtful accounts of $963, $748 and $4,854 for 1997,
1996 and 1995, respectively and other charges consisting primarily of
claims for pricing adjustments and discounts allowed.
NOTE 2 - Represents the increase or (decrease) in the net deferred tax asset.
NOTE 3 - Doubtful accounts charged off, net of recoveries, claims and discounts
allowed and reclassification to other assets.
F-1
<PAGE>
EXHIBIT INDEX
Except for those exhibits which are incorporated by reference, as indicated
below, all exhibits are being filed along with this Form 10-K.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------- -------------------
<S> <C>
2-A Assets Purchase Agreement between Weirton Steel Corporation and the Company, dated as of April
29, 1983, together with collateral agreements incident to such Assets Purchase Agreement, filed
as Exhibit 2-A to the annual report of the Company on Form 10-K for the year ended December 31,
1995, is incorporated herein by reference.
2-B Stock Purchase Agreement by and among NKK Corporation, National Intergroup, Inc. and the
Company, dated August 22, 1984, together with certain collateral agreements incident to such
Stock Purchase Agreement and certain schedules to such agreements, filed as Exhibit 2-B to the
annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated
herein by reference.
2-C Stock Purchase and Recapitalization Agreement by and among National Intergroup, Inc., NII
Capital Corporation, NKK Corporation, NKK U.S.A. Corporation and the Company, dated as of June
26, 1990, filed as Exhibit 2-C to the annual report of the Company on Form 10-K for the year
ended December 31, 1995, is incorporated herein by reference.
2-D Amendment to Stock Purchase and Recapitalization Agreement by and among, National Intergroup,
Inc., NII Capital Corporation, NKK Corporation, NKK U.S.A. Corporation and the Company, dated
July 31, 1991.
2-E Stock Purchase Agreement dated as of January 31, 1997 among the Company, North Limited, NS
Holdings Corporation, Bethlehem Steel Corporation and Bethlehem Steel International Corporation
filed as Exhibit 2-A to the quarterly report of the Company on Form 10-Q for the quarter ended
June 30, 1997, is incorporated herein by reference.
2-F Asset Purchase Agreement dated as of June 6, 1997 between EES Coke Battery Company, Inc. and the
Company, filed as Exhibit 2.1 to the Report on Form 8-K of the Company dated June 12, 1997, is
incorporated herein by reference.
2-G Coal Inventory Purchase Agreement dated as of June 6, 1997 between DTE Coal Services, Inc. and
the Company, filed as Exhibit 2.2 to the Report on Form 8-K of the Company dated June 12, 1997,
is incorporated herein by reference.
3-A The Sixth Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated herein
by reference.
3-B Form of Amended and Restated By-laws of the Company filed as Exhibit 3-B to the annual report of
the Company on Form 10-K for the year ended December 31, 1996, is incorporated herein by
reference.
4-A NSC Stock Transfer Agreement between National Intergroup, Inc., the Company, NKK Corporation and
NII Capital Corporation dated December 24, 1985, filed as Exhibit 4-A to the annual report of
the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by
reference.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4-B The Company is a party to certain long term debt agreements where the amount involved does not
exceed 10% of the Company's total assets. The Company agrees to furnish a copy of any such
agreement to the Commission upon request.
10-A Amended and Restated Lease Agreement between the Company and Wilmington Trust Company, dated as
of December 20, 1985, relating to the Electrolytic Galvanizing Line, filed as Exhibit 10-A to
the annual report of the Company on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
10-B Lease Agreement between The Connecticut National Bank as Owner Trustee and Lessor and National
Acquisition Corporation as Lessee dated as of September 1, 1987 for the Ladle Metallurgy and
Caster Facility located at Ecorse, Michigan, filed as Exhibit 10-B to the annual report of the
Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference.
10-C Lease Supplement No. 1 dated as of September 1, 1987 between The Connecticut National Bank as
Owner Trustee and National Acquisition Corporation as the Lessee for the Ladle Metallurgy and
Caster Facility located at Ecorse, Michigan, filed as Exhibit 10-C to the annual report of the
Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference.
10-D Lease Supplement No. 2 dated as of November 18, 1987 between The Connecticut National Bank as
Owner Trustee and National Acquisition Corporation as Lessee for the Ladle Metallurgy and Caster
Facility located at Ecorse, Michigan, filed as Exhibit 10-D to the annual report of the Company
on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference.
10-E Purchase Agreement dated as of March 25, 1988 relating to the Stinson Motor Vessel among
Skar-Ore Steamship Corporation, Wilmington Trust Company, General Foods Credit Investors No. 1
Corporation, Stinson, Inc. and the Company, and Time Charter between Stinson, Inc. and the
Company, filed as Exhibit 10-E to the annual report of the Company on Form 10-K for the year
ended December 31, 1995, is incorporated herein by reference.
10-F Purchase and Sale Agreement, dated as of May 16, 1994 between the Company and National Steel
Funding Corporation, filed as Exhibit 10-A to the quarterly report of the Company on Form 10-Q/A
for the quarter ended March 31, 1994, is incorporated herein by reference.
10-G Form of Indemnification Agreement filed as Exhibit 10-R to the Annual Report of the Company on
Form 10-K for the year ended December 31, 1996 is incorporated herein by reference.
10-H Shareholders' Agreement, dated as of September 18, 1990, among DNN Galvanizing Corporation,
904153 Ontario Inc., National Ontario Corporation and Galvatek America Corporation, filed as
Exhibit 10.27 to the Company's Registration Statement on Form S-1, Registration No. 33-57952, is
incorporated herein by reference.
10-I Partnership Agreement, dated as of September 18, 1990, among Dofasco, Inc., National Ontario II,
Limited, Galvatek Ontario Corporation and DNN Galvanizing Corporation, filed as Exhibit 10.28 to
the Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated
herein by reference.
10-J Amendment No. 1 to the Partnership Agreement, dated as of September 18, 1990, among Dofasco,
Inc., National Ontario II, Limited, Galvatek Ontario Corporation and DNN Galvanizing
Corporation, filed as Exhibit 10.29 to the Company's Registration Statement on Form S-1,
Registration No. 33-57952, is incorporated herein by reference.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10-K Agreement, dated as of May 19, 1993, among the Company and NKK Capital of America, Inc., filed
as Exhibit 10-FF to the annual report of the Company on Form 10-K for the year ended December
31, 1993, is incorporated herein by reference.
10-L Receivables Purchase Agreement, dated as of March 16, 1994, between the Company and National
Steel Funding Corporation, filed as exhibit 10-A to the quarterly report of the Company on Form
10-Q/A for the quarter ended June 30, 1994, is incorporated herein by reference.
10-M Amendment Number One to the Receivables Purchase Agreement, dated as of May 31, 1995, between
the Company and National Steel Funding Corporation, filed as exhibit 10-A to the quarterly
report of the Company on Form 10-Q for the quarter ended June 30, 1995, is incorporated herein
by reference.
10-N Amendment No. 2 and Consent to the Receivables Purchase Agreement, dated as of July 18, 1996,
among the Company, National Steel Funding Corporation and Morgan Guaranty Trust Company of New
York, filed as Exhibit 10-A to the quarterly report of the Company on Form 10-Q for the quarter
ended September 30, 1996, is incorporated herein by reference.
10-O Agreement for the Transfer of Employees by and between NKK Corporation and the Company, dated as
of May 1, 1995, filed as Exhibit 10-CC to the annual report of the Company on Form 10-K for the
year ended December 31, 1995, is incorporated herein by reference.
10-P Amendment No. 1 to Agreement for the Transfer of Employees by and between the Company and NKK
Corporation filed as Exhibit 10-NN to the annual report of the Company on Form 10-K for the year
ended December 31, 1996, is incorporated herein by reference.
10-Q Amendment No. 2 to Agreement for the Transfer of Employees by and between the Company and NKK
Corporation.
10-R Agreement dated as of November 25, 1997 among Avatex Corporation, National Steel Corporation,
NKK Corporation and NKK U.S.A. Corporation
10-S 1993 National Steel Corporation Long-Term Incentive Plan, filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-57952, is incorporated herein by
reference.
10-T 1993 National Steel Corporation Non-Employee Directors' Stock Option Plan, filed as Exhibit 10.2
to the Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated
herein by reference.
10-U Amendment Number One to the 1993 National Steel Corporation Non-Employee Directors' Stock Option
Plan, filed as Exhibit 10-A to the quarterly report of the Company on Form 10-Q for the quarter
ended June 30, 1997, is incorporated herein by reference.
10-V Amendment Number Two to the 1993 National Steel Corporation Non-Employee Directors' Stock Option
Plan
10-W National Steel Corporation Management Incentive Compensation Plan dated January 30, 1989, filed
as Exhibit 10.3 to the Company's Registration Statement on Form S-1, Registration No. 33-57952,
is incorporated herein by reference.
10-X Employment contract dated April 30, 1996 between National Steel Corporation and Bernard D.
Henely, filed as Exhibit 10-B to the quarterly report of the Company on Form 10-Q for the
quarter ended June 30, 1996, is incorporated herein by reference.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10-Y Employment contract dated April 30, 1996 between National Steel Corporation and George D. Lukes,
filed as Exhibit 10-C to the quarterly report of the Company on Form 10-Q for the quarter ended
June 30, 1996, is incorporated herein by reference.
10-Z Supplement to Employment contract dated July 30, 1996 between National Steel Corporation and
George D. Lukes, filed as Exhibit 10-B to the quarterly report of the Company on Form 10-Q for
the quarter ended September 30, 1996, is incorporated herein by reference.
10-AA Employment contract dated April 30, 1996 between National Steel Corporation and David L.
Peterson, filed as Exhibit 10-D to the quarterly report of the Company on Form 10-Q for the
quarter ended June 30, 1996, is incorporated herein by reference.
10-BB Supplement to Employment contract dated July 30, 1996 between National Steel Corporation and
David L. Peterson, filed as Exhibit 10-C to the quarterly report of the Company on Form 10-Q for
the quarter ended September 30, 1996, is incorporated herein by reference.
10-CC Amended and Restated Employment Agreement dated as of February 1, 1998 between National Steel
Corporation and Robert G. Pheanis.
10-DD Employment contract dated April 30, 1996 between National Steel Corporation and David A.
Pryzbylski, filed as Exhibit 10-F to the quarterly report of the Company on Form 10-Q for the
quarter ended June 30, 1996, is incorporated herein by reference.
10-EE Employment contract dated May 1, 1996 between National Steel Corporation and John A. Maczuzak,
filed as Exhibit 10-G to the quarterly report of the Company on Form 10-Q for the quarter ended
June 30, 1996, is incorporated herein by reference.
10-FF Employment contract dated December 11, 1996 between National Steel Corporation and Osamu
Sawaragi filed as Exhibit 10-MM to the annual report of the Company on Form 10-K for the year
ended December 31, 1996, is incorporated herein by reference.
13 Portions of the Company's 1997 Annual Report to Stockholders which are incorporated by reference
into this Form 10-K.
21 List of Subsidiaries of the Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 2-D
AMENDMENT TO STOCK PURCHASE AND
-------------------------------
RECAPITALIZATION AGREEMENT
--------------------------
Amendment to Stock Purchase and Recapitalization Agreement, dated as of
July 31, 1991 ("Amendment to the Agreement") by and among, NATIONAL INTERGROUP,
INC. ("NII"), NII CAPITAL CORPORATION ("NCC"), NKK CORPORATION ("NKK"), NKK
U.S.A. CORPORATION ("NAC") AND NATIONAL STEEL CORPORATION ("NSC").
WHEREAS, NII, NCC, NKK, NAC and NSC entered into the Stock Purchase and
Recapitalization Agreement dated June 26, 1990 (the " Agreement"); and
WHEREAS, NII, NCC and NSC entered into the Amended and Restated Weirton
Liabilities Agreement dated June 26, 1990 (the "Weirton Liabilities Agreement");
and
WHEREAS, pursuant to the Weirton Liabilities Agreement, NII and NCC, as of
the date hereof, have an obligation to reimburse NSC for $131,307.64,
representing the amounts paid by NSC with respect to certain obligations of NSC
to pay supplemental pensions to certain individuals; and
WHEREAS, NII, NCC and NSC desire to provide that, subject to the applicable
provisions of the Internal Revenue Code of 1986, as amended and the Employee
Retirement Income Security Act of 1974, as amended, pension contributions to
Plan 056 shall be reduced by such amount of supplemental pensions and by the
amount of such payments made after the date hereof; and
WHEREAS, Section 10.09 permits the Agreement to be modified by a written
instrument duly executed by each party; and
WHEREAS, the parties have agreed to amend the Agreement in order to modify
the manner in which NII and NCC satisfy their obligation to reimburse NSC with
respect to such supplemental pensions.
NOW THEREFORE, the parties hereto agree to amend the Agreement as follows:
Article I of the Agreement is amended by restating the definition of
"Weirton Benefit Liabilities" in its entirety to read as follows:
<PAGE>
"Weirton Benefit Liabilities" means (i) the liabilities of the Company
described in and/or arising pursuant to the Benefits Agreement and (ii)
with respect to the various "supplemental pensions" that are payable to the
individuals listed on Appendix I hereto, that portion of such supplemental
pensions that became or will become due and payable to such individuals at
any time on or after June 26, 1990."
IN WITNESS WHEREOF, the undersigned have caused this Amendment to the
Agreement to be executed by their duly authorized officers as of the 31st day of
July, 1991.
NATIONAL INTERGROUP, INC.
----------------------------
By:
Title:
NII CAPITAL CORPORATION
----------------------------
By:
Title:
NKK CORPORATION
----------------------------
By:
Title:
NKK U.S.A. CORPORATION
----------------------------
By:
Title:
NATIONAL STEEL CORPORATION
----------------------------
By:
Title:
<PAGE>
APPENDIX I
Baird, Alex
Berwinkle, M. J.
Cutcher, J. N.
Donley, W. B.
Grimes, W. D.
Harper, W. T.
Harris, G. N.
Hartford, Martha B.
Jones, Doris C.
Larkin, T. J.
Long, William B.
Losey, Charles H.
Lowry, Wayne L.
Mahlie, Joe C.
Malin, A. J.
Martt, Judson W.
McDonnell Jr., Henry E.
Miller Jr., R. H.
Morrow, Harry
Newman, Anastasia G.
Parsons, Earl G.
Pettit, A. W.
Redline, John G.
Roberts, Jesse E.
Rogalski, Genevieve
Ross, Virginia
Seaman, D. E.
Steffin, Ralph J.
Stewart, Vernard W.
Strick, J. F.
Tattan, J. R.
Tournay, Helen M.
Warren, E. R.
Werner, Fred O.
<PAGE>
EXHIBIT 10-Q
AMENDMENT NO. 2 TO THE
-----------------------
AGREEMENT FOR THE TRANSFER OF EMPLOYEES
---------------------------------------
THIS AGREEMENT, by and between NKK CORPORATION, a Japanese corporation, having
its main office at 1-1-2, Marunouchi, Chiyoda-ku, Tokyo, Japan (herein called
"NKK") and NATIONAL STEEL CORPORATION, a Delaware corporation having its
principal office at 4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440, U.S.A.
(herein called "NSC"), is made effective December 16, 1997.
WITNESSETH:
WHEREAS, NKK and NSC entered into an Agreement for the Transfer of Employees
dated as of May 1, 1995 (the "Agreement"), pursuant to which certain employees
have been transferred from NKK to NSC for the purpose of providing technical
assistance, consulting services and business assistance to NSC; and
WHEREAS, NKK and NSC desire to extend the term of the Agreement for an
additional year, through 1998.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Capitalized terms as used herein and not defined herein shall have the same
meaning as set forth in the Agreement.
2. In accordance with Paragraph 15 of the Agreement, the term of the Agreement
is hereby extended for an additional Contract Year, from January 1, 1998
through December 31, 1998 (the "1998 Contract Year").
3. The Reimbursable Expenses Cap for the 1998 Contract Year shall be Seven
Million Dollars ($7,000,000).
4. Each party represents and warrants to the other that it has the requisite
power and authority to extend the Agreement, including, without limitation,
that all necessary corporate proceedings have been duly taken as required
under Paragraph 15 of the Agreement.
5. Except as amended hereby, all of the terms of the Agreement shall remain in
full force and effect.
<TABLE>
<CAPTION>
NATIONAL STEEL CORPORATION NKK CORPORATION
<S> <C>
By: By:
-------------------------------- --------------------------------
Title: Title:
----------------------------- -----------------------------
Date: Date:
------------------------------ ------------------------------
</TABLE>
<PAGE>
EXHIBIT 10-R
-----------------------
AGREEMENT
-----------------------
BY AND AMONG
AVATEX CORPORATION,
NKK CORPORATION,
NKK U.S.A. CORPORATION
and NATIONAL STEEL CORPORATION
-----------------------
Dated as of November 25, 1997
-----------------------
<PAGE>
AGREEMENT (this "Agreement"), dated as of November 25, 1997, by and among
AVATEX CORPORATION, a corporation organized and existing under the laws of the
State of Delaware ("Avatex"), NKK CORPORATION, a corporation organized and
existing under the laws of Japan ("NKK"), NKK U.S.A. CORPORATION, a wholly owned
subsidiary of NKK organized and existing under the laws of the State of Delaware
("NAC"), and NATIONAL STEEL CORPORATION, a corporation organized and existing
under the laws of the State of Delaware ("NSC"),
W I T N E S S E T H T H A T
-----------------------------
WHEREAS,
1. Pursuant to a Stock Purchase Agreement and related documents
dated as of August 22, 1984 (the "1984 Stock Purchase Agreement"), NKK
Corporation ("NKK") acquired 50% of the outstanding capital stock of National
Steel Corporation ("NSC") from National Intergroup, Inc. ("NII"). As a condition
to such purchase, NKK required NII to indemnify it and NSC and hold it and NSC
harmless against certain existing and contingent obligations and liabilities of
NSC relating to NSC's former Weirton Steel Division ("Weirton") which had been
sold by NSC (the "Weirton Sale") prior thereto and certain other liabilities of
NSC not related to its ongoing business. Accordingly, pursuant to the 1984 Stock
Purchase Agreement and the Weirton Liabilities Agreement (the "Weirton
Liabilities Agreement") dated as of August 22, 1984 and entered into by and
between NSC and NII, NII agreed to indemnify and hold NKK and NSC harmless from
and against these liabilities (the "Weirton Liabilities") which consist of,
among other things, pension, life, health insurance and other benefits for
employees and former employees of Weirton (the "Weirton Employee Related
Liabilities") as more specifically described in the Weirton Liabilities
Agreements (as defined herein) and certain environmental liabilities (the
"Indemnified Environmental Liabilities") as more specifically described in the
Weirton Liabilities Agreements.
2. NII established, and on December 24, 1985 transferred to, NII
Capital Corporation, a wholly-owned subsidiary of NII ("NCC"), its 50% interest
in the then outstanding capital stock of NSC and as a condition to such
transfer, NII and NCC entered into, with NKK and NSC, the NSC Stock Transfer
Agreement dated as of December 24, 1985 (the "Stock Transfer Agreement"),
pursuant to which NII and NCC agreed to be jointly and severally liable for the
Weirton Liabilities.
2
<PAGE>
3. NII, NCC, NKK, NAC and NSC entered into the Stock Purchase and
Recapitalization Agreement dated June 26, 1990 (the "1990 Stock Purchase
Agreement"). Pursuant thereto, among other things, ( NSC released NII from
indemnification of $146.6 million aggregate present value (the "Notional
Amount") of certain Weirton Employee Related Liabilities, ( NII exchanged a
portion of its NSC Common Stock for a new issue of Series B Preferred Stock (the
"B Preferred Stock"), (iii) the parties thereto agreed that, under the
circumstances and at the time specified therein either (a) NSC would pay to NCC
an amount equal to the excess, if any, of (i) the excess, if any, of (A) the
Notional Amount (adjusted as set forth in the 1990 Stock Purchase Agreement) (as
so adjusted, the "Adjusted Notional Amount") over (B) the then present value
(determined under the 1990 Stock Purchase Agreement) of certain amounts paid by
NSC in respect of the Weirton Employee Related Liabilities (the "Employee
Related Liabilities Payments") over (ii) the amount determined in accordance
with the 1990 Stock Purchase Agreement to be the then present value of the
remaining Weirton Employee Related Liabilities (the "Remaining Employee Related
Liabilities") or (b) NII and NCC would pay to NSC an amount equal to the excess,
if any, of (i) the Remaining Employee Related Liabilities over (ii) the excess,
if any, of (A) the Adjusted Notional Amount over (B) the Employee Related
Liabilities Payments and (iv) NII, NCC and NSC entered into the Amended and
Restated Weirton Liabilities Agreement and NCC, NAC and NSC entered into a put
agreement (the "Put Agreement"). The amount determined pursuant to clause
(iii)(a) or (iii)(b) of the preceding sentence is hereinafter referred to as the
RRCEO.
4. In 1993, NSC effected an initial public offering of its equity
securities (the "IPO"). Prior thereto, NII, NCC, NSC, NKK and NAC entered into
an agreement, dated February 3, 1993 (the "1993 Agreement"), pursuant to which,
among other things, NCC paid to NSC $10 million as a prepayment for the
Indemnified Environmental Liabilities. NSC also contributed approximately $68
million of the IPO proceeds to Plan 056 (as defined in the Weirton Liabilities
Agreement), thereby reducing the underfunding of Plan 056 and causing a portion
of NII's and NCC's indemnity obligations, in the amount of $68 million, to
become due and owing. NSC then redeemed 50% of the B Preferred Stock held by NCC
and paid the re-
3
<PAGE>
demption amount in the form of a release of NII and NCC from $68 million of
their indemnity obligations to NSC in respect of the Weirton Employee Related
Liabilities.
5. On October 28, 1993, NCC merged with NII, with NII being the
surviving entity. On October 12, 1994, NII changed its name to FoxMeyer Health
Corporation ("FoxMeyer").
6. On January 31, 1997, FoxMeyer changed its name to Avatex Corporation
("Avatex").
7. The Parties desire to provide for the resolution of all claims
against each other arising from the ownership by Avatex of the B Preferred
Stock, the Weirton Liabilities and the Indemnified Environmental Liabilities on
the terms and conditions hereinafter set forth, and deem such settlement to be
fair, reasonable and adequate and in the best interests of the Parties.
NOW, THEREFORE, on the basis of the representations, warranties, covenants
and agreements contained in this Agreement, and subject to the terms and
conditions of this agreement, it is hereby agreed as follows:
1. Definitions
Unless the context otherwise requires and unless otherwise defined herein,
terms used herein which are defined in the Weirton Liabilities Agreements are
used herein with the meanings therein described. As used herein, the following
terms shall have the meanings herein specified unless the context otherwise
requires. Defined terms in this Agreement shall include in the singular number
the plural and in the plural number the singular.
"Agreement" shall mean this Settlement Agreement as the same may from time
to time hereafter be modified, supplemented or amended.
"Avatex" shall mean Avatex Corporation, a Delaware corporation.
4
<PAGE>
"Avatex Group" shall mean (i) Avatex, (ii) Bull Moose Tube Company and
other former Subsidiaries of NSC which became Avatex's (but not NSC's)
Subsidiaries in the reorganization pursuant to which Avatex (then known as NII)
became the parent of NSC and (iii) any of Avatex's current Subsidiaries.
"Avatex Release" shall have the meaning set forth in Section 2.4 of this
Agreement.
"Avatex Releasees" shall have the meaning set forth in Section 2.4 of this
Agreement.
"Business Day" shall mean any day excluding Saturday, Sunday and any day
which shall be in New York City a legal holiday or a day on which banking
institutions are authorized or required by law or other government actions to
close.
"Claims" shall have the meaning set forth in Section 2.4 of this Agreement.
"Closing" shall have the meaning set forth in Section 6 of this Agreement.
"Closing Date" shall be the date of this Agreement.
"Consolidated Net Worth" shall mean, at any time, the sum of the amount by
which the total consolidated assets of Avatex and its Subsidiaries exceeds the
total consolidated liabilities of Avatex and its Subsidiaries at such time, as
determined in accordance with GAAP; it being agreed that the First Series
Cumulative Convertible Preferred Stock, stated price per share $50 (the "First
Series Preferred Stock"), and the Cumulative Exchangeable Series A Preferred
Stock, par value $5 per share (the "Series A Preferred Stock"), of Avatex and
all accrued dividends thereon shall not be deemed liabilities for purposes of
this definition.
"Damages" shall have the meaning set forth in Section 2.6(a) of this
Agreement.
"Environmental Insurance Claims" shall have the meaning set forth in
Section 2.5(a) of this Agreement.
5
<PAGE>
"Financial Advisor" shall mean The Gordian Group, L.P.
"GAAP" shall mean United States generally accepted accounting principles as
in effect on the date hereof.
"Indemnifiable Claims" shall have the meaning set forth in Section 2.6(a).
"Indemnified Party" shall have the meaning set forth in Section 2.6(b).
"Indemnified Environmental Liabilities" shall have the meaning set forth in
the whereas clause, paragraph one, of this Agreement.
"Material Adverse Effect" shall mean a material adverse effect upon (i) the
business, operations, properties, assets, prospects or condition (financial or
otherwise) of Avatex and its Subsidiaries, taken as a whole, or (ii) the ability
of Avatex to perform any of its obligations hereunder as they become due.
"NAC" shall mean NKK U.S.A. Corporation, a Delaware corporation.
"NKK" shall mean NKK Corporation, a Japan corporation.
"NSC" shall mean National Steel Corporation, a Delaware corporation.
"NKK, NAC, NSC Release" shall have the meaning set forth in Section 2.4 of
this Agreement.
"NSC Releasees" shall have the meaning set forth in Section 2.4 of this
Agreement.
"Person" shall mean and include any individual, partnership, joint venture,
firm, corporation, association, trust or other enterprise or any government or
political subdivision or agency, department or instrumentality thereof.
6
<PAGE>
"Released Avatex Liabilities" shall have the meaning set forth in Section
2.4 of this Agreement.
"Subsidiary" of any Person shall mean and include (i) any corporation 50%
or more of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person directly or
indirectly through Subsidiaries and (ii) any partnership, association, joint
venture or other entity in which such Person, directly or indirectly through
Subsidiaries, is either a general partner or has a 50% or more equity interest
at the time; provided, however, that Riverside Insurance Company Ltd.
("Riverside") shall not be considered a Subsidiary of Avatex.
"Weirton Liabilities Agreements" shall mean the 1984 Stock Purchase
Agreement, the Weirton Liabilities Agreement, the 1990 Stock Purchase Agreement,
the Amended and Restated Weirton Liabilities Agreement, the Stock Transfer
Agreement, the Put Agreement, the 1993 Agreement and all other agreements
entered into between one or more of the parties hereto in connection therewith.
2. Agreements
----------
2.1. Notwithstanding any contrary provision in the Certificate of
Designation of the B Preferred Stock ("Certificate of Designation"), NSC shall
redeem, and Avatex shall surrender to NSC, on the Closing Date, all B Preferred
Stock held by Avatex at such place as is designated by NSC, and Avatex shall not
be entitled to, as of or following the Closing Date, any dividends on the B
Preferred Stock, declared, accrued or otherwise, or any other payment in respect
of the redemption other than the Settlement Payment.
2.2. On the terms and subject to the conditions hereof, (i) at the
Closing, NSC shall pay to Avatex $59 million in cash payable by wire transfer or
delivery of other immediately available funds, and (ii) on each of the same day
as the Closing Date in the 3rd, 6th and 12th month after the Closing Date (if
not a Business Day, the
7
<PAGE>
immediately following day which is a Business Day) (each, a "Payment Date"), NSC
shall pay to Avatex an additional $2.5 million on the Payment Date in the 3rd
and 6th months after the Closing Date and $5 million on the Payment Date in the
12th month after the Closing Date (each, an "Additional Payment" and, together
with the $59 million payment, the "Settlement Payment"), in cash by wire
transfer or delivery of other immediately available funds. If Avatex is in
breach of its obligations set forth in Section 5.2 below and such breach shall
remain uncured for 30 days from the date such breach occurs, the Additional
Payments shall be reduced to $5,000,000 (the "Reduction") and, if all the
Additional Payments have been paid, Avatex shall pay to NSC in cash by wire
transfer or delivery of other immediately available funds on such 30th day
$5,000,000 (together with the Reduction, "Liquidated Damages"). The parties
acknowledge that if Avatex breaches Section 5.2 below, it would be difficult, if
not impossible to prove the amount of the damages to NSC and the parties hereto
agree that the Liquidated Damages constitute a fair and reasonable amount of
compensation, and is agreed to as a reasonable forecast of probable or actual
loss and not as a penalty.
2.3. At the Closing, NSC, Avatex and NAC agree that a number of Put
Consideration Shares (as defined in the Put Agreement) as calculated pursuant to
Section 3(d) of the Put Agreement shall be deemed to have been transferred, in
turn, from NSC to NAC to Avatex, and from Avatex to NSC for retirement in
partial consideration for the Settlement Payment.
2.4. At the Closing, in consideration of the Settlement Payment, Avatex
shall execute a release in the form annexed hereto as Exhibit A ("NKK, NAC, NSC
Release"), pursuant to which it shall release NKK, NAC, NSC and their respective
Subsidiaries, officers, directors and employees (the "NSC Releasees") from any
and all claims, causes of action or obligations (collectively, "Claims") owed to
Avatex by the NSC Releasees, whether known or presently unknown, foreseen or
presently unforeseen, asserted or not yet asserted, of any kind or character,
including and not limited to any Claims relating to the ownership by Avatex of
any securities of NSC or the Weirton Liabilities Agreements, including the
RRCEO, the Weirton Liabilities and any amounts that have or may
8
<PAGE>
become payable to Avatex pursuant to the 1993 Agreement in connection with NSC's
Recapitalization (as defined therein); provided, however, that NSC shall not be
released from the claims identified in Schedule 1 to Exhibit A hereto. NKK, NAC
and NSC shall execute a release in the form annexed hereto as Exhibit B (the
"Avatex Release"), pursuant to which they shall release Avatex, its
Subsidiaries, officers, directors and employees (the "Avatex Releasees") from
any and all obligations (the "Released Avatex Liabilities"), owed by the Avatex
Releasees to NKK, NAC and NSC, whether known or presently unknown, foreseen or
presently unforeseen, asserted or not yet asserted, of any kind or character,
including and not limited to any and all Claims arising out of the ownership by
NKK and/or NAC of any securities of NSC or the Weirton Liabilities Agreements,
including the RRCEO, the Weirton Liabilities and the Indemnified Environmental
Liabilities other than obligations identified in the Avatex Release.
Notwithstanding the foregoing, Avatex shall not be released from any claims
against Avatex and its Subsidiaries for contribution or joint liability that (a)
arise not from contract but from federal, state or local environmental laws and
regulations, (b) do not relate to an Indemnified Environmental Liability and (c)
relate to: (i) any site that is or was owned or operated by any member of the
Avatex Group or (ii) any off-site disposal by any member of the Avatex Group of
materials at any site owned or operated by a third party.
2.5. (a) Avatex hereby surrenders and assigns to NSC all rights it has
under any insurance policy incepting prior to January 1, 1987 with respect to
Environmental Insurance Claims. Environmental Insurance Claims shall mean claims
made under any such insurance policy, including but not limited to the
Indemnified Environmental Liabilities, for property damage or personal injury
caused or allegedly caused by the discharge of pollutants.
(b) (1) Avatex hereby surrenders and assigns to NSC all rights that it may
have to settlement proceeds under the Allocation Agreement dated September 26,
1997 (the "Allocation Agreement"), including but not limited to rights to
payments under settlements concluded with Continental Casualty Company, Evanston
Insurance Company, London Market Insurers, Fireman's Fund Insurance Company,
9
<PAGE>
Yasuda Fire & Marine Insurance Company of Europe, Ltd., and Ludgate Insurance
Company. Avatex further agrees that to the extent that the Allocation Agreement
calls for certain settlement funds received from insurance carriers to be paid
into a joint escrow account for the benefit of NSC and Avatex, that any such
funds received after the Closing Date shall be paid directly to NSC. Nothing in
this agreement shall affect any rights that Southwire Company ("Southwire") may
have under the Allocation Agreement or under any individual settlement agreement
with an insurance carrier.
(2) Avatex hereby surrenders and assigns to NSC all rights that it may
have to funds placed in an escrow account (the "Escrow Account") under the
Escrow Agreement dated August 20, 1997 (the "Escrow Agreement"), except that NSC
agrees that Avatex may authorize the payment of all of Avatex's outstanding
legal fees, disbursements, expert witness fees and other professional service
fees incurred in connection with National Steel Corp. v. Continental Casualty
Co., 95-C-52W (Circuit Court of Hancock County, West Virginia) (the "WVA
Litigation"), as of the Closing Date, from the Escrow Account in accordance with
paragraph 3 of the Escrow Agreement. After the Closing Date, NSC shall be solely
responsible for any outstanding WVA Litigation Expenses and Avatex and NSC
hereby authorize Weil, Gotshal & Manges LLP, as escrow agent, to pay the balance
of the Escrow Account to NSC.
(3) NSC hereby agrees that as of the Closing Date, Avatex shall have no
further obligation to pay legal and other expenses in connection with the WVA
Litigation. NSC shall assume Avatex's obligations to pay the legal and other
expenses of the action under cost sharing arrangements with LTV Steel Company
and with Southwire. Avatex shall remain a plaintiff in the action and shall
cooperate with NSC in the prosecution of the lawsuit.
(4) NSC, Avatex, and Southwire are in the process of negotiating a
settlement agreement with Insurance Company of North America ("INA") a/k/a The
Cigna Companies. Under the terms of the proposed settlement agreement, INA would
make two initial payments and would make certain additional payments thereafter
up to a limited amount, contingent upon certain events, and may agree to
reimburse Riverside, an Avatex subsidiary, those
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amounts which Riverside had paid to INA. In the event INA does not agree to so
reimburse Riverside, Avatex shall not make any claim to the monies otherwise
payable by INA under the proposed or any other settlement agreement (the "INA
Agreement"). Avatex hereby surrenders and assigns to NSC its rights to payment
under the INA Agreement (other than any reimbursement monies to Riverside) which
does not increase in any material respect the liabilities of Avatex hereunder.
Avatex also will sign the INA Agreement negotiated with INA and release all
Environmental Insurance Claims against INA under policies incepting prior to
January 1, 1987.
(5) NSC, Avatex and Southwire are in the process of negotiating a
settlement agreement with Everest Reinsurance Company ("Everest"). Avatex hereby
surrenders and assigns to NSC its rights to payment under the proposed or any
other settlement agreement (the "Everest Agreement") which does not increase in
any material respect the liabilities of Avatex hereunder. Avatex also will sign
the Everest Agreement negotiated with Everest and release all claims with
respect to policies issued by Prudential Reinsurance Company (Everest's
predecessor in interest) to NSC in 1978 and 1979.
(6) NSC, Avatex and Southwire are in the process of negotiating a
settlement agreement with Lexington Insurance Company ("Lexington"). Avatex
hereby surrenders and assigns to NSC its rights to payment under the proposed or
any other settlement agreement (the "Lexington Agreement") which does not
increase in any material respect the liabilities of Avatex hereunder. Avatex
also will sign the Lexington Agreement negotiated with Lexington and release all
claims with respect to policies issued by Lexington to Avatex or NSC prior to
January 1, 1987.
(7) NSC, Avatex and Southwire are in the process of negotiating a
settlement agreement with International Insurance Company ("International").
Avatex hereby agrees to surrender and assign to NSC its rights to payment under
the proposed or any other settlement agreement (the "International Agreement")
which does not increase in any material respect the liabilities of Avatex
hereunder. Avatex also will sign the International Agreement negotiated with
International and release all claims with respect to policies issued by
International to Avatex prior to January 1, 1987.
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(8) NSC, Avatex and Southwire are in the process of negotiating a
settlement agreement with National Union Fire Insurance Company ("National
Union"). Avatex hereby surrenders and assigns to NSC its rights to payment under
the proposed or any other settlement agreement (the "National Union Agreement")
which does not increase in any material respect the liabilities of Avatex
hereunder. Avatex also will sign the National Union Agreement negotiated with
National Union and release Environmental Insurance Claims against National Union
with respect to a specific excess policy issued to Avatex in 1984.
(9) Avatex shall cooperate with NSC in NSC's efforts to negotiate
settlements of Environmental Insurance Claims with the outstanding defendants in
the WVA Litigation, and with any excess insurance carriers. Avatex will sign all
necessary settlement agreements and release all carriers from Environmental
Insurance Claims, as may be reasonably requested by NSC. NSC agrees that if NSC
(i) asserts any environmental or related claim against any insurer which has a
potential reinsurance claim against Riverside and (ii) recovers any amounts on
such claim, whether by settlement, judgment or otherwise, then (x) if such
recovery is obtained through settlement or other consensual means, NSC shall
obtain the insurer's agreement to waive any reinsurance claim against Riverside
or pay through Avatex to Riverside Sufficient funds with which to pay the
reinsurance claim, or (y) if such recovery is otherwise obtained, NSC shall pay
through Avatex to Riverside sufficient funds with which to pay the reinsurance
claim.
(c) As between Avatex and NSC, NSC shall be solely responsible for payment
and discharge for: (i) any claims made by any insurer for indemnification
pursuant to indemnities made by NSC and Avatex in the settlement agreements
referenced in Section 2.5(b) above or in any future settlement agreements with
insurers regarding Environmental Insurance Claims, except for indemnification
claims relating to Bull Moose Tube Company, for which Avatex shall be solely
responsible; (ii) any claims against NSC for breach of any provision of the
settlement
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agreements referenced in Section 2.5(b) above or any future settlement
agreements with insurers regarding Environmental Insurance Claims; and (iii) any
counterclaims, arising out of acts or omissions of NSC, asserted against NSC or
Avatex in any action in or relating to the WVA Litigation or any action to
enforce any of the settlement agreements referenced in Section 2.5(b) above or
any future settlement agreements with insurers regarding Environmental Insurance
Claims; provided, however, with respect to each of Section 2.5(c)(i) and (ii),
NSC shall be liable only to the extent of any net proceeds received under such
settlement agreements.
(d) NSC acknowledges that, as between Avatex and NSC, NSC and its
Subsidiaries will be solely liable for paying and discharging any environmental
claims in connection with (i) any of the Indemnified Environmental Liabilities,
(ii) any site owned or operated by NSC, which has not been owned or operated by
any member of the Avatex Group, or (iii) any site receiving any off-site
disposal of materials from NSC, but in the case of subsection (iii) only with
respect to off-site disposal of materials received by such site from NSC. NSC
will support the dismissal of Avatex and its Subsidiaries from any legal action
involving any of the Indemnified Environmental Liabilities or any of the sites
described in clauses (i) or (ii) above except with respect to a site at which
Avatex or its Subsidiaries has disposed materials. For the purpose of the
foregoing two sentences, NSC shall mean NSC and its Subsidiaries, other than any
member of the Avatex Group.
2.6. (a) NSC shall in accordance with the provisions of this Section 2.6,
indemnify and hold harmless Avatex, against any and all losses, liabilities,
damages, demands, claims, actions, judgments or causes of action, assessments,
costs and expenses, including, without limitation, interest, penalties and
reasonable attorneys' fees (collectively, "Damages"), asserted against,
resulting to, imposed upon or incurred or suffered by Avatex (whether originally
asserted against or imposed on Avatex, by a third party or originally resulting
to, incurred or suffered by NSC, and asserted by NSC directly against Avatex),
if such Damages arise by reason of a breach by NSC of the agreements made by it
in Section 2.5 of this Agreement ("Indemnifiable Claims").
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(b) Avatex, when seeking indemnification under this Section 2.6 (the
"Indemnified Party") with respect to Indemnifiable Claims resulting from the
assertion of liability by third parties shall give notice to NSC within 20 days
of becoming aware of any such Indemnifiable Claim; provided, however, any delay
in such notice shall not release NSC from any of its obligations hereunder,
except where failure to give timely notice results in actual prejudice to the
rights of NSC hereunder. In case any such liability is asserted against Avatex,
and it accordingly notifies NSC thereof, NSC will promptly assume the defense
thereof with counsel reasonably satisfactory to Avatex.
(c) In the event that NSC, within twenty (20) days after receipt of a
notice pursuant to Section 2.6(b) of an Indemnifiable Claim, fails to assume the
defense of Avatex against such Indemnified Claim, Avatex shall have the right to
undertake the defense, compromise or settlement of such Indemnifiable Claim on
behalf of and for the account and risk of NSC.
2.7. Effective as of the Closing Date, Avatex shall cause the members of
the Pension Committee and the Investment Committee (as each such term is defined
in Section 3 of the Amended and Restated Weirton Liabilities Agreement) under
Plan 056 who are appointed by Avatex to resign from such committees. From and
after the Closing Date, NSC shall appoint, in its sole discretion, such
individuals to the Pension Committee and the Investment Committee as it shall
deem appropriate.
2.8. Immediately after the Closing Date, NSC shall pay to Avatex
$12,522.54 on account of the legal bills previously paid by Avatex. In addition,
NSC shall pay directly, in the ordinary course of NSC's business, any legal
bills properly payable for (a) "Weirton Liabilities Monitoring" services
performed by Thorp, Reed & Armstrong and (b) "NSC Workers' Compensation"
services performed by Frankovitch & Anetakis, whether such services were
performed before or after the Closing Date.
3. Representations and Warranties of Avatex
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Avatex represents and warrants to each of NSC, NKK and NAC as follows:
3.1. Organization. It is a corporation duly organized, validly existing
and in good standing, under the laws of Delaware.
3.2. Authority. It has all requisite corporate power and authority to
execute, deliver, and perform this Agreement and all other agreements,
instruments, and documents being or to be delivered by it hereunder or in
connection herewith. All necessary corporate proceedings have been duly taken to
authorize the execution, delivery, and performance by it of this Agreement. This
Agreement has been duly authorized, executed, and delivered by it and, assuming
due execution and delivery by all other parties thereto, upon execution and
delivery by it as contemplated hereby, will be its legal, valid, and binding
obligation, in each case enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium, or
similar laws affecting the rights of creditors generally and the availability of
equitable remedies (regardless of whether enforcement is sought in a proceeding
at law or in equity).
3.3. No Violation. Neither the execution and delivery of this Agreement
and all other agreements to be delivered hereunder, nor the consummation of the
transactions contemplated hereby nor its compliance with the terms hereof will
(i) violate any provision of its certificate of incorporation or bylaws; (ii)
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to it, or any of its properties or assets; or
(iii) violate, conflict with, result in a breach of any of the provisions of,
result in the loss of any material benefit under, constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under or give rise to any right of termination, acceleration or cancellation
with respect to, or result in the creation or imposition of any security
interest, lien, charge or other encumbrance upon any of its property or assets
under, any note, bond, loan, mortgage, indenture, obligation, deed of trust,
license, lease, agreement, permit, concession, grant, franchise, judgment,
injunction, order, decree or any security issued by it or any other instrument
to which it is a party or by which it or any of its properties or assets may be
bound or affected either directly or indirectly.
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3.4. Consents and Approvals of Governmental Authorities. It has complied
and will comply with all applicable laws and all applicable rules and
regulations of any governmental authority in connection with the execution and
delivery of this Agreement and all other agreements to be delivered hereunder.
It has obtained all governmental authorizations and approvals required with
respect to the execution and delivery of this Agreement and all other agreements
to be delivered hereunder and the consummation of the transactions contemplated
hereby or thereby. It is not required to submit any notice, report or other
filing with any governmental authority or to seek governmental authorization or
approval and no consent, approval or authorization of any governmental or
regulatory authority is required to be obtained by it, in either case.
3.5. Consents. Other than consents which have been obtained and are in
full force and effect, no consent of any Person or any group is necessary to the
consummation of the transactions contemplated by this Agreement and all other
agreements to be delivered hereunder, including, without limitation, consents
from parties to or beneficiaries of, loans, mortgages, notes, indentures,
material contracts, loan guarantees, material leases or other material
agreements, including pension agreements, collective bargaining agreements and
any other material agreements.
3.6. Solvency. Avatex is, and upon and after giving effect to
transactions to take place at the Closing shall be, Solvent. "Solvent" means
that: (a) Avatex's assets exceed its liabilities, at a fair valuation; it being
agreed that the First Series Preferred Stock and the Series A Preferred Stock
and all accrued dividends thereon shall not be deemed liabilities for purposes
of this section 3.6; (b) the present fair saleable value of Avatex's assets
exceeds the amount that will be required to pay its probable liability on its
existing debts as they become absolute and matured; (c) Avatex does not have
unreasonably small capital for the
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businesses in which it is engaged; and (d) Avatex has not incurred and does not
intend to incur obligations beyond its ability to pay as they mature.
3.7. Financial Statements. (a) Attached hereto as Exhibit C-1 are the
following financial statements (collectively the "Financial Statements"): (i)
audited consolidated balance sheets for the fiscal years ended March 31, 1996
and 1997 and statements of income, changes in stockholders' equity, and cash
flow as of and for the fiscal years ended March 31, 1995, 1996, and 1997 for
Avatex and its Subsidiaries; (ii) unaudited consolidated balance sheets and
statements of income and cash flow (the "Most Recent Financial Statements") as
of and for the six months ended September 30, 1997 (the "Most Recent Fiscal
Month End") for Avatex and its Subsidiaries and (iii) a pro forma consolidated
balance sheet of Avatex and its Subsidiaries, dated as of September 30, 1997,
giving effect to the transactions contemplated hereby and giving effect to the
settlement of the claims made against Avatex in the bankruptcy proceeding
involving certain Subsidiaries of Avatex, certified by the principal financial
officer of Avatex. The Financial Statements (including the notes thereto) have
been prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby and present fairly the financial condition of Avatex
and its Subsidiaries as of such dates and the results of operations of Avatex
and its Subsidiaries for such periods; in the case of the Most Recent Financial
Statements, subject to year-end and audit adjustments.
(b) Attached hereto as Exhibit C-2 are projections prepared by Avatex
demonstrating the projected cash flow of Avatex and its Subsidiaries after
giving effect to the transactions contemplated hereby, for the 12 month period
subsequent to the Closing Date, which projections are accompanied by a written
statement of the assumptions underlying the projections. Such projections have
been prepared on the basis of the assumptions accompanying them, and such
projections and assumptions, as of the date of preparation and as of the Closing
Date, are reasonable and represent Avatex's good faith estimate of its future
cash flow, it being understood that nothing contained in this Section 3.7(b)
shall be construed as a representation or warranty that such future cash flow
will in fact be achieved.
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3.8. Indebtedness; Liabilities; No Undisclosed Liabilities. Set forth in
Schedule 3.8 is a full and complete list of all indebtedness of Avatex for money
borrowed. Except as set forth in Schedule 3.8, Avatex is not in default in
respect of any agreement or instrument evidencing borrowed money and has not
requested any deferral of the payment of interest or principal due in respect
thereof. Neither Avatex nor any of its Subsidiaries has any liabilities or
obligations (absolute, accrued, contingent or otherwise) as of the date hereof
which are required by GAAP to be reflected but which are not reflected in the
Financial Statements, except for liabilities and obligations incurred in the
ordinary course of business and consistent with past practice.
3.9. Events Subsequent to Most Recent Fiscal Month End. Since September
30, 1997, there has not been any change that has resulted in a Material Adverse
Effect compared with the comparable prior period. Without limiting the
generality of the foregoing, since that date Avatex has not engaged in any
practice, taken any action, or entered into any transaction outside the ordinary
course of business.
3.10. Good Title to B Preferred Stock. Upon surrender of the B Preferred
Stock by Avatex pursuant to Section 2.1 above, NSC shall have reacquired the B
Preferred Stock free and clear of all claims, liens, charges, encumbrances,
pledges, options, security interests, shareholders' agreements and voting
trusts.
3.11. Absence of Litigation. There is not (i) any preliminary or
permanent injunction issued by any federal or state court of competent
jurisdiction or by any governmental or other regulatory or administrative agency
or commission or (ii) any litigation instituted by any federal agency or
administrative authority or any governmental authority which would, if
successful, enjoin or prohibit the consummation of the transactions contemplated
hereby or require rescission of this Agreement or any such transactions.
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3.12. Reports. Avatex has filed all required forms, reports and documents
with the Securities and Exchange Commission ("SEC") since January 1, 1997, all
of which are complete and complied and shall continue to comply in all material
respects with applicable requirements of the Securities Act of 1934, as amended
(the "1934 Act"). None of such forms, reports or documents, including without
limitation any financial statements or schedules included therein, contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
4. Representations and Warranties of NSC, NAC and NKK
Except as to Section 4.6, each of NSC, NAC and NKK represents and warrants
to Avatex as follows:
4.1. Organization. It is a corporation duly organized, validly existing
and in good standing, under the laws of Delaware, in the case of NSC and NAC,
and duly organized and validly existing under the laws of Japan, in the case of
NKK.
4.2. Authority. It has all requisite corporate power and authority to
execute, deliver, and perform this Agreement and all other agreements,
instruments, and documents being or to be delivered by it hereunder or in
connection herewith. All necessary corporate proceedings have been duly taken to
authorize the execution, delivery, and performance by it of this Agreement. This
Agreement has been duly authorized, executed, and delivered by it and, assuming
due execution and delivery by all other parties thereto, upon execution and
delivery by it as contemplated hereby, will be its legal, valid, and binding
obligation, in each case enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium, or
similar laws affecting the rights of creditors generally and the availability of
equitable remedies (regardless of whether enforcement is sought in a proceeding
at law or in equity).
4.3. No Violation. Neither the execution and delivery of this Agreement
and all other agreements to be
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delivered hereunder, nor the consummation of the transactions contemplated
hereby nor its compliance with the terms hereof will (i) violate any provision
of its certificate of incorporation or bylaws, in the case of NSC and NAC, or
certificate of incorporation (teikan), in the case of NKK; (ii) violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to it, or any of its properties or assets; or (iii)
violate, conflict with, result in a breach of any of the provisions of, result
in the loss of any material benefit under, constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under
or give rise to any right of termination, acceleration or cancellation with
respect to, or result in the creation or imposition of any security interest,
lien, charge or other encumbrance upon any of its property or assets under any
note, bond, loan, mortgage, indenture, obligation, deed of trust, license,
lease, agreement, permit, concession, grant, franchise, judgment, injunction,
order, decree or any security issued by it or any other instrument to which it
is a party or by which it or any of its properties or assets may be bound or
affected either directly or indirectly.
4.4. Consents and Approvals of Governmental Authorities. It has
complied and will comply with all applicable laws and all applicable rules and
regulations of any governmental authority in connection with the execution and
delivery of this Agreement and all other agreements to be delivered hereunder.
It has obtained all governmental authorizations and approvals required with
respect to the execution and delivery of this Agreement and all other agreements
to be delivered hereunder and the consummation of the transactions contemplated
hereby or thereby. It is not required to submit any notice, report or other
filing with any governmental authority or to seek governmental authorization or
approval and no consent, approval or authorization of any governmental or
regulatory authority is required to be obtained by it, in either case.
4.5. Consents. Other than consents which have been obtained and are
in full force and effect, no consent of any Person or any group is necessary to
the consummation of the transactions contemplated by this Agreement and all
other agreements to be delivered hereunder,
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including, without limitation, consents from parties to or beneficiaries of,
loans, mortgages, notes, indentures, material contracts, loan guarantees,
material leases or other material agreements, including pension agreements,
collective bargaining agreements and any other material agreements.
4.6. Events Subsequent to Most Recent Fiscal Month End. NSC
represents and warrants that since September 30, 1997, there has not been any
change that has resulted in a material adverse effect upon (i) the business,
operations, properties, assets, prospects or condition (financial or otherwise)
of NSC and its Subsidiaries, taken as a whole or (ii) the ability of NSC to
perform any of its obligations hereunder as they become due, compared with the
comparable prior period. Without limiting the generality of the foregoing, since
that date NSC has not engaged in any practice, taken any action, or entered into
any transaction outside the ordinary course of business.
4.7. Absence of Litigation. There is not (i) any preliminary or
permanent injunction issued by any federal or state court of competent
jurisdiction or by any governmental or other regulatory or administrative agency
or commission or (ii) any litigation instituted by any federal agency or
administrative authority or any governmental authority which would, if
successful, enjoin or prohibit the consummation of the transactions contemplated
hereby or require rescission of this Agreement or any such transactions.
5. Covenants
Avatex covenants and agrees that on and after the Closing Date and
until the same day as the day of the Closing Date in the 15th month after the
month in which the Closing Date occurs:
5.1. Information Covenants. Avatex will furnish to NSC:
(a) Quarterly Financial Statements. Within 45 days after the
close of each quarterly accounting period in each fiscal year of Avatex, the
consolidated balance sheet of Avatex and its Subsidiaries, as at
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the end of such quarterly period and the related consolidated statements of
income, cash flow and retained earnings for such quarterly period and for the
elapsed portion of the fiscal year ended with the last day of such quarterly
period, and in each case setting forth comparative figures for the related
periods in the prior fiscal year.
(b) Annual Financial Statements. Within 90 days after the close
of each fiscal year of Avatex, the consolidated balance sheet of Avatex and its
Subsidiaries, as at the end of such fiscal year, and the related consolidated
statements of income, cash flow and retained earnings for such fiscal year,
setting forth comparative figures for the preceding fiscal year and certified by
its independent certified public accountants.
(c) Management Letters. Promptly after Avatex's receipt
thereof, a copy of any "management letter" or other material report received by
Avatex from its certified public accountants.
(d) Dividends and Stock Payments. No less than 15 days prior
thereto, notification of any action to be voted upon by the Board of Directors
of Avatex to declare or pay any cash dividend on or cause to be purchased for
cash by Avatex or any of its Subsidiaries any capital stock of Avatex.
(e) Officer's Certificates. At the time of the delivery of the
financial statements under clauses (a) and (b) above, a certificate of the chief
financial officer of Avatex which certifies (x) that such financial statements
fairly present the financial condition and the results of operations of Avatex
and its Subsidiaries on the dates and for the periods indicated, subject, in the
case of interim financial statements, to normally recurring year-end adjustments
and (y) that such officer has reviewed the terms of this Agreement and has made,
or caused to be made under his or her supervision, a review in reasonable detail
of the business and condition of Avatex and its Subsidiaries during the
accounting period covered by such financial statements, and that as a result of
such review such officer has concluded that no breach of any covenant hereunder
has occurred during the
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period commencing at the beginning of the accounting period covered by the
financial statements accompanied by such certificate and ending on the date of
such certificate or, if any breach of any covenant hereunder has occurred,
specifying the nature and extent thereof and, if continuing, the action Avatex
proposes to take in respect thereof.
(f) Notice of Breach or Litigation. Promptly and in any event within ten
Business Days after Avatex or any of its Subsidiaries obtains knowledge thereof,
notice of (i) the occurrence of any breach of this Section 5 and (ii) any
litigation or governmental proceeding pending or threatened against Avatex or
any of its Subsidiaries which would be likely to result in a Material Adverse
Effect.
(g) SEC Filings. Promptly upon filing thereof, copies of all regular and
periodic financial information, proxy materials and other information and
reports, if any, which Avatex shall file with the SEC or any governmental
agencies substituted therefor or which Avatex shall send to its stockholders.
(h) Other Information. From time to time, such other information or
documents (financial or otherwise) as NSC, NKK or NAC may reasonably request.
5.2. Other Covenants
Consolidated Net Worth. The Consolidated Net Worth of Avatex shall at all
times be greater than or equal to $15,000,000.
6. The Closing
6.1. Obligations of All Parties. Simultaneous with the execution of this
Agreement, the following documents were delivered:
(a) Solvency Opinion. The solvency opinion by the Financial Advisor,
satisfactory to all parties hereto, was duly executed and delivered by the
Financial Advisor.
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(b) Opinions. NSC, NKK and NAC received the written opinion, dated the
Closing Date, of Thorp, Reed & Armstrong, special counsel to Avatex, in the form
set forth in Exhibit D-1 hereto, and of the general counsel to Avatex, in the
form set forth in Exhibit D-2 hereto.
(c) Opinions. Avatex received the written opinions, dated the Closing
Date, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to NKK and NAC, in
the form set forth in Exhibit E hereto, and of general counsel of NSC, in the
form set forth in Exhibit F hereto.
7. Miscellaneous.
7.1. Further Actions. At any time and from time to time each party
agrees, at its expense, to take such actions and to execute and deliver such
documents as may be reasonably necessary to effectuate the purposes of this
Agreement.
7.2 Submission to Jurisdiction. Solely for the purposes of disputes
among the parties hereto, the parties hereby consent and submit to personal
jurisdiction of the Federal District Court in the State of Delaware and of any
other court in Delaware having jurisdiction over any controversy, and to service
of process upon them in accordance with the rules and statutes governing service
of process, solely in connection with actions or proceedings involving the
parties to and relating to this Agreement. Each of the parties hereto appoints
CT Corporation Systems as its agent for the purpose of receiving and accepting
service of process on its behalf.
7.3. Survival. Except for Section 3.10 of this Agreement, which shall
survive the Closing Date and continue in full force and effect without time
limit, all representations, warranties, covenants and agreements made by the
parties hereto shall survive the Closing Date for a period of 15 months. There
are no representations, warranties, covenants or agreements by or among the
parties and relating to the subject matter of this Agreement, except as
contained in this Agreement.
7.4. Entire Agreement; Modification. This Agreement, and the exhibits
and schedules hereto, set forth the entire understanding of the parties with
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respect to the subject matter hereof, supersede all existing agreements and
understandings among them concerning such subject matter, and may be modified
only by a written instrument duly executed by each party. With respect to the
recitals, to the extent that there are inconsistencies between the description
of the terms of any of the Weirton Liabilities Agreements with the actual
Weirton Liabilities Agreements, the Weirton Liabilities Agreements shall govern.
The Weirton Liabilities Agreements shall not survive the execution and delivery
of this Agreement.
7.5 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be mailed by
certified mail, return receipt requested, or delivered against receipt to the
party to whom it is to be given at the address of such party set forth below:
If to NSC:
National Steel Corporation
4100 Edison Lakes Parkway
Mishawaka, IN 46545
Attention: Senior Vice President and
General Counsel; and
Vice President-Finance,
Fax: 219-273-7868
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Attention: Edmund C. Duffy, Esq.
Fax: 212-735-2000
If to Avatex:
Avatex Corporation
5910 North Central Expressway
Suite 1780
Dallas, TX 75206
Attention: Senior Vice President, Chief
Financial Officer,
General Counsel and Secretary
Fax: 214-365-7499
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with a copy to Thorp, Reed & Armstrong
One Riverfront Center
Pittsburgh, PA 15222
Attn: Joseph Shuman, Esq.
Fax: 412-394-2555
If to NKK:
NKK Corporation
1-1-2 Marunouchi Chiyoda-ku
Tokyo 100, Japan
Attention: Assistant General Manager
North American Business
Steel Division
Fax: 011-81-3-3214-8426
with a copy to Skadden, Arps, Slate,
Meagher & Flom LLP
at the address set forth above
If to NAC:
NKK U.S.A. Corporation
1013 Centre Road
Wilmington, New Castle County
DE 19805
Attention: Secretary
with a copy to:
NKK and
Skadden, Arps, Slate, Meagher & Flom LLP
at the addresses set forth above
7.6. Waiver. Any waiver by any party of a breach of any provision of
this Agreement must be in writing and shall not operate as or be construed to be
a waiver of any other breach of such provision or of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term of
this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement.
26
<PAGE>
7.7. Binding Effect; Assignment. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and the
respective successors and assigns of the parties hereto. No party may assign or
otherwise transfer any of its rights under this Agreement without the written
consent of all other parties hereto.
7.8. No Third Party Beneficiaries. This Agreement does not create,
and shall not be construed as creating, any rights enforceable by any person not
a party to this Agreement.
7.9. Severability. If any provision of this Agreement is invalid,
illegal, or unenforceable, the balance of this Agreement shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
7.10. Headings. The headings in this Agreement are solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
7.11. Counterparts; Governing Law. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument. It shall be
governed by and construed in accordance with the laws of the State of Delaware,
without giving effect to its principles of conflict of laws.
7.12. Expenses. Except as otherwise provided herein, each party
hereto shall pay its own costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby.
27
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
AVATEX CORPORATION
By:___________________________
Name:
Title:
NKK CORPORATION
By:___________________________
Name:
Title:
NKK U.S.A. CORPORATION
By:___________________________
Name:
Title:
NATIONAL STEEL CORPORATION
By:___________________________
Name:
Title:
28
<PAGE>
EXHIBIT 10-V
AMENDMENT NO. TWO TO THE
1993 NATIONAL STEEL CORPORATION
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Amendment made this 9th day of February, 1998, to the 1993 National Steel
Corporation Non-Employee Directors' Stock Option Plan (hereinafter called the
"Plan").
WITNESSETH
WHEREAS, National Steel Corporation, a Delaware corporation (hereinafter
called the "Company"), has established the Plan;
WHEREAS, the Company maintains the Plan to assist it in attracting and
retaining the services of certain non-employee directors by providing such
persons with the option to purchase shares (the "Option") of Class B Common
Stock of the Company, $.01 par value;
WHEREAS, certain non-employee directors have been granted such an option
under the Plan, and other such Options may continue to be granted from time to
time under the Plan;
WHEREAS, the Company wishes to amend the Plan;
WHEREAS, the Board (as defined in Section 2.01.3 of the Plan) has the
authority under Section 10.01 of the Plan to amend the Plan from time to time.
NOW, THEREFORE, the Plan is amended effective as of January 1, 1998, as
follows:
I. Section 6.01 of the Plan is hereby amended by replacing the current
Section 6.01 with the following:
6.01 General. Subject to the terms of the Plan and any applicable Award
Agreement, Awards may be issued as set forth in this Section 6. In
addition, the Committee may impose on any Award or the exercise
thereof, at the date of grant or thereafter (subject to the terms of
Section 10.01), such additional terms and conditions, not inconsistent
with the provisions of the Plan, as the Committee shall determine,
including terms requiring forfeiture of Awards in the event the
Participant ceases service as a director of the Company. Except as
required by applicable law, Awards shall be granted for no
consideration other than prior and future services.
II. The introduction of Section 6.02 of the Plan is hereby amended by
replacing the current introduction with the following
<PAGE>
6.02 Options. The Committee is authorized to grant Options to Participants
on the following terms and conditions.
III. Sections 6.02(iii) and (iv) of the Plan are hereby amended by
replacing the current Sections 6.02(iii) and (iv) with the following:
(iii) Exerciseability. The Committee shall determine the time or times at
which an Option may be exercised in whole or in part.
(iv) Methods of Exercise. The Committee shall determine the methods by
which the exercise price of any Option may be paid or deemed to be
paid, and the form of such payment, including, without limitation,
cash, Shares, or other property (including notes or other contractual
obligations of Participants to make payment on a deferred basis to
the extent permitted by law) or any combination thereof, having a
fair market value equal to the exercise price,
IV. Section 10.01 of the Plan is hereby amended by adding the following
new sentence at the end thereof:
The Committee may waive any conditions or rights under, amend any
terms of, or amend, alter, suspend, discontinue or terminate any
Award theretofore granted, prospectively or retrospectively;
provided, however, that without the consent of a Participant, no
amendment, alteration, suspension, discontinuation or termination of
any Award may materially and adversely affect the rights of such
Participant under any Award theretofore granted to him.
<PAGE>
EXHIBIT 10-CC
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is dated and effective as of
the 1st day of February, 1998 ("Effective Date"), and is by and between National
Steel Corporation, a Delaware corporation (the "Company"), and Robert G. Pheanis
("Executive"). In consideration of the mutual covenants contained herein, and
other good and valuable consideration (including the Termination Benefits and
the Special Termination Benefits) the receipt and adequacy of which the Company
and Executive each hereby acknowledge, the Company and Executive hereby agree as
follows:
1. Employment and Term
-------------------
Executive is or may be employed by the Company pursuant to one or more
contracts or letter agreements (the "Prior Agreement"). The Company hereby
agrees to employ Executive as a Vice President of the Company and Executive
hereby agrees to accept such employment and serve in such capacity on a full-
time basis during the Term and upon the terms and conditions set forth in this
Amended and Restated Employment Agreement (this "Agreement"). Executive shall
report to an officer of the Company designated by the Company's Chief Executive
Officer and Executive will have such responsibilities, duties and authorities as
are determined by the officer to whom Executive reports. The term of employment
of Executive under this Agreement shall be the period commencing on the
Effective Date and terminating on June 1, 1999, unless extended or unless sooner
terminated by the Company or Executive as hereinafter provided (the "Term"). On
June 1, 1999, the Term shall be automatically extended on a month to month basis
without further action by either party unless either party hereto notifies the
other party that such extension shall not occur. In the event either party
notifies the other party that such extension shall not occur, or continue to
occur, Executive's employment shall terminate automatically at the end of the
initial Term or any extended Term, as the case may be. "Term" shall mean the
initial term as well as any extension thereof. In the event the Company notifies
Executive that the initial Term, or any extended Term, shall not be further
extended, such notification shall be deemed to be a termination of Executive's
employment without Cause. The respective rights and obligations of the parties
hereunder shall survive any termination of employment to the extent necessary to
achieve the intended preservation of rights and obligations.
-1-
<PAGE>
2. Salary and Annual Incentive Compensation.
----------------------------------------
Executive's annual base salary as in effect on the Effective Date shall be
the Executive's annual base salary hereunder as of the Effective Date, payable
in consecutive equal monthly installments. The term "base salary" as utilized in
this Agreement shall refer to the then current base salary as adjusted from time
to time. Executive shall also be eligible to receive annual incentive
compensation pursuant to the Company's Management Incentive Compensation Program
or any successor plan (the "MICP") during the Term and as determined in
accordance with the terms and conditions of the MICP. Executive's MICP target
annual incentive compensation for 1998 shall be 35% of base salary. The Company
will maintain in effect, for each year during the Term, the MICP or an
equivalent plan under which Executive will be eligible for an award not less
than the prior year opportunity level available to Executive. Any such annual
incentive compensation payable to Executive shall be paid in accordance with the
Company's usual practices with respect to payment of incentive compensation of
senior executives.
3. Benefit and Compensation Plans.
------------------------------
(a) Executive shall be entitled during the Term to participate in all
executive compensation plans, and other employee and executive benefits,
practices, policies and programs of the Company, as presently in effect or as
they may be modified or added to by the Company from time to time ("Benefit
Plans"); and during the Term, the Company will pay the cost of financial and
tax planning services, up to a maximum amount in effect on the Effective Date of
this Agreement. Such services shall be furnished by a provider selected by
Executive.
(b) During the Term, the Company will provide Executive with coverage by
long-term disability insurance and benefits; and group or individual life
insurance or a combination thereof, all in accordance with the plans, policies,
programs and arrangements as presently in effect or as they may be modified or
added to by the Company from time to time.
(c) During the Term, Executive will participate in the Company's Executive
Deferred Compensation Plan, ERISA Parity Plan, and any other supplemental
retirement plans, benefits, practices, programs, or policies of the Company, as
in effect on the Effective Date or as they may be modified or added to by the
Company from time to time ("Compensation Plans").
4. Non-Compete Agreement.
---------------------
Executive hereby agrees that if Executive voluntarily terminates his
employment with the Company, then for a period of one (1) year after the Date of
Termination, but in any event only as long as the Company satisfies its
obligations
-2-
<PAGE>
under this Agreement, (the "Restricted Period"), Executive will not
engage (either as owner, investor, partner, stockholder, employer, employee or
director) in any "Competitive Business" in the continental United States (the
"Territory"). The term "Competitive Business" means the making, producing,
manufacturing or coating of steel products which products are in direct
competition with steel products that are made, produced, manufactured or coated
by the Company on the Date of Termination. It is agreed that the ownership of
not more than one percent of the equity securities of any company having
securities listed on an exchange or regularly traded in the over-the-counter
market shall not be deemed inconsistent with this Section 4. If any court of
competent jurisdiction shall deem any obligation of this Section 4 too lengthy
or the Territory too extensive, the other provisions of this Section shall
nevertheless stand, the Restricted Period shall be deemed to be the longest
period such court deems not to be too lengthy and the Territory shall be deemed
to comprise the portion of the United States east of the Mississippi River (or
such other portion of the United States that such court deems not to be too
extensive).
5. Non-Inducement
--------------
Executive hereby agrees that for a period commencing with the Date of
Termination and ending on the second anniversary of the Date of Termination,
Executive shall not induce, or attempt to influence, any employee of the Company
who reports either directly to the Company's Chief Executive Officer or to
another employee who reports directly to the Company's Chief Executive Officer,
to terminate his employment with the Company.
6. Non-Disclosure
--------------
For a period commencing on the Date of Termination and ending on the fifth
anniversary of the Date of Termination, Executive shall keep secret and retain
in strictest confidence, and shall not furnish, make available or disclose to
any third party or use for the benefit of himself or any third party, any
Confidential Information. As used in this Section, "Confidential Information"
shall mean any information relating to the business or affairs of the Company,
including but not limited to information relating to financial statements,
customer identities, customer needs, potential customers, employees, suppliers,
servicing methods, equipment, programs, strategies and information, analyses,
profit margins or other proprietary information used by the Company in
connection with its business; provided, however, that Confidential Information
shall not include any information which is in the public domain or becomes known
in the industry through no wrongful act on the part of Executive. Executive
acknowledges that the Confidential Information is vital, sensitive, confidential
and proprietary to the Company.
-3-
<PAGE>
7. No Unfavorable Publicity
------------------------
Subsequent to Executive's Date of Termination, Executive agrees not to make
statements or communications and not to issue any written communications or
release any other written materials which would likely be materially damaging to
the Company's reputation or standing, whether in the investor or financial
community, the steel industry or otherwise.
8. Cooperation With the Company
----------------------------
Executive agrees to cooperate with the Company for a reasonable period of time
after the Term of this Agreement by making himself available to testify on
behalf of the Company, in any action, suit, or proceeding. In addition, for a
reasonable period of time, Executive agrees to be available at reasonable times
to meet and consult with the Company on matters reasonably within the scope of
his prior duties with the Company so as to facilitate a transition to his
successor. The Company agrees to reimburse Executive, on an after-tax basis,
for all expenses actually incurred in connection with his provision of testimony
or consulting assistance.
9. Release of Employment Claims
----------------------------
Executive and the Company agree that in the event Executive receives Special
Termination Benefits (as defined in Section 11(d)), he and the Company will
execute a mutual release agreement releasing any and all claims which either of
them have or may have against the other arising out of Executive's employment
(other than enforcement of this Agreement). Executive agrees that in the event
his employment with the Company terminates or is terminated, the Executive's
sole and exclusive remedy shall be, and the Company's liability shall be limited
to, damages equal to the payments and benefits to be provided by the Company
hereunder and to payment or reimbursement of Executive's costs and expenses in
accordance with Section 13(b).
10. Remedies
--------
Executive acknowledges and agrees that the covenants set forth in Sections 4
through 8 are reasonable and necessary for the protection of the Company's
business interests, that irreparable injury will result to the Company if
Executive breaches any of the terms of such covenants, and that in the event of
Executive's actual or threatened breach of any such covenants, the Company will
have no adequate remedy at law. Executive accordingly agrees that in the event
of any actual or threatened breach by him of any of such covenants, the Company
shall be entitled to immediate temporary injunctive and other equitable relief,
without the necessity of showing actual monetary damages, subject to hearing as
soon thereafter as possible. Nothing contained herein shall be construed as
prohibiting the Company from pursuing any other remedies available to it for
such breach or threatened breach,
-4-
<PAGE>
including the recovery of any damages which it is able to prove.
11. Termination of Employment.
(a) Termination Due to Death or Disability. Upon an Executive's Date of
Termination during the Term due to death or Disability, the Company will pay
Executive (or his beneficiaries, dependents or estate), and Executive (or his
beneficiaries, dependents or estate) will be entitled to receive, the
Termination Benefits (as defined in Section 11(c)).
(b) Other Termination. Upon Executive's Date of Termination, either by the
Company without Cause, or by Executive for any reason other than death or
Disability, the Company shall pay Executive (or his beneficiaries, dependents or
estate), and Executive (or his beneficiaries, dependents or estate) shall be
entitled to receive, the Termination Benefits (as defined in Section 11(c)) and
the Special Termination Benefits (as defined in Section 11(d)).
(c) "Termination Benefits". "Termination Benefits" means the aggregate of
all of the following:
(i) A single sum cash payment by the Company to Executive within thirty
(30) days after the Date of Termination of
(A) Executive's then current annual base salary pro rata through the Date
of Termination to the extent not theretofore paid; (B) the product of (y) the
greater of (aa) the average annual incentive compensation paid to Executive in
the three fiscal years immediately preceding the fiscal year of the Date of
Termination (or all fiscal years Executive was employed if less than three, and
annualized in the event Executive was not employed by the Company for the whole
of any such fiscal year), and (bb) Executive's target incentive compensation
percentage payable under the MICP multiplied by Executive's then current base
salary and (z) a fraction, the numerator of which is the number of days in the
current fiscal year through the Date of Termination, and the denominator of
which is 365; (C) any accrued vacation pay to the extent not theretofore paid;
and (D) Reimbursement of reasonable business expenses and disbursements incurred
by Executive prior to such Date of Termination.
(ii) All vested amounts owing or accrued at the Date of Termination under
any compensation and benefit plans, programs, and arrangements set forth or
referred to in this Agreement, including, but not limited to, Sections 2 and 3
hereof; and if the Date of Termination is due to Disability or death, Executive
or his estate or other beneficiaries shall receive the Disability or death
benefits described in Section 3(b).
(iii) Executive shall be eligible to receive incentive compensation based
on
-5-
<PAGE>
the Company's performance for the preceding year (to the extent not previously
paid), if and when any such incentive compensation for such year is paid to
eligible employees generally pursuant to the Company's MICP.
(d) "Special Termination Benefits". "Special Termination Benefits" means
the aggregate of all of the following:
(i) The Company shall pay to Executive, in a single sum in cash within
thirty (30) days after the Date of Termination, an amount equal to (y) one times
the Executive's annual base salary (immediately preceding the Date of
Termination), plus (z) in the event a Change of Control has previously occurred,
an additional amount equal to one times the greater of (aa) the average annual
incentive compensation paid to Executive in the three fiscal years immediately
preceding the fiscal year of the Date of Termination (or all fiscal years
Executive was employed if less than three, and annualized in the event Executive
was not employed by the Company for the whole of any such fiscal year), or (bb)
Executive's most recent target incentive compensation percentage payable under
the MICP multiplied by his then current base salary; provided, however, that
notwithstanding the foregoing, in the event a Change of Control has previously
occurred, the maximum aggregate amount payable under this Section 11(d)(i) shall
not exceed three times the Executive's annual base salary (immediately preceding
the Date of Termination).
(ii) For two years after Executive's Date of Termination, the Company
shall continue life insurance benefits and financial and tax planning benefits
to Executive equal to the life insurance benefits and financial and tax planning
benefits that would have been provided to him if Executive's employment had not
been terminated.
(iii) Stock options and stock appreciation rights held by Executive on his
Date of Termination will immediately become fully vested and exercisable and
shall remain fully exercisable for a period of two years following his Date of
Termination; such stock options and stock appreciation rights shall otherwise be
governed by the plans and programs (and the agreements and other documents
thereunder) pursuant to which such stock options and stock appreciation rights
were granted; provided, however, that notwithstanding the foregoing, no stock
options or stock appreciation rights may be exercised until at least six months
after the date of grant.
(iv) In the event Executive terminates his employment after September 30,
1998, upon at least 30 days' notice, or if his employment is terminated by the
Company at any time without Cause, in each case prior to his having at least
five years of service for vesting purposes under the National Steel Corporation
Retirement Program (including any successor thereto), the Company shall provide
Executive the retirement benefits which he would have been entitled to receive
pursuant to the Retirement Plan and the Company's ERISA Parity Plan had his
employment continued, at the rate of compensation in effect immediately prior to
the termination
-6-
<PAGE>
of his employment, until he had five years of service for vesting purposes under
the Retirement Plan. Executive's retirement benefit shall be calculated (i)
without regard to the limitations on earnings taken into account for purposes of
calculation of accrued benefits under section 401(a)(17) of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) without regard to any applicable
limitations on maximum benefits under section 415 of the Code. The retirement
benefit or its actuarially equivalent value shall be payable beginning as of the
first day of the month following the month in which occurs the later of
Executive's 65th birthday or termination of employment, in the form of the
normal form of benefit under the Retirement Plan or such optional form of
benefit as Executive elects from among the forms of payment then available under
the Retirement Plan.
12. Special Provisions on Change of Control.
In the event of a Change of Control, the provisions of this Section shall
apply, and the Agreement shall be interpreted and applied consistently with the
provisions of this Section.
(a) Benefit and Compensation Plans. In no event shall Benefit Plans or
Compensation Plans provide Executive with benefits or compensation, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company for Executive under Benefit Plans or Compensation Plans
as in effect at any time during the 120-day period immediately preceding the
Change of Control or if more favorable to Executive, those provided generally at
any time after the Change of Control to other peer executives of the Company. If
after a Change of Control (i) Executive terminates his employment with the
Company for any reason, or (ii) Executive's employment with the Company is
terminated without Cause, the actuarially equivalent value of nonqualified
unfunded retirement benefits under any plan, program or arrangement of the
Company shall be paid to Executive in a single sum within thirty (30) days after
Executive is no longer employed by the Company.
(b) Tax Matters. If Executive becomes entitled to one or more payments
(with a "payment" including, without limitation, any Termination Benefits,
Special Termination Benefits, the vesting of any stock option or stock
appreciation right or other cash or non-cash benefit or property), whether
pursuant to the terms of this Agreement or any other plan, program, policy,
practice, arrangement, or agreement with the Company (the "Benefit Payments"),
which are or may become subject to the tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that
may hereafter be imposed) (the "Excise Tax"), the Company shall indemnify and
hold the Executive harmless on an after-tax basis from the Excise Tax and any
additional federal, state, and local income tax, employment tax and penalties
and interest thereon, and the Company shall pay to Executive at the time of the
Benefit Payments (or at the time the Excise Tax is imposed, if earlier) an
additional amount which shall equal and include the Excise Tax,
-7-
<PAGE>
reimbursement for any penalties and interest that may accrue in respect of any
Excise Tax (including any penalties or interest thereon) and any federal, state
and local income or employment tax and Excise Tax on such additional amount,
including any penalties or interest thereon (collectively, the "Additional
Amounts"), but before reduction for any federal, state, or local income or
employment tax on the Benefit Payments, so that after payment of the previously
mentioned taxes (including penalties and interest thereon) Executive retains an
amount equal to the sum of (a) the Benefit Payments, and (b) an amount equal to
the product of any deductions disallowed for federal, state, or local income tax
purposes because of the inclusion of the Additional Amounts in Executive's
adjusted gross income multiplied by the highest applicable marginal rate of
federal, state, or local income taxation, respectively, for the calendar year in
which payment of the Additional Amounts is to be made.
The Benefit Payments shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments"
within the meaning of Section 280G(b)(1) of the Code shall be treated as subject
to the Excise Tax, unless, and except to the extent independent legal counsel or
independent compensation consultants or independent certified public accountants
of nationally recognized standing mutually selected by the Company and Executive
("Independent Advisors") provide a written opinion acceptable to Executive that
the Benefit Payments (in whole or in part) are not subject to Excise Tax because
they do not constitute parachute payments, or such excess parachute payments (in
whole or in part) represent reasonable compensation for services actually
rendered within the meaning of Section 280G(b)(4) of the Code in excess of the
base amount within the meaning of Section 280G(b)(3) of the Code or are
otherwise not subject to the Excise Tax.
For purposes of determining the amount of the Additional Amounts, Executive
shall be deemed (A) to pay federal income taxes at the highest marginal rate of
federal income taxation for the calendar year in which the payment of the
Additional Amounts is to be made; (B) to pay any applicable state and local
income taxes at the highest marginal rate of taxation for the calendar year in
which the payment of the Additional Amounts is to be made, net of the maximum
reduction in federal income taxes which could be obtained from deduction of such
state and local taxes if paid in such year (determined without regard to
limitations on deductions based upon the amount of Executive's adjusted gross
income); and (C) to have otherwise allowable deductions for federal, state, and
local income tax purposes at least equal to those disallowed because of the
inclusion of the Additional Amounts in Executive's adjusted gross income.
The Company shall have the right to contest any claim by the Internal
Revenue Service relating to the Excise Tax; provided, however, that the Company
shall bear and pay directly all costs and expenses (including additional
interest and penalties)
-8-
<PAGE>
incurred in connection with such contest and shall indemnify and hold Executive
harmless, on an after-tax basis, for any Excise Tax, federal, state and local
income or employment tax (including interest and penalties with respect thereto)
imposed and payment of costs and expenses.
The Company shall bear all of its own expenses and the expense of the
Independent Advisors, and the legal, consulting and accounting expenses of
Executive incurred by Executive for any reason under or with respect to this
Section.
13. Governing Law; Disputes; Arbitration.
(a) Governing Law. This Agreement is governed by and is to be construed,
administered, and enforced in accordance with the laws of the State of Indiana,
without regard to Indiana conflicts of law principles, except insofar as the
Delaware General Corporation Law and federal laws and regulations may be
applicable. If under the governing law, any portion of this Agreement is at any
time deemed to be in conflict with any applicable statute, rule, regulation,
ordinance, or other principle of law, such portion shall be deemed to be
modified or altered to the extent necessary to conform thereto or, if that is
not possible, to be omitted from this Agreement. The invalidity of any such
portion shall not affect the force, effect, and validity of the remaining
portion hereof.
(b) Reimbursement of Expenses in Enforcing Rights. All costs and expenses
(including, without limitation, fees and disbursements of actuaries, accountants
and counsel) incurred by Executive in seeking in good faith to enforce rights
pursuant to this Agreement shall be paid on behalf of or reimbursed to Executive
promptly by the Company, whether or not Executive is successful in asserting
such rights. If there shall be any dispute between the Company and Executive,
the Company shall pay or provide, as applicable, all undisputed amounts or
benefits as are then payable to Executive or Executive's beneficiaries or
dependents pursuant to this Agreement. Any amounts that have become payable
pursuant to the terms of this Agreement or any decision by arbitrators or
judgment by a court of law, but which are not timely paid shall bear interest,
payable by the Company, at the lower of (A) the highest lawful rate or (B) the
prime rate in effect at the time such payment first becomes payable, as quoted
by The Wall Street Journal.
(c) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Chicago, Illinois, in accordance with the rules of the American Arbitration
Association in effect at the time of submission to arbitration, by three (3)
arbitrators, one of which shall be chosen by the Company, one of which shall be
chosen by Executive, and one of which shall be chosen by the arbitrators chosen
by Company and Executive. Judgment may be entered on the arbitrators' award in
any court having jurisdiction. For purposes of entering any judgment upon an
award rendered by the arbitrators,
-9-
<PAGE>
the Company and Executive hereby consent to the jurisdiction of any or all of
the following courts: (i) the United States District Court for the Northern
District of Indiana; (ii) any of the courts of the State of Indiana, or (iii)
any other court having jurisdiction. The Company and Executive further agree
that any service of process or notice requirements in any such proceeding shall
be satisfied if the rules of such court relating thereto have been substantially
satisfied. The Company and Executive hereby waive, to the fullest extent
permitted by applicable law, any objection which it may now or hereafter have
to such jurisdiction and any defense of inconvenient forum. The Company and
Executive hereby agree that a judgment upon an award rendered by the arbitrators
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. The Company shall bear all costs and expenses arising in
connection with any arbitration proceeding. Notwithstanding any provision in
this Section 13(c), Executive shall be entitled to seek specific performance of
Executive's right to be paid during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
14. Definitions
Certain terms in this Agreement are defined the first time they appear;
other terms which are capitalized are not defined the first time they appear,
but unless the context indicates otherwise, have the meanings set forth below:
(a) "Cause". For purposes of this Agreement, "Cause" shall mean
Executive's gross misconduct (as defined herein) or willful and material breach
of this Agreement. For purposes of this definition, "gross misconduct" shall
mean (A) a felony conviction or a plea of nolo contendere to a felony charge in
a court of law under applicable federal or state laws which results in material
damage to the Company, or (B) willfully engaging in one or more acts which is
demonstrably and materially damaging to the Company. Notwithstanding the
foregoing, Executive may not be terminated for Cause unless and until there
shall have been delivered to him, within six months after the Board (A) had
knowledge of conduct or an event allegedly constituting Cause and (B) had reason
to believe that such conduct or event could be grounds for Cause, a copy of a
resolution duly adopted by a majority affirmative vote of the entire membership
of the Company's Board of Directors (excluding Executive if a member of
Company's Board of Directors), at a meeting of the Board called and held for
such purpose (after giving Executive reasonable notice specifying the nature of
the grounds for such termination and not less than 30 days to correct the acts
or omissions complained of, if correctable, and affording Executive the
opportunity, together with his counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, Executive was guilty of conduct
set forth above in this Section 14(a).
(b) "Change of Control". For the purpose of this Agreement, a "Change of
Control" shall mean:
-10-
<PAGE>
(i) (A) If any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) (a "Person") acquires (by purchase, tender offer or otherwise)
or becomes the "beneficial owner" (as defined in rule 13d-3 under the Exchange
Act) of thirty percent (30%) or more of the combined voting power of the then-
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities") and (B) NKK
Corporation ceases to be the beneficial owner, directly or indirectly, of more
than fifty percent (50%) of the total voting power of all the then Outstanding
Company Voting Securities; provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute a Change of
Control: (1) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company, or (2) any acquisition by any entity
pursuant to a transaction which complies with each of clauses (A), (B) and (C)
of subsection (iii) of this paragraph (b);
(ii) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board;
(iii) Consummation of a reorganization, recapitalization, merger,
acquisition of securities or assets by the Company or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (A) the individuals and entities who were the beneficial owners,
respectively, of the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than fifty percent (50%) of, respectively, the then-outstanding
shares of common stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business Combination
(including, without limitation, the Company or a corporation which as a result
of such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock and Outstanding
Company
-11-
<PAGE>
Voting Securities, as the case may be and (B) no Person (excluding any
corporation resulting from such Business Combination or any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, thirty percent
(30%) or more of, respectively, the then outstanding shares of common stock of
the corporation resulting from such Business Combination, or the combined voting
power of the then outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business Combination and (C)
at least two-thirds of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
(c) "Date of Termination". "Date of Termination" means (i) if Executive's
employment is terminated by the Company for any reason other than death or
Disability, or by Executive for any reason other than death or Disability, the
date of receipt of the notice of termination or any later date specified
therein, as the case may be; and (ii) if Executive's employment is terminated by
reason of death or Disability, the Date of Termination shall be the date of
death of Executive or the Disability Effective Date, as the case may be. If the
Company determines in good faith that the Disability of Executive has occurred
pursuant to the definition of Disability set forth in Section 14(d), it may give
to Executive written notice of its intention to terminate Executive's
employment. In such event, Executive's Date of Termination is effective on the
date that is six months after receipt of such notice by Executive (the
"Disability Effective Date"), provided that, within such six month period,
Executive shall not have returned to full- time performance of Executive's
duties.
(d) "Disability". "Disability" means the failure of Executive to render
and perform the services required of him under this Agreement, for a total of
180 days or more during any consecutive 12 month period, because of any physical
or mental incapacity or disability as determined by a physician or physicians
selected by the Company and reasonably acceptable to Executive, unless, within
six (6) months after Executive has received written notice from the Company of a
proposed Date of Termination due to such absence, Executive shall have returned
to the full performance of his duties hereunder and shall have presented to the
Company a written certificate of Executive's good health prepared by a physician
selected by Executive and reasonably acceptable to the Company.
15. Miscellaneous.
(a) Integration. This Agreement modifies and supersedes any and all prior
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<PAGE>
employment agreements (including but not limited to the Prior Agreement, if
any). This Agreement constitutes the entire agreement among the parties with
respect to the matters herein provided, and no modification or waiver of any
provision hereof shall be effective unless in writing and signed by the parties
hereto. Notwithstanding the foregoing, all stock options and stock appreciation
rights granted to Executive pursuant to such Prior Agreement shall remain
outstanding, and to the extent applicable, Section 11(d)(iii) shall apply to
such stock options and stock appreciation rights and shall also apply to such
other stock options and stock appreciation rights now or hereafter granted to
Executive.
(b) Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which Executive may qualify, nor shall anything herein limit or
otherwise affect such rights as Executive may have under any contract or
agreement with the Company or any of its affiliated companies. Amounts which are
vested benefits or which Executive is otherwise entitled to receive under any
plan, policy, practice or program of or any contract or agreement with the
Company or any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with such plan, policy, practice or
program or contract or agreement except as explicitly modified by this
Agreement. In the event of any conflict between the terms and provisions of this
Agreement and any of the Company's plans, policies, practices, programs,
contracts or agreements, the terms and provisions of whichever is more favorable
to the Executive shall prevail.
(c) Non-Transferability. Neither this Agreement nor the rights or
obligations hereunder of the parties hereto shall be transferable or assignable
by Executive, except in accordance with the laws of descent and distribution or
as specified in Section 15(d). The Company may, but only with the consent of
Executive, assign this Agreement and the Company's rights and obligations
hereunder, and the Company shall, as a condition of the succession, require such
Successor to assume (jointly and severally with the Company) the Company's
obligations and be bound by this Agreement. Any such assignment shall not
release the Company of any of its obligations under this Agreement. For purposes
of this Agreement, "Successor" shall mean any person that succeeds to, or has
the practical ability to control (either immediately or with the passage of
time), the Company's business directly, by merger or consolidation, or
indirectly, by purchase of the Company's voting securities or all or
substantially all of its assets, or otherwise.
(d) Beneficiaries. Executive shall be entitled to designate (and change,
to the extent permitted under applicable law) a beneficiary or beneficiaries to
receive any compensation or benefits payable hereunder following Executive's
death. If Executive should die while any amount would still be payable to him
hereunder had Executive continued to live, all such amounts, unless otherwise
provided herein, shall
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<PAGE>
be paid in accordance with the terms of this Agreement to his devisee, legatee
or other designee or, if there is no such designee, to his estate.
(e) Notices. Whenever under this Agreement it becomes necessary to give
notice, such notice shall be in writing, signed by the party or parties giving
or making the same, and shall be served on the person or persons for whom it is
intended or who should be advised or notified, by overnight courier service or
by certified or registered mail, return receipt requested, postage prepaid and
addressed to such party at the address set forth below or at such other address
as may be designated by such party by like notice:
If to the Company: With copies to:
Senior Vice President - Administration Senior Vice President &
National Steel Corporation General Counsel
4100 Edison Lakes Parkway National Steel Corporation
Mishawaka, Indiana 46545-3440 4100 Edison Lakes Parkway
Mishawaka, Indiana 46545-3440
If to Executive at his then current address reflected in the Company's
records.
If the parties by mutual agreement supply each other with telecopier
numbers for the purposes of providing notice by facsimile, such notice shall
also be proper notice under this Agreement when sent. In the case of overnight
courier service, such notice or advice shall be effective when sent, and, in the
cases of certified or registered mail, shall be effective 2 days after deposit
into the mails by delivery to the U.S. Post Office. If the person to receive the
notice (or a copy thereof) for the Company is Executive, then notice to the
Company shall be sent to the Chief Executive Officer of the Company at the above
address rather than to the officer previously named.
(f) Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
(g) No General Waivers. The failure of any party at any time to require
performance by any other party of any provision hereof or to resort to any
remedy provided herein or at law or in equity shall in no way affect the right
of such party to require such performance or to resort to such remedy at any
time thereafter, nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent breach of such
provisions. No such waiver shall be effective unless in writing and signed by
the party against whom such waiver is sought to be enforced.
-14-
<PAGE>
(h) No Obligation To Mitigate. Executive shall not be required to seek
other employment or otherwise to mitigate Executive's damages on or after
Executive's Date of Termination, and the amount of any payment or benefit
provided for in this Agreement shall not be reduced by any compensation or
benefits earned by Executive as the result of employment by another employer or
by retirement benefits.
(i) Offsets; Withholding. The amounts required to be paid by the Company
to Executive pursuant to this Agreement shall not be subject to offset. The
foregoing and other provisions of this Agreement notwithstanding, all payments
to be made to Executive under this Agreement, including under Sections 11 and
12, or otherwise by the Company, will be subject to required withholding taxes
and other required deductions.
(j) Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of Executive, his heirs, executors, administrators
and beneficiaries, and shall be binding upon and inure to the benefit of the
Company and its permitted successors and assigns as provided in Section 15(c).
This Agreement is a personal contract and the rights and interests of Executive
hereunder may not be sold, transferred, assigned, pledged, encumbered, or
hypothecated by him, except as otherwise expressly permitted by the provisions
of this Agreement. This Agreement shall inure to the benefit of and be
enforceable by Executive and his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
(k) Actuarially Equivalent Value Calculation. For the purpose of
determining an actuarially equivalent value under the terms of this Agreement,
the interest rate specified in Section 417(e)(3) of the Internal Revenue Code of
1986, or any successor section thereto, as of the date of such determination,
and the 1994 Group Annuitants Mortality Table, shall be used and for purposes of
determining present value under the terms of this Agreement, the interest rate
specified immediately above shall be used. All calculations shall be made at the
expense of the Company, by the independent auditors of the Company. As soon as
practicable after the need for such calculation arises, the Company shall
provide to its auditors all information needed to perform such calculations.
-15-
<PAGE>
IN WITNESS WHEREOF, Executive has hereunto set his hand and the Company has
caused this instrument to be duly executed as of the day and year first above
written.
NATIONAL STEEL CORPORATION
By: /s/ Osamu Sawaragi
-------------------------------
Name: Osamu Sawaragi
Title: Chairman of the Board and
Chief Executive Officer
/s/ Robert G. Pheanis
------------------------------------
Robert G. Pheanis
-16-
<PAGE>
Exhibit 13
National Steel Corporation Financial Report
CONTENTS
Five Year Selected Financial and Operating Information 17
Management's Discussion and Analysis 18
Statements of Consolidated Income 27
Consolidated Balance Sheets 28
Statements of Consolidated Cash Flows 29
Statements of Changes in Consolidated Stockholders' Equity
and Redeemable Preferred Stock -- Series B 30
Notes to Consolidated Financial Statements 31
Report of Ernst & Young LLP Independent Auditors 49
<PAGE>
Five Year Selected Financial and Operating Information
<TABLE>
<CAPTION>
Dollars in millions
(except per share amounts) Years Ended December 31,
1997 1996 1995 1994 1993
===============================================================================
<S> <C> <C> <C> <C> <C>
Operations
Net sales $ 3,140 $ 2,954 $ 2,954 $ 2,700 $ 2,419
Cost of products sold 2,674 2,618 2,529 2,337 2,255
Depreciation 135 144 145 142 137
- -------------------------------------------------------------------------------
Gross margin 331 192 280 221 27
Selling, general and
administrative expense 141 137 154 138 137
Unusual charges (credits) ________ ________ 5 (25) 111
Income (loss) from
operations 191 65 129 113 (219)
Financing costs (net) 15 36 39 56 62
Income (loss) before income
taxes, extraordinary items
and cumulative effect of
accounting change 235 32 90 169 (281)
Extraordinary items (5) ________ 5 ________ _________
Cumulative effect of
accounting changes ________ 11 ________ ________ (16)
Net income (loss) 214 54 108 185 (260)
Net income (loss)
applicable to common stock 203 43 97 174 (273)
Basic earnings per share:
Income (loss) before
extraordinary items and
cumulative effect of
accounting change 4.82 .74 2.13 4.79 (7.58)
Net income (loss)
applicable to common stock 4.70 .99 2.26 4.79 (8.07)
Diluted earnings per share
applicable to common stock 4.64 .99 2.22 4.70 (7.93)
December 31,
1997 1996 1995 1994 1993
===============================================================================
Financial Position
Cash and cash equivalents $ 313 $ 109 $ 128 $ 162 $ 5
Working capital 367 279 250 252 51
Net property, plant and
equipment 1,229 1,456 1,469 1,394 1,399
Total assets 2,453 2,558 2,669 2,500 2,305
Current maturities of
long-term obligations 32 38 36 36 28
Long-term obligations 311 470 502 671 674
Redeemable Preferred
Stock--Series B ________ 64 65 67 68
Stockholders' equity 837 645 600 401 220
- -------------------------------------------------------------------------------
Other Data
Shipments (net tons, in
thousands) 6,144 5,895 5,564 5,208 5,005
Raw steel production (net
tons, in thousands) 6,527 6,557 6,081 5,763 5,551
Effective capacity
utilization 96.0% 93.7% 96.5% 96.1% 100.0%
Number of employees at
year end 9,417 9,579 9,474 9,711 10,069
Capital investments $ 152 $ 129 $ 215 $ 138 $ 161
Total debt and redeemable
preferred stock as
a percent of total
capitalization 29.0% 47.0% 50.1% 65.9% 77.8%
Common shares outstanding
at year end (in thousands) 43,288 43,288 43,288 36,376 36,361
</TABLE>
1997 ANNUAL REPORT NATIONAL STEEL 17
<PAGE>
Management's Discussion and Analysis of Results
of Operations and Financial Condition
AUDIT COMMITTEE INQUIRY AND
RESTATEMENT OF PRIOR PERIODS
In the third quarter of 1997, the Audit Committee of the Company's Board of
Directors was informed of allegations about managed earnings, including excess
reserves and the accretion of such reserves to income over multiple periods, as
well as allegations about deficiencies in the system of internal controls. The
Audit Committee engaged legal counsel who, with the assistance of an accounting
firm, inquired into these matters. The Company, based upon the inquiry, restated
its financial statements for certain prior periods. On January 29, 1998, the
Company filed a Form 10-K/A for 1996 and Forms 10-Q/A for the first, second and
third quarters of 1997 reflecting the restatements. See these Forms for
information about the restatement, including the effect of the restatement on
items previously presented in Management's Discussion and Analysis of Results of
Operations and Financial Condition.
The following Management's Discussion and Analysis reflects the effects of
the restated financial statements (see Note B to the consolidated financial
statements).
GENERAL OVERVIEW
In 1997, the Company achieved record levels for net sales and net income.
Comparative operating results for the last three years are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Dollars and tons in millions (except earnings per share amounts)
<S> <C> <C> <C>
Net sales $3,139.7 $2,954.0 $2,954.2
Income from operations 191.0 64.5 129.2
Net income 213.5 53.9 107.5
Basic earnings per share 4.70 .99 2.26
Diluted earnings per share 4.64 .99 2.22
Tons shipped 6.144 5.895 5.564
- -------------------------------------------------------------------------------
</TABLE>
In 1997, operations were favorably impacted by record shipments of finished
product, increased selling prices, improvements in product and customer mix, and
continued cost reduction efforts. Shipments rose 4.2% in 1997 while raw steel
production fell just short of its record 1996 level at 6.527 million tons. The
improvements in product mix contributed approximately 3% toward the increase in
average selling price in 1997. Net income in 1997 was also favorably impacted by
the gain recorded on the disposal of non-core assets and other related
activities of $58.7 million and a $21.6 million reduction in net financing costs
as compared with 1996. Non-core asset disposals included the Company's minority
equity investment in Iron Ore Company of Canada, the Great Lakes Division No. 5
coke battery and certain coal properties, as well as a charge related to the
decision to cease operations of American Steel Corporation, a wholly-owned
subsidiary which pickled and slit steel. The reduction in net financing costs
resulted from higher interest income earned coupled with lower debt costs due to
significant debt repayments. Income from operations in 1996 was adversely
effected by the market pricing environment, significant increases in natural gas
prices, an unplanned outage at the Company's pellet operation and a blast
furnace explosion at the Granite City Division. Net income in 1996 was favorably
impacted by the $11.1 million recorded for the cumulative effect of changing the
measurement date used to account for pensions and other postretirement employee
benefit obligations ("OPEBs").
18
<PAGE>
The current year's profitable operations and the disposal of non-core
assets significantly improved the Company's liquidity and financial condition
during 1997. Cash and cash equivalents and investments at year-end 1997
increased to $337.6 million compared to $109.0 million at the end of 1996. The
Company's debt/total capital ratio improved from 47.0% at the end of 1996 to
29.0% at the end of 1997. During 1997, the Company utilized a portion of the
cash proceeds from the disposal of non-core assets to redeem both its Series A
and Series B Preferred Stock. These transactions utilized an aggregate of
approximately $83.8 million of cash. Concurrent with the redeemable preferred
stock repurchase, the Company and Avatex settled Avatex's obligation relating to
certain Weirton liabilities as to which Avatex had agreed to indemnify the
Company in prior recapitalization programs. This is further discussed in Note I
of the consolidated financial statements. The Company expects that both of these
redemptions will be accretive to future income attributable to common
shareholders.
RESULTS OF OPERATIONS
Net Sales
Net sales for 1997 were $3.14 billion compared to $2.95 billion in both
1996 and 1995. Tons shipped in 1997 were 6.144 million compared to 5.895 million
in 1996 and 5.564 million in 1995. Higher shipment levels resulted in
approximately $122.0 million of higher sales in 1997 compared to 1996. Also
contributing to the sales increase in 1997 as compared to 1996 was higher
pricing as a result of improved market conditions which resulted in higher sales
of approximately $34.0 million and the impact of improved customer and product
mix which increased sales by approximately $66.0 million. Non-steel related
revenues fell by approximately $36.0 million in 1997 due to lower pellet
shipments and lower by-product sales.
The 1996 sales level was approximately the same as the 1995 sales level
despite a 5.9% increase in steel shipment levels largely because of lower market
pricing levels which occurred early in 1996. Also contributing to the lower
sales level were lower outside sales of pellets.
Gross Margin
The table below compares gross margin, calculated as net sales less cost of
products sold and depreciation for the last three years.
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Gross margin (dollars in millions) $330.7 $191.5 $279.4
Gross margin as a percentage
of net sales 10.5% 6.5% 9.5%
</TABLE>
The improved gross margin level in 1997 as compared to 1996 is a result of
the net sales improvements discussed above, cost reductions as a result of
continued emphasis on cost improvements, reduced depreciation expense in 1997
and more stable operations in 1997 as compared to 1996. These cost improvements
were partially offset by higher prices for coke and zinc. In addition, insurance
recoveries aggregating approximately $8.5 million were received in 1997, which
increased gross margin.
Depreciation expense in 1997 was $134.5 million as compared to $144.4
million in 1996 and $145.5 million in 1995. The lower level of depreciation in
1997 principally results from the sale of the Great Lakes Division No. 5 coke
battery in the second quarter of 1997.
The lower level of gross margin in 1996 as compared to 1995 is the result
of a less favorable market pricing environment, particularly in the early part
of the year, significant increases in natural gas prices as a result of adverse
market conditions and two unplanned outages that interrupted business and
increased costs. The first of these was a kiln outage at the Company's pellet
operation in the first quarter of 1996, which increased costs by approximately
$10 million. The second outage was a blast furnace explosion at the Granite City
Division in the third quarter, which increased costs by approximately $15
1997 ANNUAL REPORT NATIONAL STEEL 19
<PAGE>
million. Partially offsetting these higher costs in 1996 was the reversal of
an accrual resulting from the settlement of a dispute with the Pension Benefit
Guaranty Corporation, which reduced costs and increased gross margin by $7.5
million.
Selling, General and Administrative Expense
Selling, general and administrative expense comparative data for the last
three years is as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Selling, general and
administrative expense
(dollars in millions) $141.3 $136.7 $153.7
Selling, general and
administrative expense as a
percentage of net sales 4.5% 4.6% 5.2%
- --------------------------------------------------------------------------------
</TABLE>
Expense levels increased in 1997 as compared to 1996 as a result of the
expense associated with converting stock options to stock appreciation rights;
higher information systems costs, which are the result of preliminary systems
evaluations and engineering expenses and year 2000 remediation costs; and higher
legal and professional fees primarily due to the Audit Committee inquiry (see
Note B to the consolidated financial statements). These higher cost levels are
offset by lower benefit related expenses. In addition, 1996 expense levels were
lower as a result of the settlement of a lawsuit in 1996, the proceeds of which
were recognized as an offset to selling, general and administrative expenses.
The 1996 expense levels are lower than in 1995 as a result of lower
professional and legal services.
Equity Income from Affiliates
Equity income from affiliates was $1.6 million in 1997 compared to $9.8
million in 1996 and $8.8 million in 1995. The lower income level in 1997 is
primarily the result of the sale of the Company's minority equity investment in
Iron Ore Company of Canada early in the second quarter of 1997.
Unusual Charge
The unusual charge in 1995 represents costs associated with the reduction
of the salaried work force.
20
<PAGE>
Net Financing Costs
Net financing costs for the last three years are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
(Dollars in millions)
<S> <C> <C> <C>
Interest and other financial income $(19.2) $(7.1) $(11.7)
Interest and other financial expense 33.8 43.3 50.9
- --------------------------------------------------------------------------------
Net financing costs $ 14.6 $36.2 $ 39.2
================================================================================
</TABLE>
The reduced cost levels in 1997 are the result of higher interest income of
$12.1 million due to higher average cash and cash equivalents, and investments
balances and lower interest costs of $9.5 million due to lower average debt
outstanding. The higher cash and cash equivalents, and investments and lower
debt balances are the result of the disposal of non-core assets, which were
completed in 1997, as well as positive cash flows from operations in 1997.
The 1996 net financing costs were lower than the 1995 expense level
principally as a result of lower levels of average debt outstanding due to the
prepayment of $133.3 million of debt in August of 1995.
Net Gain on Disposal of Non-Core Assets and Other Related Activities
In 1997 and 1996, the Company disposed, or made provisions for disposing
of, certain non-core assets. The effects of these transactions and other
activities relating to non-core assets are presented as a separate component in
the statement of consolidated income entitled "net gain on disposal of non-core
assets and other related activities." A discussion of these items follows.
On April 1, 1997, the Company completed the sale of its 21.7% minority
equity interest in the Iron Ore Company of Canada ("IOC") to North Limited, an
Australian mining and metal company ("North"). The Company received proceeds
(net of taxes and expenses) of $75.3 million from North in exchange for its
interest in IOC and recorded a $37.0 million gain. The Company will continue to
purchase iron ore at fair market value from IOC pursuant to the terms of long-
term supply agreements.
On June 12, 1997, the Company completed the sale of the Great Lakes
Division No. 5 coke battery and other related assets, including coal
inventories, to a subsidiary of DTE Energy Company ("DTE"). The Company received
proceeds (net of taxes and expenses) of $234.0 million in connection with the
sale and recorded a $14.3 million loss. The Company utilized a portion of the
proceeds to prepay the remaining $154.3 million of the related party coke
battery debt, which resulted in a net of tax extraordinary loss of $5.4 million.
As part of the arrangement, the Company has agreed to operate the battery, under
an operation and maintenance agreement executed with DTE, and will purchase the
majority of the coke produced from the battery under a requirements contract,
with the price being adjusted during the term of the contract, primarily to
reflect changes in production costs.
In the second quarter of 1997, the Company also recorded a charge of $3.6
million related to the decision to cease operations of American Steel
Corporation, a wholly-owned subsidiary which pickled and slit steel.
In 1997, the Company sold four coal properties and recorded a net gain of
$11.8 million. In conjunction with one of the property sales, the purchaser
agreed to assume the potential environmental liabilities and, as a result, the
Company eliminated the related accrual of approximately $8 million.
Additionally, during 1997, the Company received new information related to
closed coal properties" employee benefit liabilities and other expenses, and
reduced the related accrual by $19.8 million. In aggregate, the above coal
properties" transactions resulted in a gain of $39.6 million in 1997.
In September 1996, the Company sold a portion of the land that had been
received in conjunction with the settlement of a lawsuit and recorded a net gain
of $3.7 million.
Income Taxes (Credit)
During 1997, the Company recorded current taxes payable of $37.8 million.
In 1996 and 1995, the Company recorded current taxes payable of $10.8 million
and $16.4 million, respectively. The current portion of the income tax
represents taxes which are
1997 ANNUAL REPORT NATIONAL STEEL 21
<PAGE>
expected to be due as a result of the filing of the current period's tax returns
and, for federal purposes, such amounts have generally been determined based on
alternative minimum tax payments due.
The current taxes payable represents 16.1% of pre-tax income in 1997.
Current taxes payable in 1996 and 1995 represented 33.6% and 18.2% of pre-tax
income, respectively. The current levels are less than the U.S. Statutory Rate
primarily because of the continued utilization of net operating loss
carryforwards, which exist for federal and state tax purposes.
In the years ended December 31, 1997 and 1996, the Company recorded a
deferred tax benefit of $21.6 million due to the expectation of additional
future taxable income. A deferred tax benefit of $28.6 million was recorded in
1995. An additional deferred tax benefit is expected to be recognized in 1998 as
continued realization of taxable income increases the likelihood of future
taxable income.
Cumulative Effect of Accounting Change
The Company reflected in its 1996 income statement the cumulative effect of
an accounting change which resulted from a change in the valuation date used to
measure pension and OPEBs. The cumulative effect of this change was $11.1
million. The valuation date to measure the liabilities was changed from December
31 to September 30 in order to provide more timely information with respect to
pension and OPEB provisions.
Extraordinary Items
An extraordinary loss of $5.4 million (net of a tax benefit of $1.4
million) was reflected in 1997 income. This loss relates to early debt repayment
costs related to debt associated with the Company's Great Lakes Division No. 5
coke battery, which was sold in the second quarter of 1997. An extraordinary
gain of $5.4 million (net of a tax provision of $.5 million) was recorded in
income in 1995. This gain relates to the early payment of $133.3 million of
debt.
COMMENTS ON EARNINGS OUTLOOK
As stated in a press release dated March 24, 1998, the Company's First
Quarter 1998 results are expected to be roughly break-even. Among those items
affecting First Quarter 1998 performance are the planned major reline of a blast
furnace at the Company's Great Lakes Division which began several weeks earlier
than anticipated and will likely take longer to complete. This has been coupled
with the effects of a late winter storm earlier this month which as negatively
impacted operations, particularly at the Midwest Steel Division and an equipment
failure at the National Steel Pellet operations which has affected production.
While these operating issues will have a negative impact on First Quarter 1998
results, the problems have been largely resolved and the effects will be
primarily confined to the First Quarter of 1998.
DISCUSSIONS OF OTHER OPERATIONAL AND FINANCIAL DISCLOSURE MATTERS:
Impact of Recommendations from Audit Committee Inquiry
On January 21, 1998, the Board of Directors accepted the report and
approved the recommendations of the legal counsel to the Audit Committee for
improvements in the Company's system of internal controls, a restructuring of
its finance and accounting department, and the expansion of the role of the
internal audit function, as well as corrective measures to be taken related to
the specific causes of accounting errors. On February 9, 1998, the Board of
Directors approved revisions to the Audit Committee charter. The Company has
begun the process of implementing these recommendations with the involvement of
the Audit Committee. The cost of these corrective actions is expected to
approximate $1.5 million on an annual basis.
Change in Assumptions for Pensions and OPEBs
As a result of the decrease in long-term interest rates in the United
States, at September 30, 1997, the Company decreased the discount rate used to
calculate the actuarial present value of its accumulated benefit obligation for
pensions and OPEBs by 50 basis points to 7.5% from the rate used at December 31,
1996. The effect of these changes did not impact 1997 expense. The decrease in
the discount rate used to calculate the pension obligation increased the minimum
pension liability. However, the increase to the minimum pension liability was
more than offset by favorable investment returns and higher contribution levels,
resulting in a decrease on the Company's balance sheet from $17.5 million to
$2.3 million at September 30, 1997, and, at the same time, a $.7 million
decrease to stockholders' equity.
Environmental Liabilities
The Company's operations are subject to numerous laws and regulations
relating to the protection of human health and the environment. The Company has
expended, and can be expected to expend in the future, substantial amounts for
ongoing compliance with these laws and regulations, including, the Clean Air
Act, the Resource
22
<PAGE>
Conservation's Recovery Act of 1976 and the Great Lakes Water Quality
Initiative. Additionally, the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 and similar state superfund statutes have imposed
joint and several liability on the Company as one of many potentially
responsible parties at a number of sites requiring remediation. During 1997, in
connection with a settlement with Avatex, the Company released Avatex from its
obligation to indemnify the Company for certain environmental liabilities of its
former Weirton Steel Division.
With respect to those claims for which the Company has sufficient
information to reasonably estimate its future expenditures, the Company has
accrued $18.7 million. Since environmental laws are becoming increasingly more
stringent, the Company's expenditures and costs for environmental compliance may
increase in the future. 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.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which is effective for years beginning after December 15, 1997, and will be
adopted by the Company in 1998. The Statement establishes standards for the
reporting and display of comprehensive income and its components, including
changes in minimum pension liabilities. Implementation of this disclosure
standard will not affect financial position or results of operations and
management has not yet determined the manner in which comprehensive income will
be displayed.
In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statement changes the way public
companies are required to report operating segment information in annual
financial statements and in interim financial reports to stockholders. Operating
segments are determined consistent with the way management organizes and
evaluates financial information internally for making decisions and assessing
performance. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Statement is
effective for financial statements for fiscal years beginning after December 15,
1997, and the Company will adopt the Statement in 1998. Although the Company
continues to evaluate the impact that this Statement will have on its financial
reporting, the Company does not expect significant additional reporting
requirements.
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. The Company has a similar labor
agreement with the International Chemical Workers Union Council of the United
Food and Commercial Workers.
The Company estimates that these items, along with certain other provisions
in the agreement, will increase employee related expenses by approximately $15
million and $10 million for 1998 and 1999, respectively. The Company's 1997
labor costs increased by approximately $12 million as a result of the
arbitrator's award.
1997 ANNUAL REPORT NATIONAL STEEL 23
<PAGE>
Year 2000 Issues
The "Year 2000" problem is caused by software which processes years using
only two digits in the date field. In computer programming, programmers
routinely create date fields with only two digit years in an effort to conserve
computer memory. If not corrected, this programming technique would cause
computer applications to fail or give erroneous results by or at the year 2000.
This problem is not exclusive to the mainframe business computer, but may affect
all devices using a microprocessor, including mill equipment, process control
computers, telephony, discreet devices and even elevators and security systems.
The Company is in the process of correcting this problem and has formed a
committee consisting of executive management to oversee all Year 2000
activities.
The Company retained a third party consulting group to assess the Company's
mainframe environment and identify the actions which need to be taken to correct
any Year 2000 problems. Based upon these assessments, certain modifications to
existing software will be necessary to maintain both operational and support
systems. The Company has already begun work on projects related to Year 2000 and
spent approximately $1.8 million in 1997. The Company expects to spend up to an
additional $10 million on Year 2000 projects and anticipates final completion of
these projects to occur sometime in the second quarter of 1999.
The cost and completion of the Year 2000 projects are based on management's
best estimates and were derived utilizing certain industry standard estimation
techniques and analysis of actual programs. Assumptions are relative to the
timing of future events and availability of resources. Various factors could
cause expected cost and completion times to differ from those anticipated.
However, the Company does not believe that the Year 2000 issues will have a
material adverse impact on the Company's financial condition or results of
operations.
DISCUSSION OF LIQUIDITY AND SOURCES OF CAPITAL:
Overview
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. Additional sources of liquidity consist of a Receivables Purchase
Agreement (the "Receivables Purchase Agreement") with commitments of up to
$200.0 million which was extended during 1997 and now has an expiration date of
September 2002, and a $100.0 million and a $50.0 million credit facility, both
of which are secured by the Company's inventories (the "Inventory Facilities")
and expire in May 2000 and July 1998, respectively.
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, 1997, 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 $91.0 million. For 1997, the maximum availability under the
Receivables Purchase Agreement, after reduction for letters of credit
outstanding, varied from $76.7 million to $111.1 million and was $109.0 million
as of December 31, 1997.
At December 31, 1997, total debt as a percentage of total capitalization
decreased to 29.0% as compared to 47.0% at December 31, 1996. Cash and cash
equivalents, and investments totaled $337.6 million and $109.0 million as of
December 31, 1997 and 1996, respectively. At December 31, 1997, obligations
guaranteed by the Company approximated $21.7 million, compared to $32.2 million
at December 31, 1996.
Cash Flows From Operating Activities
For 1997, cash provided from operating activities totaled $332.2 million,
an increase of $173.3 million compared to 1996. This increase is primarily
24
<PAGE>
attributable to the $159.6 million increase in net income as well as a lower
cash usage to fund working capital needs.
For 1996, cash provided from operating activities totaled $158.9 million, a
decrease of $106.2 million compared to 1995. This decrease is primarily
attributable to the $53.6 million decrease in net income as well as a higher
cash usage to fund working capital needs.
Capital Expenditures
Capital investments at December 31, 1997 and 1996 amounted to $151.8
million and $128.6 million, respectively. The 1997 and 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.
Budgeted capital expenditures approximating $222 million, of which $45.8
million is committed at December 31, 1997, are expected to be made during 1998.
Included among the budgeted capital expenditures is a new hot dip galvanizing
line. Other capital expenditures include new business systems, a blast furnace
reline at the Great Lakes Division and mobile equipment purchases to be used
mainly at the Company's pellet operations. It is expected that capital
expenditures will be in excess of historical levels for the next several years.
Cash Proceeds From The Sale Of Non-Core Assets
During the second quarter of 1997, the Company sold its Great Lakes
Division No. 5 coke battery, as well as its minority equity investment in the
Iron Ore Company of Canada. The sale of these two assets generated net proceeds
of $309.3 million. Additionally, in 1997, certain coal properties were sold
generating net proceeds of $11.3 million.
A portion of the proceeds from these sales was used in the fourth quarter
when the Company redeemed all of the outstanding Redeemable Preferred Stock--
Series B owned by Avatex. Concurrent with the stock repurchase, the Company and
Avatex settled Avatex's obligation relating to certain Weirton liabilities as to
which
1997 ANNUAL REPORT NATIONAL STEEL 25
<PAGE>
Avatex had agreed to indemnify the Company in prior recapitalization programs.
Avatex had pre-funded certain of these indemnifications and, at the time of the
pre-funding, the Company and Avatex agreed that a settlement of the liabilities
would occur no later than in the year 2000. The redemption of the preferred
stock and the related settlement resulted in the Company paying Avatex $59.0
million in the fourth quarter, with an additional $10.0 million required to be
paid in 1998. At the time of the settlement, the Company recognized insurance
proceeds (net of taxes and expenses) aggregating approximately $13.6 million
relating to certain environmental sites, some of which had been indemnified by
Avatex and for which the Company is now solely responsible. This transaction is
expected to result in lower on-going costs to the Company with respect to the
continuing Weirton employee benefit obligations. These lower costs and the
elimination of approximately $7 million per year in dividend costs are expected
to have an accretive impact on future reported basic and diluted earnings per
common share. (See Note I of the consolidated financial statements.)
On December 29, 1997, the Company also redeemed the Preferred Stock--Series
A, which was owned by NKK U.S.A. Corporation. The Company paid NKK U.S.A.
Corporation the face value of the stock ($36.7 million) plus accrued dividends
as of the redemption date. The accrued dividends approximated $.6 million.
The Company is continuing to evaluate other possible uses of the proceeds
of the sale of non-core assets, including additional pension and Voluntary
Employees' Beneficiary Association ("VEBA Trust") funding, additional debt
retirements and additional strategic investment opportunities.
Cash Flows Utilized In Financing Activities
During 1997, the Company utilized $297.1 million for financing activities.
These included the $154.3 million prepayment of related party debt associated
with the sale of the Great Lakes Division No. 5 coke battery and $4.5 million of
costs associated with the prepayment of the aforementioned debt. In addition,
also included was the $83.8 million for the redemption of the Preferred
Stock--Series A and B. Other areas of cash utilization for financing activities
included scheduled payments of debt, as well as dividend payments on the
Company's preferred stock.
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.
26
<PAGE>
<TABLE>
<CAPTION>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
Statements of Consolidated Income
Dollars in thousands (except per share amounts) Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Net Sales $3,139,659 $2,954,033 $2,954,218
Cost of products sold 2,674,444 2,618,151 2,529,323
Selling, general and administrative expense 141,252 136,731 153,690
Depreciation 134,546 144,413 145,452
Equity income of affiliates (1,576) (9,763) (8,767)
Unusual charge ------ ------ 5,336
- -----------------------------------------------------------------------------------------------------------
Income from Operations 190,993 64,501 129,184
- -----------------------------------------------------------------------------------------------------------
Other (income) expense
Interest and other financial income (19,198) (7,103) (11,736)
Interest and other financial expense 33,805 43,352 50,950
Net gain on disposal of non-core assets
and other related activities (58,745) (3,732) ------
- -----------------------------------------------------------------------------------------------------------
Income Before Income Taxes, Extraordinary Items and
Cumulative Effect of Accounting Change 235,131 31,984 89,970
- -----------------------------------------------------------------------------------------------------------
Income taxes (credit) 16,231 (10,840) (12,201)
- -----------------------------------------------------------------------------------------------------------
Income Before Extraordinary Items and Cumulative
Effect of Accounting Change 218,900 42,824 102,171
Extraordinary items (5,397) ------ 5,373
Cumulative effect of accounting change ------ 11,100 ------
- -----------------------------------------------------------------------------------------------------------
Net Income 213,503 53,924 107,544
Less preferred stock dividends 10,252 10,959 10,958
- -----------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 203,251 $ 42,965 $ 96,586
===========================================================================================================
Basic Earnings Per Share:
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary items and cumulative
effect of accounting change $ 4.82 $ .74 $ 2.13
Extraordinary items (.12) --- .13
Cumulative effect of accounting change --- .25 ---
- -----------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 4.70 $ .99 $ 2.26
===========================================================================================================
Diluted Earnings Per Share:
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary items and cumulative
effect of accounting change $ 4.76 $ .74 $ 2.10
Extraordinary items (.12) --- .12
Cumulative effect of accounting change --- .25 ---
- -----------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 4.64 $ .99 $ 2.22
===========================================================================================================
Weighted average shares outstanding 43,288 43,288 42,707
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
1997 ANNUAL REPORT NATIONAL STEEL 27
<PAGE>
<TABLE>
<CAPTION>
National Steel Corporation and Subsidiaries
Consolidated Balance Sheets
Dollars in thousands December 31,
1997 1996
<S> <C> <C> <C>
ASSETS Current assets
Cash and cash equivalents $ 312,642 $ 109,041
Investments 25,000 ------
Receivables, less allowances (1997--$17,644; 1996--$19,320) 284,306 281,889
Inventories 374,202 440,567
Deferred tax assets 8,597 ------
- --------------------------------------------------------------------------------------------------------------
Total current assets 1,004,747 831,497
- --------------------------------------------------------------------------------------------------------------
Investments in affiliated companies 15,709 65,399
Property, plant and equipment
Land and land improvements 190,859 244,203
Buildings 301,058 272,897
Machinery and equipment 2,886,214 3,147,497
- --------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 3,378,131 3,664,597
Less accumulated depreciation 2,149,107 2,209,079
- --------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 1,229,024 1,455,518
Deferred tax assets 164,503 153,538
Intangible pension asset 1,151 17,040
Other assets 38,325 35,338
- --------------------------------------------------------------------------------------------------------------
Total Assets $2,453,459 $2,558,330
==============================================================================================================
LIABILITIES, Current liabilities
REDEEMABLE Accounts payable $ 246,085 $ 234,892
PREFERRED Salaries and wages 90,604 67,964
STOCK AND Withheld and accrued taxes 70,608 69,137
STOCKHOLDERS' Pension and other employee benefits 141,350 79,132
EQUITY Other accrued liabilities 50,680 57,525
Income taxes 6,507 6,427
Current portion of long-term obligations 31,533 37,731
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 637,367 552,808
- --------------------------------------------------------------------------------------------------------------
Long-term obligations 310,976 323,550
Long-term obligations to related parties ------ 146,744
Long-term pension liabilities 162,234 243,237
Postretirement benefits other than pensions 354,604 251,769
Other long-term liabilities 151,300 332,130
Redeemable Preferred Stock--Series B ------ 63,530
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity
Common Stock par value $.01:
Class A--authorized 30,000,000 shares; issued and outstanding
22,100,000 shares in 1997 and 1996 221 221
Class B--authorized 65,000,000 shares; issued and outstanding
21,188,240 shares in 1997 and 1996 212 212
Preferred Stock--Series A ------ 36,650
Additional paid-in capital 491,835 465,359
Retained earnings 344,710 142,120
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 836,978 644,562
- --------------------------------------------------------------------------------------------------------------
Total Liabilities, Redeemable Preferred Stock and
Stockholders' Equity $2,453,459 $2,558,330
==============================================================================================================
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Dollars in thousands Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 213,503 $ 53,924 $ 107,544
Adjustments To Reconcile Net Income To
net cash provided by operating activities:
Depreciation 134,546 144,413 145,452
Carrying charges related to facility sales and plant closings 19,322 22,385 24,307
Net gain on disposal of non-core assets (58,745) (3,732) ------
Equity income of affiliates (1,576) (9,763) (8,767)
Dividends from affiliates 6,808 4,375 6,332
Long-term pension liability (net of change in intangible pension asset) (79,717) 18,430 24,763
Postretirement benefits other than pensions 19,028 29,459 43,579
Extraordinary items 5,397 ------ (5,373)
Cumulative effect of accounting change ------ (11,100) ------
Deferred income taxes (21,600) (21,600) (28,600)
Changes in working capital items:
Investments (25,000) ------ ------
Receivables 4,757 34,773 (23,793)
Inventories 56,365 (27,192) (44,291)
Accounts payable 942 (20,682) (17,012)
Accrued liabilities 74,166 (38,209) 52,386
Other (15,990) (16,576) (11,431)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 332,206 158,905 265,096
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchases of property, plant and equipment (151,773) (128,621) (215,442)
Net proceeds from sale of assets ------ 4,118 110
Net proceeds from disposal of non-core assets 320,602 3,732 ------
Other (362) ------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 168,467 (120,771) (215,332)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Redemption of Preferred Stock--Series A (36,650) ------ ------
Redemption of Redeemable Preferred Stock--Series B
and related settlement with Avatex (47,148) ------ ------
Prepayment of related party debt (154,328) ------ (125,624)
Cost associated with prepayment of related party debt (4,500) ------ ------
Debt repayments (35,041) (35,750) (35,849)
Borrowings 3,959 6,500 ------
Payment of released Weirton benefit liabilities (12,119) (15,360) (15,429)
Payment of unreleased Weirton liabilities and their release in lieu of cash
dividends on Redeemable Preferred Stock--Series B (7,037) (8,066) (7,099)
Dividend payments on Preferred Stock--Series A (3,998) (4,033) (4,032)
Dividend payments on Redeemable Preferred Stock--Series B (210) ------ (964)
Exercise of stock options ------ ------ 169
Issuance of Class B Common Stock ------ ------ 104,734
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (297,072) (56,709) (84,094)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 203,601 (18,575) (34,330)
Cash and cash equivalents at beginning of the year 109,041 127,616 161,946
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year $ 312,642 $ 109,041 $ 127,616
====================================================================================================================================
Supplemental Cash Payment Information
Interest and other financing costs paid $ 28,728 $ 42,487 $ 45,627
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes To Consolidated Financial Statements.
1997 ANNUAL REPORT NATIONAL STEEL 29
<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 Total Redeemable
Stock-- Stock-- Stock-- Paid-In Retained Stockholders-- Preferred
Class A Class B Series A Capital Earnings Equity Stock--Series B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 221 $ 143 $ 36,650 $ 360,525 $ 3,072 $ 400,611 $ 66,530
Net Income 107,544 107,544
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, 1995 221 212 36,650 465,359 97,893 600,335 65,030
Net Income 53,924 53,924
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 1,262 1,262
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 221 212 36,650 465,359 142,120 644,562 63,530
Net Income 213,503 213,503
Amortization of excess of book
value over redemption value
of Redeemable Preferred
Stock--Series B 1,354 1,354 (1,354)
Cumulative dividends on
Preferred Stock--
Series A and B (11,606) (11,606)
Redemption of Preferred
Stock--Series A (36,650) (36,650)
Redemption of Redeemable
Preferred Stock--Series B
and related settlement with Avatex 26,476 26,476 (62,176)
Minimum pension liability (661) (661)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 3l, 1997 $ 221 $ 212 $ ------ $ 491,835 $ 344,710 $ 836,978 $ -------
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
National Steel Corporation
and Subsidiaries
Notes to Consolidated
Financial Statements
December 31, 1997
NOTE A--DESCRIPTION OF THE BUSINESS
AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
National Steel Corporation and its majority owned subsidiaries (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 1997, 1996 and 1995, no single customer accounted for more than 10.0% of
net sales. Sales to the automotive market accounted for approximately 27% of
total net sales in 1997 and approximately 28% in 1996 and 1995. 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"), the International Chemical Workers
Union Council of the United Food and Commercial Workers and other labor
organizations, which collectively represent 82.3% of the Company's employees.
The Company entered into a six-year agreement with these labor organizations in
1993 (the "1993 Settlement Agreement"). Additionally, the 1993 Settlement
Agreement contains a no-strike clause also effective through August 1, 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. The 1993 Settlement Agreement provided that an
individual designated by the International President of the United Steelworkers
of America would be elected to the Company's Board of Directors.
Principles of Consolidation
The consolidated financial statements include the accounts of National
Steel Corporation and its majority-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
Cash equivalents are short-term liquid investments consisting 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.
Investments
Investments consist of a time deposit at cost which has a maturity greater
than three months at the time of purchase. At December 31, 1997, the cost of the
investment approximates market.
Risk Management Contracts
In the normal course of business, the Company enters into certain
derivative financial instruments, primarily commodity purchase swap contracts
and foreign currency forward contracts, to manage its exposure to fluctuations
in commodity prices and foreign currency exchange rates. The Company designates
the financial instruments as hedges for
1997 ANNUAL REPORT NATIONAL STEEL 31
<PAGE>
specific anticipated transactions. Gains and losses from hedges are classified
in the income statement in cost of goods sold when the contracts are closed.
Cash flows from hedges are classified in the statement of consolidated cash
flows under the same category as the cash flows from the related anticipated
transactions. The Company does not enter into any derivative transactions for
speculative purposes. (See Note N--Risk Management Contracts.)
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 $183.9
and $168.8 million higher than reported at December 31, 1997 and 1996,
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 inventories as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
Dollars in thousands
<S> <C> <C>
Inventories
Finished and semi-finished $358,486 $390,675
Raw materials and supplies 154,056 184,331
- --------------------------------------------------
512,542 575,006
Less LIFO reserve 138,340 134,439
- --------------------------------------------------
$374,202 $440,567
==================================================
</TABLE>
Investments in Affiliated Companies
Investments in affiliated companies (corporate joint ventures and 20.0% to
50.0% owned companies) are stated at cost plus equity in undistributed earnings
since acquisition. Undistributed earnings (deficit) of affiliated companies
included in retained earnings at December 31, 1997 and 1996 amounted to ($1.1)
million and $14.6 million, respectively. (See Note J--Non-Operational Income
Statement Activities.)
In May 1997, the Company completed the acquisition of an additional 12% of
the equity in ProCoil Corporation ("ProCoil") for approximately $.4 million.
This brings the Company's total ownership to 56% as of December 31, 1997.
ProCoil's financial position and results of operations have been included in the
consolidated financial statements from the date of this acquisition.
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 $5.3
million in 1997, $4.0 million in 1996 and $6.3 million in 1995. Depreciation of
capitalized interest amounted to $4.5 million in 1997, $5.5 million in 1996 and
$5.6 million in 1995.
Depreciation
Depreciation of production facilities and capitalized lease obligations are
generally computed by the straight-line method. Depreciation of furnace
relinings are computed on the basis of tonnage produced in relation to estimated
total production to be obtained from such facilities.
Research and Development
Research and development costs are expensed when incurred as a component of
cost of products sold. Expenses for 1997, 1996 and 1995 were $10.9 million,
$11.1 million and $9.6 million, respectively.
Financial Instruments
Financial instruments consist of cash and cash equivalents, investments and
long-term obligations (excluding capitalized lease obligations). The fair value
of these financial instruments approximates their carrying amounts at December
31, 1997.
Earnings per Share (Basic and Diluted)
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings per Share. SFAS No. 128 requires the Company to present
two earnings per share ("EPS") amounts. It replaces the presentation of primary
and fully diluted EPS with basic and diluted EPS. Basic EPS is computed by
dividing net income available to common stockholders by the weighted average
number of common stock shares outstanding during the year. Diluted EPS is
computed by dividing net income available to common stockholders by the
32
<PAGE>
weighted-average number of common stock shares outstanding during the year plus
potential dilutive instruments such as stock options. The effect of stock
options on diluted EPS is determined through the application of the treasury
stock method, whereby proceeds received by the Company based on assumed
exercises are hypothetically used to repurchase the Company's common stock at
the average market price during the period.
The calculation of the dilutive effect of stock options on the weighted
average shares is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Shares in thousands
- -------------------------------------------------------
<S> <C> <C> <C>
Denominator for basic
earnings per share--
weighted-average shares 43,288 43,288 42,707
Effect of stock options 485 6 772
- -------------------------------------------------------
Denominator for diluted
earnings per share 43,773 43,294 43,479
=======================================================
</TABLE>
Options to purchase common stock of 194,000 shares in 1997, 1,154,235
shares in 1996 and 196,000 shares in 1995 were outstanding, but were excluded
from the computation of diluted earnings per share because the exercise prices
were greater than the average market price of the common shares during those
years. All EPS amounts for all periods presented conform to SFAS No. 128
requirements.
Use of Estimates
Preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and
expense during the year. Actual results could differ from those estimates.
Reclassifications
Certain amounts in prior years consolidated financial statements have been
reclassified to conform with the current year presentation.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which is effective for years beginning after December 15, 1997, and will be
adopted by the Company in 1998. The Statement establishes standards for the
reporting and display of comprehensive income and its components, including
changes in minimum pension liabilities. Implementation of this disclosure
standard will not affect financial position or results of operations and
management has not yet determined the manner in which comprehensive income will
be displayed.
In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statement changes the way public
companies are required to report operating segment information in annual
financial statements and in interim financial reports to stockholders. Operating
segments are determined consistent with the way management organizes and
evaluates financial information internally for making decisions and assessing
performance. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Statement is
effective for financial statements for fiscal years beginning after December 15,
1997, and the Company will adopt the Statement in 1998. Although the Company
continues to evaluate the impact that this Statement will have on its financial
reporting; the Company does not expect significant additional reporting
requirements.
NOTE B--AUDIT COMMITTEE INQUIRY
AND SECURITIES AND EXCHANGE
COMMISSION INQUIRY
In the third quarter of 1997, the Audit Committee of the Company's Board of
Directors was informed of allegations about managed earnings, including excess
reserves and the accretion of such reserves to income over multiple periods, as
well as allegations about deficiencies in the system of internal controls. The
Audit Committee engaged legal counsel who, with the assistance of an accounting
firm, inquired into these matters. The Company, based upon the inquiry, restated
its financial statements for certain prior periods. On January 29, 1998, the
Company filed a Form 10-K/A for 1996 and Forms 10-Q/A for the first,
1997 ANNUAL REPORT NATIONAL STEEL 33
<PAGE>
second and third quarters of 1997 reflecting the restatements. See these Forms
for information about the restatement, including the effect of the restatement
on items previously presented in Management's Discussion and Analysis of Results
of Operations and Financial Condition.
On December 15, 1997, the Board of Directors approved the termination of
the Company's Vice-President Finance in connection with the Audit Committee
inquiry. During January 1998, legal counsel to the Audit Committee issued its
report to the Audit Committee, and the Audit Committee approved the report and
concluded its inquiry. On January 21, 1998, the Board of Directors accepted the
report and approved the recommendations, except for the recommendation to revise
the Audit Committee Charter, which was approved on February 9, 1998. The report
found certain misapplications of generally accepted accounting principles and
accounting errors, including excess reserves, which have been corrected in the
amended filings, referred to above. The report found that the accretion of
excess reserves to income during the first, second and third quarters of 1997,
as described in the Forms 10-Q/A for those quarters, may have had the effect of
management of earnings as the result of errors in judgement and the
misapplication of generally accepted accounting principles. However, the report
concluded that these errors do not appear to have involved the intentional
misstatement of the Company's accounts. The report also found weaknesses in
internal controls and recommended various improvements in the Company's system
of internal controls, including a comprehensive review of such controls, a
restructuring of the Company's finance and accounting department, and expansion
of the role of the internal audit functions, as well as corrective measures to
be taken related to the specific causes of the accounting errors. The Company
has begun to implement these recommendations with involvement of the Audit
Committee.
The Securities and Exchange Commission (the "Commission") has authorized an
investigation pursuant to a formal order of investigation relating to the
matters described above. The Company has been cooperating with the staff of the
Commission and intends to continue to do so.
34
<PAGE>
NOTE C--CAPITAL STRUCTURE
The Company has two classes of common stock. The shares of Class A Common
Stock are owned by NKK U.S.A. Corporation. Each of these shares is entitled to
two votes. The shares of Class B Common Stock are publicly traded and each of
the shares is entitled to one vote.
As a result of its ownership of the Class A Common Stock, NKK U.S.A.
Corporation controls approximately 67.6% of the voting power of the Company. The
remaining 32.4% of the combined voting power is held by the public.
At December 31, 1997, the Company's capital structure was as follows.
Class A Common Stock: At December 31, 1997, 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 U.S.A. Corporation. Each
share is entitled to two votes. No cash dividends were paid on the Class A
Common Stock in 1997, 1996, or 1995.
Class B Common Stock: At December 31, 1997, 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 1997, 1996, or 1995. All of the issued and outstanding shares of Class B
Common Stock are publicly traded.
On February 10, 1998, the Board of Directors authorized a quarterly
dividend payment of $.07 per common share, payable on March 11, 1998 to
stockholders of record on February 25, 1998.
In prior years, the Company had two series of preferred stock outstanding.
Both of these series of stock were redeemed in the fourth quarter of 1997.
Prior to redemption, which occurred on December 29, 1997, there were 5,000
shares of $1.00 par value Series A Preferred Stock issued and outstanding. All
of this stock was owned by NKK U.S.A. Corporation. Annual dividends of $806.30
per share were cumulative and payable quarterly. Dividend payments of
approximately $4 million were paid in each of the three years ended December 31,
1997. This stock was redeemed at its book value of approximately $36.7 million
plus accrued dividends through the redemption date. This stock had not been
subject to mandatory redemption provisions.
The Company also had 10,000 shares of Redeemable Preferred Stock--Series B
issued and outstanding prior to the redemption of these shares on November 24,
1997. This stock had been owned by Avatex Corporation ("Avatex"--formerly known
as FoxMeyer Health Corporation). Annual dividends of $806.30 per share were
cumulative and payable quarterly. This stock was subject to mandatory redemption
on August 5, 2000. Concurrent with the stock repurchase in 1997, the Company and
Avatex settled Avatex's obligations relating to certain Weirton liabilities for
which Avatex agreed to indemnify the Company in prior recapitalization programs.
A further discussion of the redemption and assumption can be found in Note I--
Weirton Liabilities. In 1997, dividends were accrued and paid on this stock
through November 4, 1997.
The mandatory redemption price of the Redeemable Preferred Stock--Series B
was $58.3 million. The difference between this price and the book value of the
stock was being amortized to retained earnings at a rate of $1.5 million per
year.
1997 ANNUAL REPORT NATIONAL STEEL 35
<PAGE>
NOTE D--LONG-TERM OBLIGATIONS
Long-term obligations are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
Dollars in thousands
<S> <C> <C>
First Mortgage Bonds, 8.375% Series due August 1, 2006,
with general first liens on principal plants, properties and certain subsidiaries. $ 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. 19,753 26,375
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. 107,873 113,920
Coke Battery Loan, 7.54% fixed rate with semi-annual payments due through 2008.
Lenders are wholly-owned subsidiaries of NKK and are unsecured.
(See discussion of debt repayment in this note.) ------- 161,912
Pickle Line Loan, 7.726% fixed rate due in equal semi-annual installments through 2007,
with a first mortgage in favor of the lender. 78,788 83,526
ProCoil, various rates and due dates 18,959 -------
Capitalized lease obligations 21,026 24,965
Other 21,110 22,327
- -------------------------------------------------------------------------------------------------------------------------------
Total long-term obligations 342,509 508,025
Less long-term obligations due within one year 31,533 37,731
- -------------------------------------------------------------------------------------------------------------------------------
Long-term obligations $310,976 $470,294
===============================================================================================================================
</TABLE>
Future minimum payments for all long-term obligations and leases as of December
31, 1997 are as follows:
<TABLE>
<CAPTION>
Other
Capitalized Operating Long-Term
Lease Leases Obligations
Dollars in thousands
<S> <C> <C> <C>
1998 $ 6,712 $ 64,463 $ 27,125
1999 6,712 59,868 24,829
2000 6,712 50,446 22,983
2001 6,712 39,673 24,001
2002 ------- 36,881 32,600
Thereafter ------- 113,603 189,945
- ------------------------------------------------------------------------------------------------------
Total Payments $ 26,848 $364,934 $321,483
=======================
Less amount representing interest 5,822
Less current portion of obligations under capitalized lease 4,408
- --------------------------------------------------------------------------
Long-term obligations under capitalized lease $ 16,618
==========================================================================
</TABLE>
36
<PAGE>
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 $75.3 million in 1997, $72.2 million
in 1996 and $71.8 million in 1995.
The Company borrowed a total of $350.0 million over a three year period
ended in 1993 from United States subsidiaries of NKK for the rebuild of the
Great Lakes Division No. 5 coke battery. During 1995, the Company utilized
proceeds from the 6.9 million share Class B Common Stock primary offering, along
with other cash funds, to prepay $133.3 million aggregate principal amount of
the aforementioned loan. During 1996, the Company made principal payments of
$15.2 million and recorded $12.1 million in interest expense on the coke battery
loan. During 1997, the Company made principal payments of $161.9 million
(includes a $154.3 million prepayment) and recorded $5.3 million in interest
expense on the coke battery loan. In June 1997, the Company utilized $154.3
million of the proceeds from the sale of the Great Lakes Division No. 5 coke
battery to prepay all of the outstanding debt associated with the related loan.
As a result of the early debt repayment, an extraordinary loss of $5.4
million (net of a tax benefit of $1.4 million) was reflected in 1997 income.
Credit Arrangements
The Company's credit arrangements consist of a Receivables Purchase
Agreement (the "Receivables Purchase Agreement") with commitments of up to
$200.0 million and an expiration date of September 2002 and a $100.0 million and
a $50.0 million credit facility, both of which are secured by the Company's
inventories (the "Inventory Facilities") and expire in May 2000 and July 1998,
respectively.
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, 1997, 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 $91.0 million. During 1997, the maximum availability under the
Receivables Purchase Agreement, after reduction for letters of credit
outstanding, varied from $76.7 million to $111.1 million and was $109.0 million
as of December 31, 1997.
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
$391.3 million was free of such limitations at December 31, 1997. In addition,
any dividend payments must be matched by a like contribution into a Voluntary
Employees' Beneficiary Association Trust ("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.
The asset value of the VEBA Trust at December 31, 1997 was approximately $91
million. The labor agreement provides for exclusion or "offsets" to the matching
of cash dividends. Currently, the Company has the capability of declaring a
dividend slightly in excess of $27 million without having to contribute any
matching amounts into the VEBA Trust.
NOTE E--PENSIONS
The Company has various non-contributory defined benefit pension plans
covering substantially all employees. Benefit payments for salaried employees
are based upon a formula which utilizes employee age, years of credited service
and the highest sixty consecutive months of pensionable
1997 ANNUAL REPORT NATIONAL STEEL 37
<PAGE>
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 Retirement
Protection Act of 1994 accelerated the Company's funding requirement in order to
reach a target funding level of 90% of current pension liability. The Company's
contributions to the pension trust for 1997 and 1996 were $83.7 million and
$59.9 million, respectively. The Company will contribute approximately $125.6
million to its pension plans in 1998 and expects to make similar contributions
over the next two years.
As a result of a third quarter 1996 change in measurement date from December
31 to September 30 for pension and other postretirement employee benefit
obligations ("OPEBs"), the Company recorded a cumulative effect credit of $8.3
million ($.19 per share) in 1996 related to pensions.
Pension expense and related actuarial assumptions utilized are summarized
below:
<TABLE>
<CAPTION>
1997 1996 1995
Dollars in thousands
<S> <C> <C> <C>
Assumptions:
Discount rate 8.00% 7.25% 8.75%
Return on assets 9.25% 9.25% 8.50%
Average rate of compensation
increase 4.70% 4.70% 4.70%
- ------------------------------------------------------------------------------
Pension expense:
Service cost $ 24,059 $ 25,989 $ 19,143
Interest cost 114,975 111,364 110,683
Actual return on plan assets (216,665) (82,362) (234,792)
Net amortization and deferral 135,356 6,930 169,756
- ------------------------------------------------------------------------------
Net pension expense 57,725 61,921 64,790
Cumulative effect of
accounting change ------- (8,300) -------
- ------------------------------------------------------------------------------
Total pension expense $ 57,725 $ 53,621 $ 64,790
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996
Dollars in thousands
<S> <C> <C>
Assumptions:
Discount rate 7.50% 8.00%
Average rate of compensation increase 4.70% 4.70%
- ------------------------------------------------------------------------------
Funded Status:
Accumulated benefit obligation ("ABO")
including vested benefits
of $1,338,694 and
$1,249,551 for 1997 and
1996, respectively $1,464,940 $1,364,742
Effect of future projected pensionable
earnings increases 122,029 99,502
- ------------------------------------------------------------------------------
Projected benefit obligation ("PBO") 1,586,969 1,464,244
Plan assets at fair market value 1,352,925 1,181,708
- ------------------------------------------------------------------------------
PBO in excess of plan assets
at fair market value 234,044 282,536
Unrecognized transition obligation (35,078) (43,809)
Unrecognized net gain 130,606 106,702
Unrecognized prior service cost (85,804) (98,480)
Pension contributions October
through December (9,633) (7,321)
Adjustment required to recognize
minimum pension liability 2,315 17,543
- ------------------------------------------------------------------------------
Accrued pension liability 236,450 257,171
Less pension liability due
within one year 69,616 13,934
- ------------------------------------------------------------------------------
Long-term pension liability
at December 31 $ 166,834 $ 243,237
==============================================================================
</TABLE>
As a result of a decrease in long-term interest rates at September 30, 1997,
the Company decreased the discount rate used to calculate the actuarial present
value of its ABO by 50 basis points to 7.50% from the rate used at September 30,
1996. This is the primary reason for the increase in the ABO.
The adjustment required to recognize the minimum pension liability of $2.3
million and $17.5 million at December 31, 1997 and 1996, 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 favorable investment returns and
higher contribution levels partially offset by a lower discount rate.
At September 30, 1997, the Company's pension plans' assets of $1.4 billion
were comprised of approximately 62% equity investments, 35% fixed income
investments and 3% real estate investments.
38
<PAGE>
NOTE F--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides contributory healthcare and life insurance benefits for
certain retirees and their dependents. Generally, employees who are retired 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, 15 of which remain at December 31, 1997.
As a result of a third quarter 1996 change in measurement date from December
31 to September 30 for pensions and OPEBs, the Company recorded a cumulative
effect credit of $2.8 million ($.06 per share) in 1996 related to OPEBs.
The components of postretirement benefit cost and related actuarial
assumptions were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Dollars in thousands
<S> <C> <C> <C>
Assumptions:
Discount rate 8.00% 7.25% 8.75%
Health care trend rate 6.60% 7.20% 7.80%
- -------------------------------------------------------------------
Postretirement benefit cost:
Service cost $ 11,256 $ 12,546 $ 10,573
Interest cost 48,623 47,812 54,416
Actual return of
plan assets (18,380) (3,422) -------
Amortization of
transition obligation 27,285 27,759 27,759
Other 6,635 (1,465) (5,003)
- --------------------------------------------------------------------
Net postretirement
benefit cost 75,419 83,230 87,745
Cumulative effect of
accounting change ------- (2,800) -------
- --------------------------------------------------------------------
Total postretirement
benefit cost $ 75,419 $ 80,430 $ 87,745
====================================================================
</TABLE>
The following represents the plans' funded status as of September 30, 1997 and
1996, reconciled with amounts recognized in the consolidated balance sheet and
related actuarial assumptions (excluding Weirton liabilities, which are
presented in Note I of the consolidated financial statements):
<TABLE>
<CAPTION>
1997 1996
Dollars in thousands
<S> <C> <C>
Assumptions:
Discount rate 7.50% 8.00%
Health care trend rate 6.30% 6.60%
Accumulated postretirement
benefit obligation ("APBO"):
Retirees $ 424,002 $ 429,774
Fully eligible active participants 75,207 76,945
Other active participants 109,671 108,823
- ----------------------------------------------------------------
Total 608,880 615,542
Plan assets at fair value 82,667 48,287
- ----------------------------------------------------------------
APBO in excess of plan assets 526,213 567,255
Unrecognized transition obligation (400,515) (427,800)
Unrecognized net gain 169,871 137,432
Claims and contributions October
through December (15,865) (15,118)
- ----------------------------------------------------------------
Accrued postretirement benefit
liability 279,704 261,769
Less postretirement benefit
liability due within one year 27,000 10,000
- ----------------------------------------------------------------
Long-term postretirement
benefit liability at December 31 $ 252,704 $ 251,769
================================================================
</TABLE>
The assumed healthcare cost trend rate of 6.3% in 1997 decreases gradually to
the ultimate trend rate of 5.0% in 2002 and thereafter. A 1.0% increase in the
assumed healthcare cost trend rate would have increased the APBO at September
30, 1997 and postretirement benefit cost for 1997 by $56.3 million and $6.5
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 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 1997 and 1996, the Company contributed $16.0
million and $15.5 million, respectively, to the VEBA Trust. The VEBA Trust
assets of $82.7 million at September 30, 1997, were comprised of 43.0% equity
investments and 57.0% fixed income investments.
1997 ANNUAL REPORT NATIONAL STEEL 39
<PAGE>
NOTE G--OTHER LONG-TERM LIABILITIES
Other long-term liabilities at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
Dollars in thousands
<S> <C> <C>
Deferred gain on sale leasebacks $ 18,618 $ 21,503
Insurance and employee benefits
(excluding pensions and OPEBs) 94,861 117,913
Plant closings 13,720 45,480
Released Weirton benefit liabilities --- 122,697
Other 24,101 24,537
- --------------------------------------------------------------------
Total other long-term liabilities $151,300 $332,130
====================================================================
</TABLE>
During 1997, the Company and Avatex settled certain Weirton benefit
liabilities. See Note I--Weirton Liabilities for details of this transaction.
NOTE H--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>
1997 1996
Dollars in thousands
<S> <C> <C>
Deferred tax assets
Accrued liabilities $ 127,300 $ 139,900
Employee benefits 211,300 206,300
Net operating loss ("NOL")
carryforwards 17,400 63,000
Leases 10,000 12,700
Alternative minimum tax credits 66,200 30,400
Other 29,200 28,000
- --------------------------------------------------------------------
Total deferred tax assets 461,400 480,300
Valuation allowance (83,300) (106,200)
- --------------------------------------------------------------------
Deferred tax assets net of
valuation allowance 378,100 374,100
- --------------------------------------------------------------------
Deferred tax liabilities
Book basis of property in
excess of tax basis (174,300) (168,200)
Excess tax LIFO over book (21,800) (40,400)
Other (8,900) (14,000)
- --------------------------------------------------------------------
Total deferred tax liabilities (205,000) (222,600)
- --------------------------------------------------------------------
Net deferred tax assets after
valuation allowance $ 173,100 $ 151,500
====================================================================
</TABLE>
In 1997 and 1996, the Company determined that it was more likely than not
that approximately $450 million and $395 million, respectively, of future
taxable income would be generated to justify the net deferred tax assets after
the valuation allowance. Accordingly, the Company recognized additional deferred
tax assets of $21.6 million in both 1997 and 1996 and $28.6 million in 1995.
Significant components of income taxes (credit) are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Dollars in thousands
<S> <C> <C> <C>
Current taxes payable:
Federal alternative
minimum tax $ 35,536 $ 10,426 $ 9,498
State and foreign 2,295 334 6,901
Deferred tax credit (21,600) (21,600) (28,600)
- -------------------------------------------------------------------------------
Income taxes (credit) $ 16,231 $(10,840) $(12,201)
===============================================================================
</TABLE>
The reconciliation of income tax computed at the federal statutory tax
rates to the recorded income taxes (credit) is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Dollars in thousands
<S> <C> <C> <C>
Tax at federal statutory rates $ 82,300 $ 11,200 $ 31,500
Benefit of operating
loss carryforward (41,400) (9,900) (62,200)
Temporary differences
for which no benefit
(benefit) was
recognized (net) (39,300) (27,300) 14,700
Depletion (5,200) (1,900) (4,300)
Dividend exclusion (2,000) (1,200) (1,800)
Alternative minimum tax 35,536 10,426 9,498
Other (13,705) 7,834 401
- -----------------------------------------------------------------------------
Income taxes (credit) $ 16,231 $ (10,840) $ (12,201)
=============================================================================
</TABLE>
At December 31, 1997, the Company had unused federal NOL carryforwards of
approximately $47.8 million ($174.8 million at December 31, 1996), which expire
in 2008.
At December 31, 1997, the Company had unused alternative minimum tax credit
carryforwards of approximately $66.2 million which may be applied to offset its
future regular federal income tax liabilities. These tax credits may be carried
forward indefinitely.
40
<PAGE>
NOTE I--WEIRTON LIABILITIES
In 1984, NKK purchased a 50% equity interest in the Company from Avatex. As
a part of these transactions, Avatex agreed to indemnify the Company, based on
agreed-upon assumptions, for certain ongoing employee benefit liabilities
related to the Company's former Weirton Steel Division ("Weirton"), which had
been divested through an Employee Stock Ownership Plan arrangement in 1984. In
1990, NKK purchased an additional 20% equity interest in the Company from
Avatex. As a part of the 1990 transaction, Avatex contributed $146.6 million to
the Company for employee benefit related liabilities and agreed that dividends
from the Redeemable Preferred Stock--Series B would be primarily used to fund
pension obligations of Weirton. Under this arrangement, it was agreed that the
Company would release Avatex from its indemnification obligation at the time of
the scheduled redemption of the Redeemable Preferred Stock--Series B or at an
earlier date if agreed to by the parties. The Redeemable Preferred Stock--Series
B was scheduled to be redeemed in the year 2000. Avatex also agreed in 1984 to
indemnify the Company against certain environmental liabilities related to
Weirton and the Company's subsidiary, The Hanna Furnace Corporation
("Environmental Liabilities"). In 1994, Avatex prepaid $10.0 million to the
Company with respect to these Environmental Liabilities. In 1995, the Company
redeemed one half of the outstanding Redeemable Preferred Stock--Series B for
approximately $67 million, with the proceeds going to partially fund the Weirton
pension obligations.
During the fourth quarter of 1997, the Company redeemed the remaining
Redeemable Preferred Stock--Series B held by Avatex, which had a book value
including accrued dividends of $62.6 million. In addition, the Company
finalized a settlement with Avatex regarding certain employee benefit
liabilities associated with Weirton, as well as the Environmental Liabilities.
As a result of the redemption and settlement, the Company made a payment of
$59.0 million to Avatex and will pay Avatex an additional $10.0 million, without
interest, in installments of $2.5 million each, in the first and second quarters
of 1998, and a third installment of $5.0 million in the fourth quarter of 1998.
In connection with the settlement, Avatex released any claims to amounts
received with respect to settlements reached in a lawsuit brought by the Company
and Avatex against certain former insurers of the Company, wherein recovery was
sought for past and future environmental claims, which included the
Environmental Liabilities. At the time of the Avatex settlement, the Company
recognized insurance proceeds (net of taxes and expenses) aggregating
approximately $13.6 million related to the settlement of such lawsuit. The
Company will also retain the $9.2 million remaining balance of the Environmental
Liabilities prepayment made by Avatex in 1994.
Under its settlement with Avatex, the Company has recorded liabilities for
the Weirton pension obligation, certain other Weirton employee benefit
liabilities and the Environmental Liabilities, and has relieved Avatex from any
future indemnity obligation with regard to all such liabilities.
Also, as a result of the redemption of the Company's Redeemable Preferred
Stock--Series B, NKK U.S.A. Corporation, a subsidiary of NKK Corporation, will
no longer have any obligation to Avatex relating to a "put" agreement entered
into in 1990 at the time this preferred stock was issued. The lapse of this
"put" with respect to the Company's dividend and redemption obligations may
result in imputed income to NKK U.S.A. Corporation. Subsequent to December 31,
1997, the Company made a payment of approximately $1.4 million to NKK U.S.A.
Corporation for taxes related to this imputed income.
The redemption of Redeemable Preferred Stock--Series B and the related
transactions described above, which are the resolution of the 1990
recapitalization plan, have been reflected as a capital transaction resulting in
an increase in additional paid-in capital of approximately $26.5 million.
The Company has accrued for the Weirton employee benefit liabilities in its
financial statements based on consistent interest rate, mortality and other
assumptions used in its other benefit plan valuations.
1997 ANNUAL REPORT NATIONAL STEEL 41
<PAGE>
Information with respect to the funded status of the Weirton Pension and
OPEB liabilities using actuarial valuations as of November 30, 1997 is as
follows: (See Note E--Pensions and Note F--Post retirement Benefits Other than
Pensions.)
<TABLE>
<CAPTION>
Pension Information Dollars in thousands
<S> <C>
Funded Status:
Accumulated benefit obligations
("ABO") including vested benefits and
effect of future pensionable earnings
increases $489,000
- -----------------------------------------------------------------------
Projected benefit obligation ("PBO") 489,000
Plans assets at fair value 493,600
- -----------------------------------------------------------------------
Plan assets at fair value in excess of PBO $ 4,600
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
OPEB Information Dollars in thousands
<S> <C>
Funded Status:
Accumulated postretirement benefit
obligation ("APBO")
Retirees $101,900
Fully eligible active participants -------
Other active participants -------
- -----------------------------------------------------------------------
Long-term postretirement
benefit liability $101,900
=======================================================================
</TABLE>
NOTE J--NON-OPERATIONAL INCOME STATEMENT ACTIVITIES
A number of non-operational activities are reflected in the income
statement in each of the three years ended December 31, 1997. A discussion of
these items follows.
Net Gain on the Disposal Of Non-Core Assets and Other Related Activities
In 1997 and 1996, the Company disposed, or made provisions for disposing
of, certain non-core assets. The effects of these transactions and other
activities relating to non-core assets are presented as a separate component in
the statement of consolidated income. A discussion of these items follows.
On April 1, 1997, the Company completed the sale of its 21.7% minority
equity interest in the Iron Ore Company of Canada ("IOC") to North Limited, an
Australian mining and metal company ("North"). The Company received proceeds
(net of taxes and expenses) of $75.3 million from North in exchange for its
interest in IOC and recorded a $37.0 million gain. The Company will continue to
purchase iron ore at fair market value from IOC pursuant to the terms of long-
term supply agreements.
On June 12, 1997, the Company completed the sale of the Great Lakes
Division No. 5 coke battery and other related assets, including coal
inventories, to a subsidiary of DTE Energy Company ("DTE"). The Company received
proceeds (net of taxes and expenses) of $234.0 million in connection with the
sale and recorded a total loss on the transaction of $14.3 million ($11.0
million in the second quarter of 1997 and $3.3 million in the fourth quarter of
1997). The Company utilized a portion of the proceeds to prepay the remaining
$154.3 million of the related party coke battery debt, resulting in an
extraordinary loss of $5.4 million (net of a tax benefit of $1.4 million). As
part of the arrangement, the Company has agreed to operate the battery under an
operation and maintenance agreement executed with DTE, and will purchase the
majority of the coke produced from the battery under a requirements contract,
with the price being adjusted during the term of the contract, primarily to
reflect changes in production costs.
In the second quarter of 1997, the Company also recorded a charge of $3.6
million for costs related to the decision to cease operations of American Steel
Corporation, a wholly-owned subsidiary which pickled and slit steel.
In 1997, the Company sold four coal properties and recorded a net gain of
$11.8 million. In conjunction with one of the property sales, the purchaser
agreed to assume the potential environmental liabilities and, as a result, the
Company eliminated the related accrual of approximately $8 million.
Additionally, during 1997, the Company received new information related to
closed coal properties' employee benefit liabilities and other expenses and
reduced the related accruals by $19.8 million. In aggregate, the above coal
properties transactions resulted in a gain of $39.6 million in 1997.
In September 1996, the Company sold a portion of land that had been
received in conjunction with the settlement of a lawsuit and recorded a net gain
of $3.7 million.
42
<PAGE>
Unusual Charge
In 1995 the Company recorded an unusual charge of $5.3 million for costs
associated with a reduction in the salaried work force.
Extraordinary Items
An extraordinary loss of $5.4 million (net of a tax benefit of $1.4
million) was reflected in 1997 income. This loss relates to early debt repayment
costs related to debt associated with the Company's Great Lakes Division No. 5
coke battery, which was sold in the second quarter of 1997. An extraordinary
gain of $5.4 million (net of a tax provision of $.5 million) was recorded in
income in 1995. This gain relates to the early payment of $133.3 million of
debt.
Cumulative Effect of Accounting Change
The Company reflected in its 1996 income statement the cumulative effect of
an accounting change which resulted from a change in the valuation date used to
measure liabilities related to pension and OPEB liabilities. The cumulative
impact of this change was $11.1 million. The valuation date to measure the
liabilities was changed from December 31 to September 30 in order to provide
more timely information with respect to pension and OPEB provisions.
NOTE K--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 NKK
affiliates totaling $161.9 million as of December 31, 1996. The Company prepaid
this related party debt in June of 1997. In addition, the Company incurred an
early debt repayment penalty of $4.5 million which was paid to the NKK
affiliates. (See Note D--Long-Term Obligations and Note J--Non-Operational
Income Statement Activity.) During 1997, the Company purchased approximately
$4.3 million of finished coated steel produced by NKK, with such purchase made
from trading companies, for what the Company believes are fair market values.
Effective May 1, 1995, the Company entered into an Agreement for the
Transfer of Employees (the "Agreement"--superceding 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 this Agreement, technical and business advice is provided through
NKK employees who are transferred to the employ of the Company. The Agreement
further provides that the initial term can be extended from year to year after
expiration of the initial term, if approved by NKK and by a majority of the
directors of the Company who were not then, and never have been, employees of
NKK. The Agreement has been extended through the calendar year 1998 in
accordance with this provision. Pursuant to the terms of the Agreement, the
Company is obligated to reimburse NKK for the costs and expenses incurred by NKK
in connection with the transfer of these employees, subject to an agreed-upon
cap. The cap was $11.7 million during the initial term and $7.0 million during
each of 1997 and 1998. The Company expensed $5.4 million and $4.2 million under
this Agreement, and for various other engineering services provided by NKK
during 1997 and 1996, respectively.
In both 1997 and 1996, cash dividends of approximately $4.0 million were
paid on the Preferred Stock--Series A. On December 29, 1997, all shares of
Preferred Stock--Series A were redeemed. (See Note C--Capital Structure.)
Also, as a result of the redemption of the Company's Redeemable Preferred
Stock--Series B, NKK U.S.A. Corporation, a subsidiary of NKK Corporation, will
no longer have any obligation to Avatex relating to a "put" agreement entered
into in 1990 at the time this preferred stock was issued. The lapse of this
"put" with respect to the Company's dividend and redemption obligations may
result in imputed income to NKK U.S.A. Corporation. Subsequent to December 31,
1997, the Company made a payment of approximately $1.4 million to NKK U.S.A.
Corporation for taxes related to this imputed income. (See Note I--Weirton
Liabilities.)
1997 ANNUAL REPORT NATIONAL STEEL 43
<PAGE>
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 $38.3 million in 1997, $111.4 million in
1996 and $86.5 million in 1995. Additional expenses were incurred in connection
with the operation of a joint venture agreement. (See Note M--Other Commitments
and Contingencies.) Accounts payable at December 31, 1997 and 1996 included
amounts with affiliated companies accounted for by the equity method of $5.3
million and $18.6 million, respectively. Accounts receivable at December 31,
1997 included amounts with affiliated companies of $1.2 million. There were no
accounts receivable balances with affiliated companies at December 31, 1996.
NOTE L--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.
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
or 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 for these items
at both December 31, 1997 and 1996.
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, the Company does not
have sufficient information regarding the nature and extent of the
contamination, the wastes contributed by other PRPs, or the required remediation
activity to estimate its potential liability. With respect to those sites for
which the Company has sufficient information to estimate its potential
liability, the Company has accrued an aggregate liability for CERCLA claims of
approximately $2.3 million and $5.1 million as of December 31, 1997 and 1996,
respectively.
The Company has also recorded reclamation and other costs to restore its
shutdown coal 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 $2.0 million and $12.1 million at December
31, 1997 and 1996, respectively, relating to these properties. Approximately $8
million of the decrease in the environmental liability from 1996 to 1997 was a
result of the sale of a coal property in the third quarter of 1997 where the
buyer assumed the liability. The balance of the decrease was a result of updated
information regarding other environmental proceedings.
During the fourth quarter of 1997, the Company finalized a settlement with
Avatex regarding certain environmental liabilities which are primarily
associated with the Company's former Weirton Steel Division. As a result of the
settlement, the Company will have responsibility for these former Avatex
indemnified sites, and accordingly, has recorded an aggregate net liability of
$10.0 million at December 31, 1997 (see Note I--Weirton Liabilities).
Since the Company has been conducting steel manufacturing and related
operations at numerous
44
<PAGE>
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 accruals, 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 M--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, 1997, the maximum amount of such payments, before
giving effect to certain credits provided in the agreement, totaled
approximately $10 million through 2002, or approximately $2 million per year.
During the three years ended December 31, 1997, no advance freight payments were
made as the Company met all of the contract requirements. The Company
anticipates meeting the specified contract requirements in 1998.
In September 1990, the Company entered into a joint venture agreement to
build a 400,000 ton per year continuous galvanizing line to serve North American
automakers. The joint venture, DNN Galvanizing Limited Partnership, which was
completed in 1993, coats steel products for the Company and Dofasco, Inc., a
large Canadian steel producer ("Dofasco"). The Company is a 10.0% equity owner
of the facility, Dofasco is a 50.0% owner, and a subsidiary of NKK owns the
remaining 40.0%. The Company is committed to utilize and pay a tolling fee in
connection with 50.0% 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 50.0% interest in a joint venture with an unrelated third
party, which commenced production in May 1994. The joint venture, Double G
Coatings Company, L.P. ("Double G"), is a 270,000 ton per year coating facility
near Jackson, Mississippi which produces galvanized and Galvalume(R) steel sheet
for the construction market. The Company is committed to utilize and pay a
tolling fee in connection with 50.0% 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 $21.7 million of Double
G's debt as of December 31, 1997.
The Company has agreed to purchase its proportionate share of the limestone
production from an 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, iron ore pellets, 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 14 years. In 1998 and 1999
the Company has commitments with "take or pay" or other similar commitment
provisions for approximately $194.1 million and $187.2 million, respectively.
The Company believes that production requirements will be such that
consumption of the products or services purchased under these
1997 ANNUAL REPORT NATIONAL STEEL 45
<PAGE>
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.
NOTE N--RISK MANAGEMENT CONTRACTS
In the normal course of business, operations of the Company are exposed to
continuing fluctuations in certain commodity prices and foreign currency values.
The Company's objective is to reduce earnings volatility associated with these
fluctuations to allow management to focus on core business issues. Accordingly,
the Company addresses these risks through a controlled program of risk
management that includes the use of derivative financial instruments. The
Company's derivative activities, all of which are for purposes other than
trading, are initiated within the guidelines of documented corporate risk-
management policies. The Company does not enter into any derivative transactions
for speculative purposes.
The amounts of derivatives summarized in the following paragraphs indicate
the extent of the Company's involvement in such agreements but do not represent
its exposure to market risk through the use of derivatives.
Foreign Exchange Risk Management: A portion of the Company's cash flows are
derived from transactions denominated in foreign currencies, principally the
currency of Canada. The United States dollar value of transactions denominated
in foreign currencies fluctuates as the United States dollar strengthens or
weakens relative to the foreign currency. In order to reduce the uncertainty of
foreign exchange rate movements on transactions denominated in foreign
currencies, the Company enters into derivative financial instruments in the form
of foreign exchange forward contracts with a major international financial
institution. These forward contracts, which typically mature within one year,
are designed to hedge anticipated foreign currency transactions, primarily
inventory purchases and processing fees. At December 31, 1997, the Company had
no contracts outstanding with respect to foreign currencies. At December 31,
1996, the Company had foreign currencies contracts outstanding in the amount of
$5.3 million. Fair value approximated the contract value of these instruments
at December 31, 1996.
Commodity Risk Management: In order to reduce the uncertainty of movements
on transactions to purchase zinc requirements, the Company enters into
derivative financial instruments in the form of swap contracts with a major
international financial institution. These swap contracts typically mature
within one year. While these hedging instruments are subject to fluctuations in
value, such fluctuations are generally offset by changes in the value of the
underlying exposures being hedged. The Company had contracts to hedge future
zinc requirements (up to 50% of annual requirements) in the amounts of $40.3
million and $9.2 million at December 31, 1997 and 1996, respectively. The fair
value of these contracts was $35.0 million and $9.2 million at December 31, 1997
and 1996, respectively.
The estimated fair values of derivative financial instruments used to hedge
the Company's risks will fluctuate over time. The fair value of commodity
purchase swap contracts and foreign currency forward contracts are calculated
using pricing models used widely in financial markets.
NOTE O--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.
46
<PAGE>
In 1997, the Company canceled 653,265 options and replaced them with Stock
Appreciation Rights ("SARs"). In accordance with Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," the Company recorded compensation expense of $1.5 million in
1997.
The Company adopted the disclosure-only provisions of SFAS 123 during 1996.
Accordingly, no compensation expense has been recognized for the stock option
plans. Had compensation cost for the option plans been determined based on the
fair value at the grant date for awards in 1997, 1996 and 1995 consistent with
the provision of SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
Dollars in thousands (except per share amounts)
<S> <C> <C> <C>
Net income --
pro forma $213,503 $52,659 $106,935
Basic earnings per
share--pro forma 4.70 .99 2.26
Diluted earnings per
share--pro forma 4.64 .96 2.21
</TABLE>
As a result of the aforementioned replacement of stock options with SARs, a
recovery of prior years' pro forma expense for those options would be required
in 1997. The recovery would offset compensation costs to be recorded in 1997,
causing the pro forma net income to be the same as the reported net income.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 2.9%; expected volatility
41.4%; risk-free interest rate of 6.5%; and expected term of seven years.
A reconciliation of the Company's stock option activity and related
information follows:
<TABLE>
<CAPTION>
Number Of Exercise
Options Price
(Weighted average)
<S> <C> <C>
Balance outstanding at
January 1, 1995 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
Forfeited (122,181)
- ---------------------------------------------------------------
Balance outstanding at
December 31, 1996 1,159,735 14.03
Granted 304,500 9.37
Forfeited (132,470)
Cancelled and
replaced with SARs (653,265) 14.14
- ---------------------------------------------------------------
Balance outstanding at
December 31, 1997 678,500 $12.10
===============================================================
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$9.00 to $17.50. The weighted-average remaining contractual life of those
options is 6.7 years.
There were no exercisable stock options as of December 31, 1997 and 457,401
and 324,249 at 1996 and 1995, respectively.
1997 ANNUAL REPORT NATIONAL STEEL 47
<PAGE>
NOTE P--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following are the unaudited quarterly results of operations for the years 1997
and 1996.
<TABLE>
<CAPTION>
1997
Three Months Ended March 31 June 30 September 30 December 31
Dollars in thousands (except per share amounts)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $757,618 $824,869 $788,663 $768,509
Gross margin 69,263 87,834 103,747 69,825
Unusual items ----- (25,385) (28,804) (4,556)
Income before extraordinary item 26,665 64,925 78,561 48,749
Extraordinary item ----- (5,397) ----- -----
- ---------------------------------------------------------------------------------------------------
Net income $ 26,665 $ 59,528 $ 78,561 $ 48,749
===================================================================================================
Basic earnings per share:
Income before extraordinary item $ .55 $ 1.43 $ 1.76 $ 1.08
Extraordinary item -- (.12) -- --
- ---------------------------------------------------------------------------------------------------
Net income applicable to common stock $ .55 $ 1.31 $ 1.76 $ 1.08
===================================================================================================
Diluted earnings per share:
Income before extraordinary item $ .55 $ 1.42 $ 1.72 $ 1.06
Extraordinary item -- (.12) -- --
- ---------------------------------------------------------------------------------------------------
Net income applicable to common stock $ .55 $ 1.30 $ 1.72 $ 1.06
===================================================================================================
<CAPTION>
1996
Three Months Ended March 31 June 30 September 30 December 31
Dollars in thousands (except per share amounts)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $682,143 $769,481 $735,858 $766,551
Gross margin 16,853 52,614 54,397 67,605
Income (loss) before cumulative
effect of accounting change (14,196) 17,917 11,527 27,576
Cumulative effect of accounting change ----- ----- 11,100 -----
- ---------------------------------------------------------------------------------------------------
Net income (loss) $(14,196) $ 17,917 $ 22,627 $ 27,576
===================================================================================================
Basic and diluted earnings per share:
Income (loss) before cumulative
effect of accounting change $ (.39) $ .35 $ .21 $ .57
Cumulative effect of accounting change -- -- .25 --
- ---------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ (.39) $ .35 $ .46 $ .57
===================================================================================================
</TABLE>
(See Note A--Description of the Business and Significant Accounting Policies
for diluted earnings per share.)
48
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
BOARD OF DIRECTORS
NATIONAL STEEL CORPORATION
We have audited the accompanying consolidated balance sheets of National Steel
Corporation and subsidiaries (the "Company") as of December 31, 1997 and 1996,
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, 1997. 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, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
As discussed in Note J to the consolidated financial statements, in 1996, the
Company changed the measurement date that is used in accounting for pensions and
postretirement benefits other than pensions.
/s/ ERNST & YOUNG LLP
Fort Wayne, Indiana
January 28, 1998,
except for Notes C, I, and K,
as to which the date is February 26, 1998.
1997 ANNUAL REPORT/NATIONAL STEEL 49
<PAGE>
Corporate Information
HEADQUARTERS
4100 Edison Lakes Parkway
Mishawaka, Indiana 46545-3440
Telephone: (219) 273-7000
Telefax: (219) 273-7869
Website: www.nationalsteel.com
ANNUAL MEETING
The Annual Stockholders' Meeting of National Steel Corporation will be held
April 27, 1998. 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
ChaseMellon Shareholders Services, L.L.C.
Ridgefield Park, New Jersey
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
1997
------------------------------------------------
<S> <C> <C>
First Quarter $10-1/8 $ 7-5/8
Second Quarter 16-7/8 7-1/2
Third Quarter 21-1/2 14
Fourth Quarter 18-3/4 10-3/4
------------------------------------------------
1996
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
------------------------------------------------
</TABLE>
As of December 31, 1997, there were approximately 168 registered holders of
Class B Common Stock. (See Note C--Capital Structure.) The Company did not pay
any dividends on its Class A Common Stock or Class B Common Stock during 1996 or
1997. On February 10, 1998, the Board of Directors authorized a quarterly
dividend payment of $.07 per common share, payable on March 11, 1998, to
stockholders of record on February 25, 1998. The decision whether to continue 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 are entitled to share ratably, as a single class, in any
dividends paid on the Common Stock.
In addition, any dividend payments must be matched by a like contribution
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. The asset value of the VEBA
Trust at December 31, 1997 was approximately $91 million. The labor agreement
provides for exclusion or "offsets" to the matching of cash dividends.
Currently, the Company has the capability of declaring a dividend slightly in
excess of $27 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
$391.3 million was free of such limitations at December 31, 1997.
50
<PAGE>
EXHIBIT 21
NATIONAL STEEL CORPORATION SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction Percentage
of Outstanding
Name Incorporation Stock Owned
---- ------------- -----------
<S> <C> <C>
American Steel Corporation Michigan 100%
Delray Connecting Railroad Company Michigan 100%
D. W. Pipeline Company Michigan 100%
Granite City Steel Company Illinois 100%
Granite Intake Corporation Delaware 100%
Great Lakes Steel Corporation Delaware 100%
The Hanna Furnace Corporation New York 100%
Hanna Ore Mining Company Minnesota 100%
Ingleside PT Corporation Texas 100%
Liberty Pipe and Tube, Inc. Texas 100%
Mathies Coal Company Pennsylvania 86.67%
Mid-Coast Minerals Corporation Delaware 100%
Midwest Steel Corporation Pennsylvania 100%
Natcoal, Inc. Delaware 100%
National Acquisition Corporation Delaware 100%
National Caster Acquisition Corporation Delaware 100%
National Caster Operating Corporation Delaware 100%
National Casting Corporation Delaware 100%
National Coal Mining Company Delaware 100%
National Coating Limited Corporation Delaware 100%
National Coating Line Corporation Delaware 100%
National Materials Procurement Corporation Illinois 100%
National Mines Corporation Pennsylvania 100%
National Ontario Corporation Delaware 100%
National Ontario II, Limited Delaware 100%
National Pickle Line Corporation Delaware 100%
National Steel Corporation (New York) New York 100%
National Steel Funding Corporation Delaware 100%
National Steel Pellet Company Delaware 100%
Natland Corporation Delaware 100%
National Steel Foreign Sales Corporation Barbados 100%
NS Holdings Corporation Delaware 100%
NS Land Company New Jersey 100%
NSC Realty Corporation Delaware 100%
NSL, Inc. Delaware 100%
Peter White Coal Mining Corporation West Virginia 100%
Puritan Mining Company Michigan 100%
Rostraver Corporation Delaware 100%
Skar-Ore Steamship Corporation Delaware 100%
The Teal Lake Iron Mining Company Michigan 100%
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of National Steel Corporation and subsidiaries (the "Company") of our report
dated January 28, 1998 (except for Notes C, I, and K, as to which the date is
February 26, 1998) included in the 1997 Annual Report to Shareholders of the
Company.
Our audit also included the financial statement schedule the Company listed in
item 14(a). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the following Registration
Statements:
. Form S-8 No. 33-51991 pertaining to the 1994 and 1995 Stock Grants to Union
Employees,
. Form S-8 No. 33-51081 pertaining to the 1993 National Steel Corporation Long
Term Incentive Plan,
. Form S-8 No. 33-51083 pertaining to the 1993 National Steel Corporation
Non-Employee Director's Stock Option Plan, and
. Form S-8 No. 33-61087 pertaining to the National Steel Retirement Savings
Plan and National Steel Represented Employee Retirement Savings Plan;
of our report dated January 28, 1998 (except for Notes C, I, and K as to which
the date is February 26, 1998), with respect to the consolidated financial
statements incorporated by reference in this Annual Report (Form 10-K) of the
Company for the year ended December 31, 1997, and and our report included in the
preceding paragraph with respect to the financial statement schedule included
therein, filed with the Securities and Exchange Commission.
Ernst & Young LLP
Fort Wayne, Indiana
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 312,642
<SECURITIES> 25,000
<RECEIVABLES> 301,950
<ALLOWANCES> 17,644
<INVENTORY> 374,202
<CURRENT-ASSETS> 1,004,747
<PP&E> 3,378,131
<DEPRECIATION> 2,149,107
<TOTAL-ASSETS> 2,453,459
<CURRENT-LIABILITIES> 637,367
<BONDS> 310,976
0
0
<COMMON> 433
<OTHER-SE> 836,545
<TOTAL-LIABILITY-AND-EQUITY> 2,453,459
<SALES> 3,139,659
<TOTAL-REVENUES> 3,139,659
<CGS> 2,674,444
<TOTAL-COSTS> 2,674,444
<OTHER-EXPENSES> 217,153
<LOSS-PROVISION> (1,676)
<INTEREST-EXPENSE> 14,607
<INCOME-PRETAX> 235,131
<INCOME-TAX> 16,231
<INCOME-CONTINUING> 218,900
<DISCONTINUED> 0
<EXTRAORDINARY> (5,397)
<CHANGES> 0
<NET-INCOME> 213,503
<EPS-PRIMARY> 4.70
<EPS-DILUTED> 4.64
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 109,041 127,616
<SECURITIES> 0 0
<RECEIVABLES> 301,209 336,648
<ALLOWANCES> 19,320 19,986
<INVENTORY> 440,567 413,375
<CURRENT-ASSETS> 831,497 857,653
<PP&E> 3,664,597 3,540,214
<DEPRECIATION> 2,209,097 2,017,511
<TOTAL-ASSETS> 2,556,292 2,669,240
<CURRENT-LIABILITIES> 550,770 607,320
<BONDS> 470,294 501,525
63,530 65,030
36,650 36,650
<COMMON> 433 433
<OTHER-SE> 607,479 563,252
<TOTAL-LIABILITY-AND-EQUITY> 2,556,292 2,669,240
<SALES> 2,954,033 2,954,218
<TOTAL-REVENUES> 2,954,033 2,954,218
<CGS> 2,618,151 2,529,323
<TOTAL-COSTS> 2,618,151 2,529,323
<OTHER-EXPENSES> 266,983 290,910
<LOSS-PROVISION> 666 4,801
<INTEREST-EXPENSE> 36,249 39,214
<INCOME-PRETAX> 31,984 89,970
<INCOME-TAX> (10,840) (12,201)
<INCOME-CONTINUING> 42,824 102,171
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 5,373
<CHANGES> 11,100 0
<NET-INCOME> 53,924 107,544
<EPS-PRIMARY> 0.99 2.26
<EPS-DILUTED> 0.99 2.22
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-30-1997 JUL-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 135,003 426,884 416,906
<SECURITIES> 0 0 0
<RECEIVABLES> 313,018 310,126 309,353
<ALLOWANCES> 20,251 24,422 23,844
<INVENTORY> 416,162 382,310 393,380
<CURRENT-ASSETS> 843,932 1,094,898 1,095,795
<PP&E> 3,709,305 3,393,635 3,334,335
<DEPRECIATION> 2,245,443 2,161,728 2,125,817
<TOTAL-ASSETS> 2,575,099 2,554,237 2,542,281
<CURRENT-LIABILITIES> 551,007 615,420 615,755
<BONDS> 453,874 321,341 311,679
63,155 62,780 62,405
36,650 36,650 36,650
<COMMON> 433 433 433
<OTHER-SE> 631,403 688,194 764,015
<TOTAL-LIABILITY-AND-EQUITY> 2,575,099 2,554,237 2,542,281
<SALES> 757,618 824,869 788,663
<TOTAL-REVENUES> 757,618 824,869 788,663
<CGS> 653,204 700,051 653,715
<TOTAL-COSTS> 653,204 700,051 653,715
<OTHER-EXPENSES> 66,570 43,693 40,653
<LOSS-PROVISION> 931 4,171 (578)
<INTEREST-EXPENSE> 8,174 4,678 1,191
<INCOME-PRETAX> 28,739 72,276 93,682
<INCOME-TAX> 2,074 7,351 15,121
<INCOME-CONTINUING> 26,665 64,925 78,561
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 (5,397) 0
<CHANGES> 0 0 0
<NET-INCOME> 26,665 59,528 78,561
<EPS-PRIMARY> 0.55 1.31 1.76
<EPS-DILUTED> 0.55 1.30 1.72
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 APR-30-1996 JUL-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 135,608 158,647 128,055
<SECURITIES> 0 0 0
<RECEIVABLES> 293,056 312,190 291,299
<ALLOWANCES> 21,998 22,027 20,333
<INVENTORY> 413,421 429,692 440,041
<CURRENT-ASSETS> 820,087 878,492 839,062
<PP&E> 3,572,968 3,587,769 3,622,322
<DEPRECIATION> 2,107,756 2,143,786 2,180,721
<TOTAL-ASSETS> 2,629,000 2,690,346 2,651,791
<CURRENT-LIABILITIES> 587,479 642,523 618,304
<BONDS> 485,828 482,862 466,876
64,655 64,280 63,905
36,650 36,650 36,650
<COMMON> 433 433 433
<OTHER-SE> 546,314 561,491 576,774
<TOTAL-LIABILITY-AND-EQUITY> 2,629,000 2,690,346 2,651,791
<SALES> 682,143 769,481 735,858
<TOTAL-REVENUES> 682,143 769,481 735,858
<CGS> 629,002 680,545 644,960
<TOTAL-COSTS> 629,002 680,545 644,960
<OTHER-EXPENSES> 61,102 67,190 71,044
<LOSS-PROVISION> 3,012 29 (1,694)
<INTEREST-EXPENSE> 8,771 9,349 9,451
<INCOME-PRETAX> (19,744) 12,368 12,097
<INCOME-TAX> (5,548) (5,549) 570
<INCOME-CONTINUING> (14,196) 17,917 11,527
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 11,100
<NET-INCOME> (14,196) 17,917 22,627
<EPS-PRIMARY> 0.39 0.35 0.46
<EPS-DILUTED> 0.39 0.35 0.46
</TABLE>
