<PAGE>
1 9 9 7
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - K/A
AMENDMENT NO. 2
[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>
Form 10-K for the Fiscal Year Ended December 31, 1997 is hereby amended as
follows:
Exhibit 13- NOTE P--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Revised Note P to the Financial Statements, Quarterly Results of Operations
(Unaudited) was previously filed in Amendment No. 1. Filed herewith is
Exhibit 13 which is restated solely to incorporate the previously filed
revised Note P. The effect of the revision is described below.
An $11,100,000 cumulative effect of accounting change is now reflected in
the three months ended March 31, 1996 which was incorrectly reflected in
the three months ended September 30, 1996 when the decision to change the
accounting principle had been made.
Income before cumulative effect of accounting change now reflects
$2,135,000 of tax expense in the three months ended December 31, 1996 which
was originally reflected in the three months ended September 30, 1996.
Basic and diluted earnings per share amounts have been changed to reflect
the above mentioned changes.
The restatement adjustments do not affect the results of operations for the
full year ended December 31, 1996.
Exhibit 18- Preferability Letter on change in accounting principles
A preferability letter to give effect to the accounting change for the
change in measurement date for pensions and other postretirement benefits
as of the beginning of 1996.
Exhibit 23- CONSENT OF INDEPENDENT AUDITORS
A new consent is hereby submitted to reflect the dates of the above
mentioned changes.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NATIONAL STEEL CORPORATION
By: /s/ John A. Maczuzak
-------------------------------------
John A. Maczuzak
President and Chief Operating Officer
By: /s/ Michael D. Gibbons
-------------------------------------
Michael D. Gibbons
Acting Chief Financial Officer
<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 13,662 25,441
Cumulative effect of accounting change 11,100 ----- ----- -----
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ (3,096) $ 17,917 $ 13,662 $ 25,441
===================================================================================================
Basic and diluted earnings per share:
Income (loss) before cumulative
effect of accounting change $ (.39) $ .35 $ .25 $ .53
Cumulative effect of accounting change .25 -- -- --
- ---------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ (.14) $ .35 $ .25 $ .53
===================================================================================================
</TABLE>
(See Note A--Description of the Business and Significant Accounting Policies
for diluted earnings per share.)
The 1996 results have been restated from those reported in the original 1997
Form 10-K to reflect the $11,100 cumulative effect of accounting change in the
first quarter. Previously, the cumulative effect had been reported incorrectly
in the third quarter when the decision to change the accounting principle had
been made. The 1996 results also have been restated to correct an overstatement
of income tax in the third quarter and a corresponding understatement in the
fourth quarter in the amount of $2,135. While the restatement adjustments affect
the quarters of 1996, such adjustments do not affect the results of operations
for the full year ended December 31, 1996.
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 18
Board of Directors
National Steel Corporation
Mishawaka, Indiana
As discussed in Notes E and F of the Notes to Consolidated Financial Statements
of National Steel Corporation and subsidiaries, included in its Form 10-K/A for
the year ended December 31, 1997, the Company changed the measurement date used
in accounting for pensions and for postretirement benefits other than pensions
from December 31 to September 30. The financial statements for the year ended
December 31, 1996 reflect this change as a change in accounting method as of the
beginning of 1996.
Management has advised us that it believes the change is to a preferable method
in the Company's circumstances because the earlier measurement date results in
more accurate year-end disclosures pertaining to the plans and more accurate
estimates of expense for interim financial reporting and because the change
enhances comparability with other major United States integrated steel
companies.
There are no authoritative criteria for determining a "preferable" measurement
date based on the particular circumstances. However, we conclude that the change
in the method of accounting for pensions and for postretirement benefits other
than pensions by the use of an earlier measurement date (that is, September 30)
is a change to an acceptable alternative method which, based on management's
business judgment to make this change for the reasons cited above, is preferable
in the Company's circumstances. We have not conducted an audit in accordance
with generally accepted auditing standards of any financial statements of the
Company as of any date or for any period subsequent to December 31, 1997, and
therefore we do not express any opinion on any financial statements of the
Company subsequent to that date.
Ernst & Young LLP
Fort Wayne, Indiana
June 5, 1998
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K/A)
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/A) 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
June 15, 1998
