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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 1 0 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 1-983
NATIONAL STEEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE 25-0687210
(State or other jurisdiction 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 219-273-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Class B Common Stock New York Stock Exchange
First Mortgage Bonds, 8-3/8% Series due 2006 New York Stock Exchange
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. [_]
At March 15, 1996, there were 43,288,240 shares of the registrant's common
stock outstanding.
Aggregate market value of voting stock held by non-affiliates:
$320,018,501.
The amount shown is based on the closing price of National Steel
Corporation's Common Stock on the New York Stock Exchange on March 15, 1996.
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 1996 Proxy Statement of National Steel Corporation
are incorporated by reference into Part III of the Report on Form 10-K.
NATIONAL STEEL CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business 3
Item 2 Properties 11
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 23
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 28
Item 6 Selected Financial Data 29
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 30
Item 8 Financial Statements and Supplementary Data 38
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 64
PART III
Item 10 Directors and Executive Officers of the Registrant 65
Item 11 Executive Compensation 65
Item 12 Security Ownership of Certain Beneficial Owners and Management 65
Item 13 Certain Relationships and Related Transactions 65
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 66
2
PART I
ITEM 1. BUSINESS
National Steel Corporation, a Delaware corporation, and its consolidated
subsidiaries (the "Company") is the fourth largest integrated steel producer in
the United States as measured by production and is engaged in the manufacture
and sale of a wide variety of flat rolled carbon steel products, including hot
rolled, cold rolled, galvanized, tin and chrome plated steels. The Company
targets high value added applications of flat rolled carbon steel for sale to
the automotive, metal buildings and container markets. Since 1984, the Company
has invested approximately $2.1 billion in capital improvements to enhance the
Company's competitive position and penetrate growing segments of these markets.
The Company was formed through the merger of Great Lakes Steel, Weirton Steel
and Hanna Iron Ore Company and was incorporated in Delaware on November 7,
1929. The Company built a finishing facility, now the Midwest Division, in
1961, and in 1971 purchased Granite City Steel Corporation, now the Granite
City Division. On September 13, 1983, the Company became a wholly-owned
subsidiary of National Intergroup, Inc., which in October 1994 changed its name
to FoxMeyer Health Corporation (collectively, with its subsidiaries,
hereinafter referred to as "FOX"), through a restructuring. On January 11,
1984, the Company sold the principal assets of its Weirton Steel Division and
retained certain liabilities related thereto. On August 31, 1984, NKK
Corporation (collectively, with its subsidiaries, "NKK") purchased a 50% equity
interest in the Company from FOX. On June 26, 1990, NKK purchased an
additional 20% equity interest in the Company from FOX. In April 1993, the
Company completed an initial public offering of its Class B Common Stock. In
October 1993, FOX converted all of its shares of Class A Common Stock to an
equal number of shares of Class B Common Stock and subsequently sold
substantially all of its shares of Class B Common Stock in the market in
January 1994, resulting in NKK owning 75.6% voting interest in the Company at
December 31, 1994. On February 1, 1995, the Company completed a primary
offering of 6.9 million shares of Class B Common Stock. Subsequent to the
transaction, NKK's voting interest decreased to 67.6%.
The Company's principal executive offices are located at 4100 Edison Lakes
Parkway, Mishawaka, Indiana 46545-3440; telephone (219) 273-7000.
STRATEGY
The Company's mission is to achieve sustained profitability, thereby enhancing
stockholder value, by reducing the costs of production and improving
productivity and product quality. Management has developed a number of
strategic initiatives designed to achieve the Company's goals.
Reduction in Production Costs. Management's primary focus is to reduce the
costs of producing hot rolled bands, the largest component of the Company's
finished product cost. Reducing all costs associated with the production
process is essential to the Company's overall cost reduction program.
Management has reduced production costs by better utilizing existing equipment,
improving productivity, involving labor in improving operating practices and by
the cost efficient use of steelmaking inputs. In addition, the Company's
facility engineers, who have access to a wide range of NKK process
technologies, analyze and implement innovative steelmaking and processing
methods on an ongoing basis.
Quality Improvement. An important element of the Company's strategy is to
reduce the cost of poor quality, which currently results in the sale of non-
prime products at lower prices and requires substantial reprocessing costs.
The Company has made improvements in this area by improving process control,
utilizing employee based problem solving methods, eliminating dependence on
final inspection and reducing internal rejections and extra processing.
Predictive Maintenance Program. Management is installing a predictive
maintenance program designed to maximize production and equipment life while
minimizing unscheduled equipment outages. This
3
program should improve operations stability through improved equipment
reliability, which is expected to result in improved productivity and reduced
costs.
ALLIANCE WITH NKK
The Company has a strong alliance with its principal stockholder, NKK, the
second largest steel company in Japan and the seventh largest in the world as
measured by production. Since 1984, the Company has had access to a wide range
of NKK's steelmaking, processing and applications technology. The Company's
engineers include approximately 40 engineers transferred from NKK, who serve
primarily at the Company's Divisions. These engineers, as well as engineers
and technical support personnel at NKK's facilities in Japan, assist in
improving operating practices and developing new manufacturing processes. This
support also includes providing input on ways to improve raw steel to finished
product yields. In addition, NKK has provided financial assistance to the
Company in the form of investments, loans and introductions to Japanese
financial institutions and trading companies; however, there can be no
assurances given as to the extent of NKK's future financial support beyond
existing contractual commitments.
This alliance with NKK was further strengthened by the Agreement for the
Transfer of Employees (superceding a prior arrangement) entered into by the
Company and NKK effective as of May 1, 1995. This Agreement was unanimously
approved by all directors of the Company who were not then, and have never
been, employees of NKK. Pursuant to the terms of this agreement, technical and
business advice is provided to the Company through NKK employees who are
transferred to the employ of the Company. The Company has agreed to reimburse
NKK for certain costs and expenses incurred by NKK in connection with the
transfer of the employees. The total amount of reimbursable expenses which the
Company is obligated to pay is capped at $11.7 million for the initial term of
the Agreement which runs from May 1, 1995 through December 31, 1996. The
Agreement can be extended from year to year thereafter if approved by NKK and
by a majority of those directors of the Company who are not then, and have
never been, employees of NKK.
CUSTOMER PARTNERSHIP
The Company's customer partnership enables the Company to differentiate its
products through superior quality and service. Management believes it is able
to differentiate the Company's products and promote customer loyalty by
establishing close relationships through early customer involvement, providing
technical services and support and utilizing its Product Application Center and
Technical Research Center facilities.
The Company operates a research and development facility near its Great Lakes
Division to develop new products, improve existing products and develop more
efficient operating procedures to meet the constantly increasing demands of the
automotive, metal buildings and container markets. The research center employs
approximately 50 chemists, physicists, metallurgists and engineers. The
research center is responsible for, among other things, the development of five
new high strength steels for automotive weight reduction and a new galvanized
steel for the metal buildings market. In addition, the Company operates a
Product Application Center near Detroit dedicated to providing product and
technical support to customers. The Product Application Center assists
customers with application engineering (selecting optimum metal and
manufacturing methods), application technology (evaluating product performance)
and technical developments (performing problem solving at plants). The Company
spent $9.8 million, $7.9 million and $9.4 million for research and development
in 1995, 1994 and 1993, respectively. In addition, the Company participates in
various research efforts through the American Iron and Steel Institute (the
"AISI").
MARKETING STRATEGY
The Company's marketing strategy has concentrated on increasing the level of
sales of higher value added products to the automotive, metal buildings and
container markets. These segments demand high quality products, on-time
delivery and effective and efficient customer service. This strategy is
4
designed to increase margins, reduce competitive threats and maintain high
capacity utilization rates by shifting the Company's product mix to higher
quality products and providing superior customer service.
To enable the Company to more efficiently meet the needs of its target markets
and focus on higher value added products, the Company has entered into two
separate joint ventures to build hot dip galvanizing facilities. One joint
venture is with NKK and an unrelated third party and has been built to service
the automotive industry. The second joint venture has been built to service
the construction industry. See "Properties-DNN Galvanizing Limited
Partnership" and "Double G Coatings, L.P." Additionally, in 1995, the Company
began construction of two additional coating lines which will serve the metal
buildings market. The line located at the Granite City Division cost
approximately $85.0 million and was completed during the first quarter of 1996.
The line which will be located at the Midwest Division will cost approximately
$70.0 million and is scheduled to be completed in the second quarter of 1998.
CAPITAL INVESTMENT PROGRAM
Since 1984, the Company has invested over $2.1 billion in capital improvements
aimed at upgrading the Company's steelmaking and finishing operations to meet
its customers' demanding requirements for higher quality products and to reduce
production costs. As described above, one of the Company's strategic
initiatives is to more effectively utilize these substantial capital
improvements. Major projects include an electrolytic galvanizing line, a
continuous caster, a ladle metallurgy station, a vacuum degasser, a complete
coke oven battery rebuild and a high speed pickle line, each of which services
the Great Lakes Division and a continuous caster, a galvanizing line and a
ladle metallurgy station, each of which services the Granite City Division.
Major improvements at the Midwest Division include the installation of process
control equipment to upgrade its finishing capabilities and a galvanizing line.
Capital investments for each of 1995, 1994 and 1993 were $215.4 million, $137.5
million and $160.7 million, respectively. Capital investments for 1996 and
1997 are expected to total approximately $268.0 million.
CUSTOMERS
The Company is a major supplier of hot and cold rolled steel and galvanized
coils to the automotive industry, one of the most demanding steel consumers.
Car and truck manufacturers require wide sheets of steel, rolled to exact
dimensions. In addition, formability and defect-free surfaces are critical.
The Company has been able to successfully meet these demands. Its steels have
been used in a variety of automotive applications including exposed and
unexposed panels, wheels and bumpers.
The Company is also a leading supplier of steel to the domestic metal buildings
market. Roof and building panels are the principal applications for galvanized
and Galvalume(R) steel in this market. Management believes that demand for
Galvalume(R) steel will exhibit strong growth for the next several years
partially as a result of a trend away from traditional building products, and
that the Company is well positioned to profit from this growth as a result of
both its position in this market and additional capacity referred to above.
The Company produces chrome and tin plated steels to exacting tolerances of
gauge, shape, surface flatness and cleanliness for the container industry. Tin
and chrome plated steels are used to produce a wide variety of food and non-
food containers. In recent years, the market for tin and chrome plated steels
has been both stable and profitable for the Company.
The Company also supplies the pipe and tube and service center markets with hot
rolled, cold rolled and coated sheet. The Company is a key supplier to
transmission pipeline, downhole casing and structural pipe producers. Service
centers generally purchase steel coils from the Company and may process them
further or sell them directly to third parties without further processing.
5
The following table sets forth the percentage of the Company's revenues from
various markets for the past five years.
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Automotive 27.8% 28.5% 28.9% 27.2% 25.8%
Metal buildings 16.8 15.0 14.3 12.8 11.2
Containers 11.3 13.2 13.3 14.9 15.6
Pipe and Tube 7.4 6.9 8.2 9.4 8.0
Service Centers 15.4 17.9 15.5 13.6 10.7
All Other 21.3 18.5 19.8 22.1 28.7
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Shipments to General Motors, the Company's largest customer, accounted for
approximately 9%, 10% and 11% of net sales in each of 1995, 1994 and 1993,
respectively. Export sales accounted for approximately 2.6% of revenue in
1995, .9% in 1994 and .1% in 1993. The Company's products are sold through the
Company's six sales offices located in Chicago, Detroit, Houston, Kansas City,
Pittsburgh and St. Louis. Substantially all of the Company's net revenues are
based on orders for short-term delivery. Accordingly, backlog is not
meaningful when assessing future results of operations.
OPERATIONS
The Company operates three principal facilities: two integrated steel plants,
the Great Lakes Division in Ecorse and River Rouge, Michigan, near Detroit, and
the Granite City Division in Granite City, Illinois, near St. Louis, and a
finishing facility, the Midwest Division in Portage, Indiana, near Chicago.
The Company's centralized corporate structure, the close proximity of the
Company's principal steel facilities and the complementary balance of
processing equipment shared by them, enable the Company to closely coordinate
the operations of these facilities in order to maintain high operating rates
throughout its processing facilities and to maximize the return on its capital
investments.
6
The following table details effective steelmaking capacity, actual production,
effective capacity utilization and percentage of steel continuously cast for
the Company and the domestic steel industry for the years indicated.
RAW STEEL PRODUCTION DATA
EFFECTIVE PERCENT
EFFECTIVE ACTUAL CAPACITY CONTINUOUSLY
CAPACITY PRODUCTION UTILIZATION CAST
-------- ---------- ----------- ------------
(000'S OF NET TONS) (%) (%)
The Company
1995 6,300 6,081 96.5 100.0
1994 6,000 5,763 96.1 100.0
1993 5,550 5,551 100.0 100.0
1992 5,355 5,380 100.5 100.0
1991 5,670 5,247 92.5 99.8
Domestic Steel Industry*
1995 112,400 103,142 91.8 91.0
1994 108,150 100,579 93.0 89.5
1993 109,900 97,877 89.1 85.7
1992 113,100 92,949 82.2 79.3
1991 117,700 87,896 74.7 75.8
* Information as reported by the AISI. The 1995 industry information is
estimated by the AISI.
In 1995, effective capacity increased to 6,300,000 net tons due to higher
production levels at both the Great Lakes and Granite City Divisions.
Effective capacity increased to 6,000,000 net tons in 1994 due to the fact that
the Company did not reline any blast furnaces during this period. The
effective capacity of the Company decreased to 5,355,000 net tons in 1992 as a
result of a scheduled blast furnace reline. Effective capacity utilization
fell to 92.5% in 1991 due, in part, to an unusually high level of inventory
carried forward from 1990, along with scheduled maintenance outages at major
finishing units and a low demand for steel products during the first half of
the year.
RAW MATERIALS
Iron ore. The metallic iron requirements of the Company are supplied primarily
from iron ore pellets that are produced from a concentration of low grade ores.
The Company, directly through its wholly owned subsidiary, National Steel
Pellet Company ("NSPC") and through an affiliate, has reserves of iron ore
adequate to produce approximately 500 million gross tons of iron ore pellets.
The Company's iron ore reserves are located in Minnesota, Michigan and Quebec,
Canada. Excluding the effects of the thirteen month period from August 1, 1993
through August 28, 1994 when NSPC was idled, a significant portion of the
Company's average annual consumption of iron ore pellets was obtained from the
deposits of the Company or those of its affiliate during the last five years.
The remaining iron ore pellets consumed by the Company were purchased from
third parties. Iron ore pellets available to the Company from its own
deposits, its affiliate and outside suppliers are sufficient to meet the
Company's total iron ore requirements at competitive market prices for the
foreseeable future.
7
Coal. In 1992, the Company decided to exit the coal mining business. At that
time, the Company owned underground coal properties in Pennsylvania, Kentucky
and West Virginia as well as undeveloped coal reserves in Pennsylvania and West
Virginia. During 1993, the Pennsylvania and Kentucky properties were sold
except for the coal reserves which were leased on a long term basis. During
1994, one of the West Virginia plant sites was sold, and in 1995, the remaining
plant site in West Virginia was leased for a 5 year term, with an option to
extend for two additional 5 year periods. Negotiations are in process for the
long term lease of certain West Virginia partially developed coal reserves.
The remaining coal assets totaling $38.8 million are included in the assets of
the Company and constitute less than 2% of the Company's total assets.
Adequate supplies of coal are readily available at competitive market prices.
Coke. The Company operates two efficient coke oven batteries servicing the
Granite City Division and a newly rebuilt No. 5 coke oven battery at the Great
Lakes Division. The No. 5 coke battery enhances the quality and stability of
the Company's coke supply, and incorporates state-of-the-art technology while
meeting the requirements of the Clean Air Act. With the No. 5 coke battery
rebuild, the Company has significantly improved its self-sufficiency and can
supply approximately 50% of its annual coke requirements. The remaining coke
requirements are met through competitive market purchases.
Limestone. The Company, through an affiliated company, has limestone reserves
of approximately 76 million gross tons located in Michigan. During the last
five years, approximately 62% of the Company's average annual consumption of
limestone was derived from these reserves. The Company's remaining limestone
requirements were purchased.
Scrap and Other Materials. Supplies of steel scrap, tin, zinc and other
alloying and coating materials are readily available at competitive market
prices.
PATENTS AND TRADEMARKS
The Company has the patents and licenses necessary for the operation of its
business as now conducted. The Company does not consider its patents and
trademarks to be material to the business of the Company.
EMPLOYEES
As of December 31, 1995, the Company employed 9,474 people. In 1995, the
Company completed a plan that resulted in the reduction of its salaried non-
represented workforce by approximately 400 employees. The Company has labor
agreements with the United Steelworkers of America (the "USWA") and other labor
organizations which collectively represent approximately 82.5% of the Company's
employees. In 1993, the Company entered into labor agreements with these
various labor organizations. These agreements expire in 1999, with mid-term
economic reopeners scheduled in 1996. Any unresolved issues are subject to
binding arbitration.
COMPETITION
The Company is in direct competition with domestic and foreign flat rolled
carbon steel producers and producers of plastics, aluminum and other materials
which can be used in place of flat rolled carbon steel in manufactured
products. Price, service and quality are the primary types of competition
experienced by the Company. The Company believes it is able to differentiate
its products from those of its competitors by, among other things, providing
technical services and support and utilizing its Product Application Center and
Technical Research Center facilities and by its focus on improving product
quality through, among other things, capital investment and research and
development, as described above.
8
Imports. Domestic steel producers face significant competition from foreign
producers and have been adversely affected by what the Company believed to be
unfairly traded imports. Imports of finished steel products accounted for
approximately 18%, 19% and 14% of the domestic market in 1995, 1994 and 1993,
respectively. Many foreign steel producers are owned, controlled or subsidized
by their governments. Decisions by these foreign producers with respect to
production and sales may be influenced to a greater degree by political and
economic policy considerations than by prevailing market conditions.
Reorganized/Reconstituted Mills. The intensely competitive conditions within
the domestic steel industry have been exacerbated by the continued operation,
modernization and upgrading of marginal steel production facilities through
bankruptcy reorganization procedures, thereby perpetuating overcapacity in
certain industry product lines. Overcapacity is also caused by the continued
operation of marginal steel production facilities that have been sold by
integrated steel producers to new owners, who operate such facilities with a
lower cost structure.
Mini-mills. Domestic integrated producers, such as the Company, have lost
market share in recent years to domestic mini-mills. Mini-mills provide
significant competition in certain product lines, including hot rolled and cold
rolled sheets, which represented, in the aggregate, approximately 58% of the
Company's shipments in 1995. Mini-mills are relatively efficient, low-cost
producers which produce steel from scrap in electric furnaces, have lower
employment and environmental costs and target regional markets. Thin slab
casting technologies have allowed mini-mills to enter certain sheet markets
which have traditionally been supplied by integrated producers. One mini-mill
has constructed two such plants and has begun construction on a third plant.
Certain companies have announced plans for, or have indicated that they are
currently considering, additional mini-mill plants for sheet products in the
United States.
Steel Substitutes. In the case of many steel products, there is substantial
competition from manufacturers of other products, including plastics, aluminum,
ceramics, glass, wood and concrete. Conversely, the Company and certain other
manufacturers of steel products have begun to compete in recent years in
markets not traditionally served by steel producers.
ENVIRONMENTAL MATTERS
The Company's operations are subject to numerous laws and regulations relating
to the protection of human health and the environment. The Company currently
estimates that it will incur capital expenditures in connection with matters
relating to environmental control of approximately $9.6 million and $7.0
million for 1996 and 1997, respectively. In addition, the Company expects to
record expenses for environmental compliance, including depreciation, of
approximately $77.0 million and $83.0 million for 1996 and 1997, respectively.
Since environmental laws and regulations are becoming increasingly stringent,
the Company's environmental capital expenditures and costs for environmental
compliance may increase in the future. In addition, due to the possibility of
future factual or regulatory developments, the amount and timing of future
environmental expenditures could vary substantially from those currently
anticipated. The costs for environmental compliance may also place the Company
at a competitive disadvantage with respect to foreign steel producers, as well
as manufacturers of steel substitutes, that are subject to less stringent
environmental requirements.
In 1990, Congress passed amendments to the Clean Air Act which impose stringent
standards on air emissions. The Clean Air Act amendments will directly affect
the operations of many of the Company's facilities, including its coke ovens.
Under such amendments, coke ovens generally will be required to comply with
progressively more stringent standards over the next thirty years. The Company
believes that the costs for complying with the Clean Air Act amendments will
not have a material adverse effect, on an individual site basis or in the
aggregate, on the Company's financial position, results of operations or
liquidity.
In 1990, the EPA released a proposed rule which establishes standards for the
implementation of a corrective action program under the Resource Conservation
Recovery Act of 1976, as amended
9
("RCRA"). The corrective action program requires facilities that are operating
under a permit, or are seeking a permit, to treat, store or dispose of
hazardous wastes to investigate and remediate environmental contamination.
Currently, the Company is conducting an investigation at its Midwest Division
facility. The Company estimates that the potential capital costs for
implementing corrective actions at such facility will be approximately $8.0
million payable over the next several years. At the present time, the Company's
other facilities are not subject to corrective action.
Since 1989, the United States Environmental Protection Agency (the "EPA") and
the eight Great Lakes states have been developing the Great Lakes Initiative,
which will impose water quality standards that are even more stringent than the
best available technology standards currently being enforced. On March 23,
1995, the EPA published the final "Water Quality Guidance for the Great Lakes
System" (the "Guidance Document"). The Guidance Document establishes minimum
water quality standards and other pollution control policies and procedures for
waters within the Great Lakes System. The Company has conducted a series of
internal analyses concerning the effect of the Guidance Document on the
Company's operations. Based upon these analyses, the Company believes that the
Guidance Document will have a limited impact on the conduct of the Company's
business, and that any such impact will not have a material adverse effect on
the Company's financial position, results of operations or liquidity.
The Company has recorded the reclamation costs to restore its coal and iron ore
mines at its shut down locations to their original and natural state, as
required by various federal and state mining statutes.
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. In addition, the Company and certain of its subsidiaries
are involved as potentially responsible parties ("PRPs") in a number of off-
site CERCLA or state superfund site proceedings. At several of these sites,
any remediation costs incurred by the Company are liabilities for which FOX has
agreed to indemnify the Company. (See the section captioned "Environmental
Matters" on page 16.)
10
ITEM 2. PROPERTIES
THE GRANITE CITY DIVISION.
The Granite City Division, located in Granite City, Illinois, has an effective
steelmaking capacity of 2.4 million tons. All steel at this Division is now
produced by continuous casting. The Granite City Division also uses ladle
metallurgy to refine the steel chemistry to enable it to meet the exacting
specifications of its customers. The Division's ironmaking facilities consist
of two coke batteries and two blast furnaces. Finishing facilities include an
80 inch hot strip mill, a continuous pickler and two hot dip galvanizing lines.
In 1995, the Granite City Division commenced construction of a 270,000 ton
coating line to serve the metal buildings market. The line cost approximately
$85.0 million and was completed in 1996. Granite City Division ships
approximately 20% of its total production to the Midwest Division for
finishing. Principal products of the Granite City Division include hot rolled,
cold rolled, hot dipped galvanized, grain bin and high strength, low alloy
steels.
The Granite City Division is located on 1,540 acres and employs approximately
2,960 people. The Division's proximity to the Mississippi River and other
interstate transit systems, both rail and highway, provides easy accessibility
for receiving raw materials and supplying finished steel products to customers.
THE GREAT LAKES DIVISION.
The Great Lakes Division, located in Ecorse and River Rouge, Michigan, is an
integrated facility engaged in steelmaking primarily for use in the automotive
market with an effective steelmaking capacity of 3.9 million tons. All steel
at this Division is now produced by continuous casting. The Division's
ironmaking facilities consist of a recently rebuilt 85-oven coke battery and
three blast furnaces. The Division also operates steelmaking facilities
consisting of a vacuum degasser and a ladle metallurgy station. Finishing
facilities include a hot strip mill, a skinpass mill, a shear line, a new high
speed pickle line, a tandem mill, a batch annealing station, two temper mills
and two customer service lines, and an electrolytic galvanizing line. The
Great Lakes Division ships approximately 40% of its production to the Midwest
Division for finishing. Principal products of the Great Lakes Division include
hot rolled, cold rolled, electrolytic galvanized, and high strength, low alloy
steels.
The Great Lakes Division is located on 1,100 acres and employs approximately
3,700 people. The Division is strategically located with easy access to lake,
rail and highway transit systems for receiving raw materials and supplying
finished steel products to customers.
THE MIDWEST DIVISION.
The Midwest Division, located in Portage, Indiana, finishes hot rolled bands
produced at the Granite City and Great Lakes Divisions primarily for use in the
automotive, metal buildings and container markets. The Division's facilities
include a continuous pickling line, two cold reduction mills and two continuous
galvanizing lines, a 48 inch wide line which can produce galvanized or
Galvalume(R) steel products and which services the metal buildings market and a
72 inch wide line which services the automotive market; finishing facilities
for cold rolled products consisting of a batch annealing station, a sheet
temper mill and a continuous stretcher leveling line; and an electrolytic
cleaning line, a continuous annealing line, two tin temper mills, two tin
recoil lines, an electrolytic tinning line and a chrome line which services the
container markets. In 1995, the Midwest Division commenced production of a
270,000 ton coating line to serve the metal buildings market. The line will
cost approximately $70.0 million and is scheduled to be completed in the second
quarter of 1998. Principal products of the Midwest Division include tin mill
products, hot dipped galvanized and Galvalume(R) steel, cold rolled, and
electrical lamination steels.
11
The Midwest Division is located on 1,100 acres and employs approximately 1,490
people. Its location provides excellent access to rail, water and highway
transit systems for receiving raw materials and supplying finished steel
products to customers.
NATIONAL STEEL PELLET COMPANY
NSPC, located on the western end of the Mesabi Iron Ore Range in Keewatin,
Minnesota, mines, crushes, concentrates and pelletizes low grade taconite ore
into iron ore pellets. NSPC operations include two primary crushers, ten
primary mills, five secondary mills, a concentrator and a pelletizer. The
facility has a current annual effective iron ore pellet capacity of over 5
million gross tons and has a combination of rail and vessel access to the
Company's integrated steel mills.
DNN GALVANIZING LIMITED PARTNERSHIP
As part of its strategy to focus its marketing efforts on high quality steels
for the automotive industry, the Company entered into an agreement with NKK and
Dofasco Inc., a large Canadian steel producer ("Dofasco"), to build and operate
DNN, a 400,000 ton per year, hot dip galvanizing facility in Windsor, Ontario,
Canada. This facility incorporates state-of-the-art technology to galvanize
steel for critically exposed automotive applications. The facility is modeled
after NKK's Fukuyama Works Galvanizing Line that has provided high quality
galvanized steel to the Japanese automotive industry for several years. The
Company is committed to utilize 50% of the available line time of the facility
and pay a tolling fee designed to cover fixed and variable costs with respect
to 50% of the available line time, whether or not such line time is utilized.
The plant began production in January 1993 and is currently operating at full
capacity. The Company's steel substrate requirements are provided to DNN by
the Great Lakes Division.
DOUBLE G COATINGS, L.P.
To continue to meet the needs of the growing metal buildings market, the
Company and an unrelated party formed a joint venture to build and operate
Double G. Coatings, L.P. ("Double G"), a 270,000 ton per year hot dip
galvanizing and Galvalume(R) steel facility near Jackson, Mississippi. The
facility is capable of coating 48 inch wide steel coils with zinc to produce a
product known as galvanized steel and with a zinc and aluminum coating to
produce a product known as Galvalume(R) steel. Double G will primarily serve
the metal buildings segment of the construction market in the south central
United States. The Company is committed to utilize and pay a tolling fee in
connection with 50% of the available line time at the facility. The joint
venture commenced production in the second quarter of 1994 and reached full
operating capacity in 1995. The Company's steel substrate requirements are
provided to Double G by the Great Lakes and Midwest Divisions.
PROCOIL CORPORATION
ProCoil Corporation ("ProCoil"), a joint venture between the Company, Marubeni
Corporation, Mitsubishi Corporation and NKK, located in Canton, Michigan,
operates a steel processing facility which began operations in 1988 and a
warehousing facility which began operations in 1992. The Company and Marubeni
Corporation each own a 44% equity interest in ProCoil. ProCoil blanks, slits
and cuts steel coils to desired lengths to service automotive market customers.
In addition, ProCoil warehouses material to assist the Company in providing
just-in-time delivery to customers.
12
OTHER PROPERTIES
Generally, the Company's properties are well maintained, considered adequate
and being utilized for their intended purposes. The Company's corporate
headquarters is located in Mishawaka, Indiana. Except as stated below, the
steel production facilities are owned in fee by the Company. A continuous
caster and related ladle metallurgy facility and an electrolytic galvanizing
line, which each service the Great Lakes Division, and a coke battery, which
services the Granite City Division, are operated pursuant to the terms of
operating leases with third parties and are not subject to a lien securing the
Company's First Mortgage Bonds. The electrolytic galvanizing line lease, the
coke battery lease and the continuous caster and related metallurgy facility
lease are scheduled to expire in 2001, 2004, and 2008, respectively. Upon
expiration, the Company has the option to extend the respective lease or
purchase the facility at fair market value.
All land (excluding certain unimproved land), buildings and equipment
(excluding, generally, mobile equipment) that are owned in fee by the Company
at the Great Lakes Division, Granite City Division and Midwest Division are
subject to a lien securing the First Mortgage Bonds, with certain exceptions,
including a vacuum degasser and a pickle line which service the Great Lakes
Division, a continuous caster which services the Granite City Division and the
corporate headquarters in Mishawaka, Indiana. Additionally, the Company has
agreed to grant to the VEBA Trust a second mortgage on the No. 5 coke oven
battery at the Great Lakes Division.
For a description of certain properties related to the Company's production of
raw materials, see "Raw Materials."
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ITEM 3. LEGAL PROCEEDINGS
In addition to the matters specifically discussed below, the Company is
involved in various legal proceedings occurring in the normal course of its
business. In the opinion of the Company's management, adequate provision has
been made for losses which are likely to result from these actions. The outcome
of these proceedings is not expected to have a material adverse effect on the
financial position, results of operations or liquidity of the Company. For a
description of certain environmental matters involving the Company, see
"Environmental Matters" below.
Baker's Port, Inc. v. National Steel Corporation. On July 1, 1988, Baker's
Port, Inc. ("BPI") and Baker Marine Corporation ("BMC") filed a lawsuit in the
District Court for San Patricio County, Texas against the Company, two of its
subsidiaries, NS Land Company ("NS Land") and Natland Corporation ("Natland"),
and several other defendants, alleging breach of their general warranty of
title and encumbrances, violation of the Texas Deceptive Trade Practice Act
(the "DTPA") and fraud, in connection with the sale by Natland to BPI in 1981
of approximately 3,000 acres of land near Corpus Christi, Texas. Approximately
$24.7 million of the purchase price was in the form of a note (the "Note")
secured by a Deed of Trust (mortgage) and BMC's guarantee. BPI and BMC sought
actual damages in excess of $55 million, or, alternatively, rescission of the
sale, and exemplary damages in excess of $155 million, as well as treble
damages under the DTPA. Natland counterclaimed for the amount defaulted on by
BPI under the Note which totaled approximately $19 million at the time of
trial. The State of Texas also claimed the rights to certain riparian land.
On September 7, 1990, after trial, a judgment was entered, holding, among
other things, (i) that the affirmative claims of BPI and BMC were barred,
except that the finding of $22 million in damages for fraud could be used as a
setoff against the Note and except as set forth in (iii) below, (ii) that
recovery by Natland on the Note was deemed offset by the setoff referred to in
(i) above, (iii) that BPI was entitled to approximately $.4 million plus pre-
judgment interest thereon in the sum of approximately $.5 million, plus post-
judgment interest thereon and (iv) that Natland's Deed of Trust lien on the
property was fully released and discharged. On June 30, 1993, the Court of
Appeals issued an opinion which affirmed in part and reversed and remanded in
part the judgment of the trial court. Specifically, the Court of Appeals (i)
affirmed the dismissal by the trial court of the title claims brought by the
State of Texas, (ii) reversed the finding by the trial court of $22 million of
damages for fraud, which had been applied to offset the entire amount then
owing on the Note, (iii) reversed the trial court's award of approximately $.4
million plus pre-judgment interest thereon in the amount of approximately $.5
million plus post-judgment interest and (iv) remanded the case for a new trial
on one title claim. All parties filed appeals with the Texas Supreme Court
which subsequently declined to hear them. As a result, the case was remanded
for a new trial. By entry of an order on April 21, 1995, the trial court
limited the issues to be tried to the breach of title claim concerning the
state-owned submerged lands and related attorneys' fees. The parties have
tentatively agreed to a settlement of this matter. In summary, the settlement
provides that (i) the lawsuit will be dismissed with prejudice and the parties
will give each other mutual releases of all claims, (ii) BPI will convey the
subject property back to Natland (with the exception that BPI will retain
ownership of 7.8 acres and a two story building situated thereon in which BPI's
headquarters are located), (iii) Natland will pay to BPI the sum of $3,500,000
($2,150,000 at the closing and $1,350,000 when a certain portion of the
property is sold by Natland) and (iv) upon sale of the subject property,
Natland will retain the first $18,000,000 of net proceeds and any net proceeds
over $18,000,000 will be shared equally between Natland and BPI. The settlement
is subject to the parties agreeing upon and executing formal documentation
embodying the aforesaid terms. In view of these settlement negotiations, the
trial court has extended the trial date to May, 1996. A new trial will take
place only if the parties are unable to finalize the tentative settlement
agreement. As of December 31, 1995, approximately $13.3 million in principal
and $13.6 million in interest was due under the Note. The Company has reserved
the entire amount owing under the Note.
Detroit Coke Corporation v. NKK Chemical, USA, Inc. On October 4, 1991,
Detroit Coke Corporation ("Detroit Coke") filed a lawsuit against NKK Chemical
USA, Inc. ("NKK Chemical") and the Company in the United States District Court
for the Eastern District of Michigan, Southern Division, at Civil Action No.
91-CV-75220DT. Plaintiff alleged that its damages exceeded $120 million. The
cause of action arises out of a coal supply and coke purchasing arrangement
entered into between Detroit Coke and NKK Chemical. In turn, NKK
14
Chemical entered into agreements with Natcoal, Inc. ("Natcoal"), a wholly-owned
subsidiary of the Company, to purchase and ship coal to Detroit Coke, which
would convert it into coke to be sold to NKK Chemical and, in turn, by NKK
Chemical to the Company's Great Lakes Division. Plaintiff claims, among other
things, that certain coal blends supplied by the Company (allegedly acting
through Natcoal) failed to meet blend specifications, allegedly causing
environmental problems and damage to its ovens, all of which resulted in
Detroit Coke having to shut down its facility. The Company filed an Answer and
Affirmative Defenses. A Motion to Transfer the action to the United States
District Court for the Western District of Pennsylvania was granted and the
case was transferred on July 2, 1992. On or about October 9, 1992, plaintiff
filed a First Amended Complaint adding a new defendant, Trans-Tech Corporation,
as well as claiming an additional $1.4 million allegedly due for coke and coke
oven gas supplied under the coke purchasing agreement between Detroit Coke and
NKK Chemical. The Company denied all of plaintiff's allegations. In an Answer
to Interrogatories, plaintiff claimed damages as great as $160 million. On
September 30, 1994, all defendants moved for summary judgment. In their
respective motions for summary judgment, NKK Chemical and the Company claimed,
among other things, that a limitation of damages provision in the Coke Purchase
Agreement between Detroit Coke and NKK Chemical barred all of Detroit Coke's
claims. On February 16, 1995, the court entered an order dismissing all claims
against Trans-Tech Corporation. On May 12, 1995, the court granted summary
judgment in favor of the Company and Natcoal, the effect of which was to
dismiss all claims against the Company and Natcoal. In addition, on May 12,
1995, the court granted summary judgment in favor of NKK Chemical, dismissing
all claims against NKK Chemical except for Detroit Coke's claim seeking
approximately $1.5 million allegedly owed for coke and coke oven gas. On June
15, 1995, Detroit Coke moved for reconsideration of the court's order granting
summary judgment in favor of the Company and NKK Chemical. On January 2, 1996,
the court denied Detroit Coke's Motion for Reconsideration and reaffirmed its
order, dismissing, inter alia, all claims against the Company. Since that time,
counsel for all parties have met with the court and it has been agreed that
Detroit Coke will withdraw all of its claims against the Company and NKK
Chemical in exchange for mutual releases. No monetary or economic consideration
is being exchanged.
Donner-Hanna Coke Joint Venture. Hanna Furnace Corporation ("Hanna"), a
wholly-owned subsidiary of the Company, was a 50% participant, along with LTV
Steel Company, Inc. ("LTV"), in the Donner-Hanna Coke Joint Venture ("Donner-
Hanna") which ceased its coke making operations in 1982. LTV filed a petition
in July 1986 with the United States Bankruptcy Court for the Southern District
of New York for relief under Chapter 11 of the Bankruptcy Code, and, with the
approval of the Bankruptcy Court, rejected the Donner-Hanna Coke Joint Venture
Agreement. As a result of LTV's actions, Donner-Hanna failed to make its
annual minimum pension contributions to the trustee of its salaried and hourly
pension plans (the "Plans") for each of the plan years 1985 through 1994 in the
aggregate amount of approximately $8.6 million. The total unfunded liability
of the Plans was determined to be $15.5 million on May 20, 1993, for purposes
of settling Hanna's bankruptcy claim against LTV. Since July 1991, the Pension
Benefit Guaranty Corporation (the "PBGC") has funded the monthly pension
benefits under the hourly pension plan. On August 13, 1993, the Internal
Revenue Services assessed Hanna, as a general partner of Donner-Hanna,
approximately $2.7 million for excise taxes (including interest through August
31, 1993) and penalties for plan years 1985 through 1991 arising from the
failure to meet minimum funding standards for the Plans. In November 1993,
Hanna contributed approximately $1.2 million to the salaried plan, representing
proceeds from the sale of LTV stock received for Hanna's claim in the LTV
bankruptcy proceeding. On July 8, 1994, the PBGC filed an application in the
United States District Court for the Western District of New York to terminate
Donner-Hanna's hourly pension plan retroactively to July 1, 1991 and the
salaried plan retroactively to December 31, 1993. The Court has ordered that
the Plans be terminated no later than the dates requested by the PBGC. Hanna
has been granted leave to intervene in this proceeding for the purpose of
contending that the Plans should be deemed to have been terminated as of an
earlier date. Hanna is liable to the PBGC for the underfunding of the Plans.
Depending upon the date the Plans are deemed to have been terminated, Hanna's
liability is estimated to range from $12.3 million to $16.9 million. The
Company has accrued the maximum amount in this range. The PBGC has indicated
that it may seek to hold the Company liable for the unfunded liability of the
Plans. Although the Company believes that under applicable law Hanna is solely
liable and the Company has valid defenses to any such action by the PBGC, the
Company is unable to predict with certainty the final outcome of any such
action by the PBGC. On January 4, 1995, Hanna and the Company tentatively
agreed with the PBGC to a settlement of the PBGC's claim with respect to the
Plans. The settlement provides that the Company will pay the PBGC $8.5 million
in cash and will
15
contribute a supplemental contribution to the Hanna Iron Ore Division Pension
Plan of $4.5 million. Such supplemental contribution would not be utilized for
the period through 1999 as a credit in the funding standard account for such
plan. The proposed settlement is in full release of the Company and its
subsidiaries and affiliates from any liability in connection with the Plans.
The settlement is conditioned on a resolution satisfactory to Hanna and the
Company of the IRS's claims against Hanna for any excise tax liability and
related penalties arising from the failure to meet minimum funding standards
for the period through the date of termination.
Management believes that the final disposition of the Baker's Port, Detroit
Coke and Donner-Hanna Coke matters will not have a material adverse effect,
either individually or in the aggregate, on the Company's financial condition,
results of operations or liquidity.
ENVIRONMENTAL MATTERS
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. In addition, the Company and certain of its subsidiaries
are involved as potentially responsible parties ("PRPs") in a number of off-
site CERCLA or state superfund site proceedings. The more significant of these
matters are described below. At several of these sites (identified below under
the caption "FOX Sites"), any remediation costs incurred by the Company are
liabilities for which FOX has agreed to indemnify the Company.
Berlin & Farro Liquid Incineration Site. The Company has been identified as a
generator of small amounts of hazardous materials allegedly deposited at this
industrial waste facility located in Swartz Creek, Michigan. The Company
received an initial request for information with respect to this site on
September 19, 1983. The Company believes that there are approximately 125 PRPs
at this site. A record of decision selecting the final remedial action for
this site was issued by the Environmental Protection Agency ("EPA") in
September 1991. The EPA and the PRP steering committee have estimated the cost
of the selected remedy at approximately $8 million and $10.5 million,
respectively. A third-party complaint was filed against the Company by three
PRPs for recovery of certain past and future response costs. The Company has
entered into a consent decree with the EPA, which was lodged with the court on
February 25, 1994. Pursuant to such consent decree, the Company's share of
liability for past and future response costs and natural resource damages is
$105,000, which amount has been paid. Consistent with the terms of the consent
decree, those settling defendants who are also plaintiffs in the above-
referenced cost recovery action executed and filed a dismissal with prejudice
as to their claims against the de minimis settling defendants, including the
Company. In addition, the Michigan Department of Environmental Quality
("MDEQ") demanded that the Company reimburse the State for its past response
costs incurred at this site. In July 1993, the MDEQ offered and the Company
accepted a "de minimis" buyout settlement of the State's claims for
approximately $1,500, which amount has been paid.
Buck Mine Complex. This is a proceeding involving a large site, called the
Buck Mine Complex, two discrete portions of which were formerly owned or
operated by a subsidiary of the Company. This subsidiary was subsequently
merged into the Company. The Company received a notice of potential liability
from the MDEQ with respect to this site on June 24, 1992. The Company's
subsidiary had conducted mining operations at only one of these two parcels and
had leased the other parcel to a mining company for numerous years. The MDEQ
alleges that this site discharged and continues to discharge heavy metals into
the environment, including the Iron River. Because the Company and
approximately eight other PRPs have declined to undertake a remedial
investigation and feasibility study, the MDEQ has advised the Company that it
will undertake the investigation at this site and charge the costs thereof to
those parties ultimately held responsible for the cleanup. The Company has
received advice from various sources that the cost of the remedial
investigation and feasibility study and the remediation at this site will be in
the range of $250,000 to $400,000, which cost will be allocated among the
parties ultimately held responsible. The Company does not have complete
information regarding the relationship of the other PRPs to the site, does not
know the extent of the contamination or of any cleanup that may be required
and, consequently, is unable to estimate its potential liability, if any, in
connection with this site.
16
Conservation Chemical Company Site. In a General Notice of Potential Liability
letter dated September 28, 1994, the EPA advised that it has information that
the Company's Midwest Division is a PRP with respect to the Conservation
Chemical Company site located in Gary, Indiana. The letter further advised
that the EPA plans to implement a removal action at the site. Attached to the
General Notice Letter was a list of the PRPs which received the letter. That
list consists of 225 entities. On November 10, 1994, a meeting was held at
which the EPA provided the PRPs with information concerning the proposed
removal action. At that meeting, the EPA advised that its estimate of the cost
of this removal action would be in the range of $6 to $10 million. This
estimate does not include the cost of groundwater remediation, if any is
determined to be necessary. Additionally, the EPA advised that it had incurred
response and oversight cost of approximately $2.8 million through August 1994.
In February 1995, the EPA offered the Company the opportunity to participate in
a de minimis settlement with respect to this site. This settlement is embodied
in the terms of an Administrative Order on Consent ("AOC"), pursuant to which
the Company would make a payment in the amount of $10,100 as its share of all
past and future response costs associated with this site. Under the terms of
the AOC, prior payments made to the PRP group will be credited toward the
settlement. The Company had previously made such a payment, in the amount of
$15,000. Accordingly, the Company will not need to make any additional
payments in settlement of its liability. The Company intends to accept the
proposed settlement and will be executing the AOC prior to March 11, 1996.
Ilada Energy Company Site. The Company and certain other PRPs have performed a
removal action pursuant to an order issued by the EPA under Section 106 of
CERCLA at this waste oil/solvent reclamation site located in East Cape
Girardeau, Illinois. The Company received a special notice of liability with
respect to this site on December 21, 1988. The Company believes that there are
approximately sixty-three PRPs identified at such site. Pursuant to an AOC,
the Company and other PRPs are currently performing a remedial investigation
and feasibility study at this site to determine whether the residual levels of
contamination of soil and groundwater remaining after the removal action pose
any threat to either human health or the environment and therefore whether or
not the site will require further remediation. During the remedial
investigation and feasibility study, a floating layer of material, which the
Company believes to be aviation fuel, was discovered above the groundwater.
The Company does not know the extent of this contamination. Furthermore, the
Company believes that this material is not considered to be a hazardous
substance as defined under CERCLA. To date, neither the Company nor the other
PRPs have agreed to remediate or take any action with respect to this material.
Due to legal and factual uncertainties remaining at this site, the Company is
unable to estimate its ultimate potential liability. To date, the Company has
paid approximately $2.0 million for work and oversight costs.
Iron River (Dober Mine), Iron County. On July 15, 1994, the State of Michigan
served M.A. Hanna Company ("M.A. Hanna") with a complaint seeking response
costs in the amount of approximately $365,000, natural resource damages in the
amount of approximately $2.0 million and implementation of additional response
activities related to an alleged discharge to the Iron and Brule Rivers of acid
mine drainage. M.A. Hanna operated the Dober Mine pursuant to a management
agreement with the Company. M.A. Hanna has requested that the Company defend
and indemnify it and the Company has undertaken the defense of the State's
claim. The Company, however, reserved the right to terminate such defense.
The Company filed on behalf of M.A. Hanna an answer to the complaint denying
liability at this site. On September 21, 1994 and November 9, 1994,
respectively, the Company filed a third party complaint and an amended third
party complaint naming a total of seven additional defendants. Additionally,
on November 15, 1994, the Company negotiated a case management order with the
State pursuant to which the court must rule on liability issues prior to
addressing other aspects of the case. That order also stays the third party
actions pending the court's decision regarding the liability issues.
Subsequently, the court denied the Company's motion for summary disposition of
the liability issues in the case. Therefore, the State can proceed with its
claim against the Company. Discovery is ongoing, as are settlement
discussions. Trial of this case will not be scheduled before June 30, 1996.
The Company is unable to estimate its ultimate potential liability, if any, at
this site because the Company believes there are numerous legal issues relating
to whether M.A. Hanna is responsible for the alleged discharge, as well as
uncertainties concerning the nature and extent of the contamination at this
site, the validity of the State's natural resource damage and additional
claims, the involvement of other PRPs and the nature of the remedy to be
implemented.
17
Martha C. Rose Chemicals Superfund Site. This proceeding involves a former PCB
storage, processing and treatment facility located in Holden, Missouri. The
Company received an initial request for information with respect to this site
on December 2, 1986. The Company believes that there are over 700 PRPs
identified at this site. The Company believes that it sent only one empty PCB
transformer there. In July 1988, the Company entered into a Consent Party
Agreement with the other PRPs and paid $48,134 in connection with the
remediation of the site. A record of decision selecting the final remedial
action and an order pursuant to Section 106 of CERCLA requiring certain PRPs,
not including the Company, to implement the final remedy have been issued by
the EPA. Construction of the remedy was completed in July 1995. To date, the
PRP steering committee has raised approximately $35.0 million to pay for past
removal actions, the remedial investigation and feasibility study and the final
remedial action. Actual costs of completion (including an allowance for future
operations and maintenance expenses and EPA oversight costs) are in the
vicinity of $28.5 million. The PRP steering committee has refunded excess
collected funds to the various participating PRPs. The Company's refund was
approximately $17,000.
Port of Monroe. In February 1992, the Company received a notice of potential
liability from the MDEQ as a generator of waste materials at this landfill.
The Company believes that there are approximately 80 other PRPs identified at
this site. The Company's records indicate that it sent some material to the
landfill. A draft remedial investigation/feasibility study ("RI/FS") for
remediation work has been prepared by the owner/operator PRPs and submitted to
the MDEQ for its approval. The cost of this RI/FS was approximately $280,000.
In March 1994, the MDEQ demanded reimbursement from the PRPs for its past and
future response costs. The MDEQ has since agreed to accept $500,000 as
reimbursement for its past response costs incurred through October 1993. This
settlement has been embodied in a consent decree. The owner/operators of this
site and certain of the generator/transporter PRPs (including the Company) have
reached an agreement regarding an interim allocation that will generate
sufficient funds to satisfy the PRPs' obligations under the above-described
settlement with the MDEQ. The Company's share under this interim allocation is
approximately $50,000, which amount has been paid to the State. The
owner/operator PRPs have advised the Company orally that the overall cost of
the remedy for the site is expected to be less than $10 million. However, the
Company does not yet have sufficient information regarding the nature and
extent of contamination at the site and the nature and extent of the wastes
that the other PRPs have sent to the site to determine whether the $10 million
estimate is accurate. Based on currently available information, the Company
believes that its proportionate share of the ultimate liability at this site
will be no more than 10% of the total costs.
Rasmussen Site. The Company and nine other PRPs have entered into a Consent
Decree with the EPA in connection with this disposal site located in
Livingston, Michigan. The Company received a general notice of liability with
respect to this site on September 27, 1988. The Company believes that there
are approximately twenty-three PRPs at this site. A record of decision
selecting the final remedial action for this site was issued by the EPA in
March 1991. The PRP steering committee has estimated that remediation costs
are approximately $19.7 million. Pursuant to a participation agreement among
the PRPs, the Company's share of such costs is 2.25%. Therefore, the Company's
share of liability should be in the vicinity of $443,000. To date, the Company
has paid approximately $264,000 of that amount.
Springfield Township Site. This is a proceeding involving a disposal site
located in Springfield Township, Davisburg, Michigan in which approximately
twenty-two PRPs have been identified. The Company received a general notice of
liability with respect to this site on January 23, 1990. The Company and
eleven other PRPs have entered into AOCs with the EPA for the performance of
partial removal actions at such site and reimbursement of past response costs
to the EPA. The Company's share of costs under the AOCs was $48,000. On
November 10, 1993, the EPA issued a unilateral order pursuant to Section 106 of
CERCLA requiring the PRP steering committee to implement the groundwater
portion of the final remedy. The members of the PRP steering committee have
entered into an agreement among themselves for the implementation of this
unilateral order. Subject to a final determination by the EPA as to what must
be included, a preliminary estimate by the PRP steering committee of the cost
of such work is approximately $300,000. Additionally, in response to a demand
letter from the MDEQ, the PRP steering committee and the MDEQ have negotiated
an AOC pursuant to which the MDEQ will be reimbursed approximately $700,000 for
its past response costs incurred through July 1993. The Company has paid its
share of this settlement amount, which was approximately $11,000. The PRPs are
currently negotiating with the EPA regarding the final remedial action at this
site. The EPA and the PRP steering committee had originally estimated the cost
to
18
implement the final remedy at approximately $33.0 million and $20.0 million,
respectively. Based upon this overall cost estimate, the Company had offered to
pay $175,000 as its share of the costs to implement the final remedy. Personnel
representing the EPA have subsequently indicated an intention to change the
soil treatment technology at the site from incineration to a less costly and
less controversial treatment method. Specifically, the EPA is expected to amend
the Record of Decision to authorize the use of significantly less expensive
alternative technologies, such as soil washing. Projected cost estimates for
the revised final remedy could be as low as $10.0 million if soil washing
rather than incineration was implemented at this site. The impact of this
reduction on the Company's prior settlement offer has yet to be determined.
Settlement discussions among the various PRPs are ongoing.
Waste, Inc. Site. On December 30, 1994, the EPA notified the Company's Midwest
Division that it was a PRP with respect to a site located in Michigan City,
Indiana known as the Waste, Inc. Landfill Site. The EPA's correspondence noted
that the Company may have contributed only a small amount of waste to this site
and that the Company may be a "de minimis" PRP. The EPA has informed the
Company that there are approximately 25 non "de minimis" PRPs, as well as
approximately 200 "de minimis" PRPs, at this site. The EPA has estimated the
cost of the remedy at this site to be between $16 and $16.5 million. The
Company does not have complete information regarding the relationship of the
other PRPs to the site or the quantity and nature of the waste contributed by
the PRPs and, consequently, is unable to estimate its potential liability, if
any, at this site.
FOX SITES
Remediation costs incurred by the Company at the following sites constitute
Weirton Liabilities or other environmental liabilities for which FOX has agreed
to indemnify the Company: The Swissvale Site, Swissvale, Pennsylvania; Buckeye
Site, Bridgeport, Ohio; Lowry Landfill, Aurora, Colorado; and Weirton Steel
Corporation Site, Weirton, West Virginia. The Company was notified of
potential liability with respect to each of these sites as follows: the
Swissvale Site -- February 1985; Buckeye Site -- September 1991; Lowry Landfill
-- December 1990; and Weirton Steel Corporation Site -- January 1993. In
accordance with the terms of an agreement between the Company and FOX, in
January 1994, FOX paid the Company $10.0 million as an unrestricted prepayment
for environmental obligations which may arise after such prepayment and for
which FOX has previously agreed to indemnify the Company. Since FOX retains
responsibility to indemnify the Company for any remaining environmental
liabilities arising before such prepayment or arising after such prepayment and
in excess of $10.0 million, these environmental liabilities are not expected to
have a material adverse effect on the Company's liquidity. However, the failure
of FOX to satisfy any such indemnity obligations could have a material adverse
effect on the Company's liquidity. The Company's ability to fully realize the
benefits of FOX's indemnification obligation is necessarily dependent upon
FOX's financial condition at the time of any claim with respect to such
obligations. FOX is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information with the
Commission.
Buckeye Site. The EPA has notified the Company that it is one of a number of
parties potentially responsible for wastes present at the Buckeye Site and has
requested the Corporation's voluntary participation in certain remedial
actions. The Company and thirteen other PRPs have entered into a consent order
with the EPA to perform collectively the remedial design pursuant to an AOC
between the PRP group and the EPA which took effect on February 10, 1992. The
Company's allocated share for the remedial design, as established by a
participation agreement for the remedial design executed by the PRPs, is 4.63%
for the first $1.6 million and 5.05% thereafter. The EPA and the PRP steering
committee have estimated the total cost for the remedial design phase to be
approximately $3.0 million. The EPA's proposed remediation activities with
respect to the site are estimated to cost approximately $35.0 million. The
PRPs are currently negotiating with EPA to reduce the scope of the remedy at
the site and, therefore, the ultimate cost of remediation at this site cannot
be estimated. In addition, the Company and the other thirteen PRPs are
discussing an additional participation agreement and allocation governing the
cost of the final remediation action and are continuing to identify other PRPs.
In March 1994, the Company was served with a copy of a complaint filed by
Consolidation Coal Company, a former owner and operator of the site. Among
other claims, the complaint seeks participation
19
from the Federal Abandoned Mine Reclamation Fund, joinder of certain public
entities, one of which delivered waste to the site, and damages and indemnity
from current owners of the site. One count of the complaint names the Company
and nine other industrial PRPs and seeks a determination of the allocation of
responsibility among the alleged industrial generators involved with the site.
The Company and eight other industrial defendants have hired common local
counsel, filed an answer to the complaint, and are vigorously defending the
action. Discovery is underway.
Weirton Steel Site. In January 1993, the Company was notified that the West
Virginia Division of Environmental Projection ("WVDEP") had conducted an
investigation on Brown's Island, Weirton, West Virginia which was formerly
owned by the Company's Weirton Steel Division and is currently owned by Weirton
Steel Corporation. The WVDEP alleged that samples taken from four groundwater
monitoring wells located at this site contained elevated levels of
contamination. WVDEP informed Weirton Steel Corporation that additional
investigation, possible groundwater and soil remediation, and on-site
housecleaning was required at the site. Weirton Steel Corporation has spent
approximately $210,000 to date on remediation of an emergency wastewater lagoon
located on Brown's Island. Weirton Steel Corporation has sought reimbursement
of that amount and is likely to seek reimbursement of any additional
remediation costs involving the lagoon from the Company. In addition, assuming
a site accepts the waste material, additional sums will be spent on disposal
and backfilling. The WVDEP may require additional investigation or remediation
at the Brown's Island facility in the future. The Company has made an offer of
settlement to Weirton Steel Corporation in an attempt to cap the Company's
liability for the lagoon at $480,000. Weirton Steel Corporation has not yet
responded to this offer.
Swissvale Site. The Company has been named as a third-party defendant in a
governmental action for reimbursement of the EPA's response costs in connection
with the Swissvale Site. The Company understands that on December 2, 1993, the
EPA and the original defendants reached a tentative settlement agreement
regarding the EPA's cost recovery claim for $4.5 million. Pursuant to that
tentative settlement agreement, the original defendants will pay a total of
$1.5 million. The original defendants have requested that the eighteen third-
party defendants, including the Company, pay a total of $375,000. The Company
has made a settlement offer, but no consent decree has yet been issued with
respect to the offer.
Lowry Landfill Site. The Company, Earth Sciences, Inc. and Southwire Company
were general partners in the Alumet Partnership ("Alumet"), which has been
identified by the EPA as one of approximately 260 PRPs at the Lowry Landfill
Site. Alumet presented information to EPA in support of its position that the
neutralized slurry it sent to the Lowry Landfill Site should not be considered
hazardous, but EPA has consistently rejected this argument, and, on November
15, 1993, Alumet received a CERCLA 107(a) demand letter from EPA demanding
approximately $15.3 million, plus interest from the date of the demand, for
past response costs incurred at the Lowry site by the EPA to the date of the
letter. The Company believes the same demand was made on all PRPs who sent
over 300,000 gallons of waste to the site. The owners and operators of the
Lowry Landfill - the City and County of Denver, Waste Management of Colorado,
Inc. and Chemical Waste Management, Inc. - are performing the remediation
activities at the site.
In December 1991, the City and County of Denver filed a complaint in the United
States District Court for the District of Colorado entitled The City and County
of Denver vs. Adolph Coors Company, et al. against forty companies, including
Earth Sciences, Inc., seeking reimbursement for costs incurred by and to be
incurred by the City and County of Denver with respect to the Lowry Landfill
Site. Earth Sciences, Inc. and the Plaintiffs reached a confidential
settlement agreement and the Plaintiffs unsuccessfully attempted to add Alumet
as a third-party defendant. Monies collected from settlement of the litigation
were placed in a trust to fund the remediation of the Lowry site. In June
1993, the Alumet Partnership received a settlement demand from the City and
County of Denver and Waste Management of Colorado, Inc. with regard to Alumet's
waste stream volume unaccounted for in the initial litigation. Alumet made a
counter-offer to the City and County of Denver and Waste Management of
Colorado, Inc. which was rejected.
In May 1994, Alumet received notice that a complaint had been filed by the City
and County of Denver, Waste Management of Colorado, Inc., and Chemical Waste
Management, Inc., against multiple companies, including Alumet, FOX, the
Company and Southwire Company. In addition, on November 22, 1994, Alumet
received a
20
Unilateral Administrative Order (the "Order") from the EPA directing each of
the recipients of the Order to perform the remedial design and remedial action
at the Lowry Landfill Site. The EPA and Alumet met in December 1994 to discuss
a settlement and resolution of Alumet's liability at the Lowry Landfill Site.
Following that meeting, EPA informed Alumet that EPA would make a formal
settlement offer during January 1995 and would extend the time period within
which to respond to the Order. In addition, EPA stated that, in exchange for a
monetary settlement, EPA would provide contribution protection to Alumet under
CERCLA for all site-related claims of other parties, including the claims of
the City of Denver and Waste Management.
On March 15, 1995, Alumet offered to settle all of EPA's claims for response
activities and costs under CERCLA in return for payment of $7,283,104.
Settlement was contingent upon the successful negotiation of a consent decree
that included a covenant not to sue Alumet. On February 16, 1996, the consent
decree was issued and an order was entered dismissing with prejudice all claims
against Alumet, the Company, FOX and Southwire Company. Southwire has funded
one-half of the settlement amount, and the Company has funded the other half
and charged the FOX $10 million prepayment. The settlement amount has been
held in an escrow account pending final approval of the consent decree, and was
required to be paid within fourteen days of the entry of the final order, or by
March 1, 1996. Such payment was made on February 29, 1996. The payment of the
settlement amount could be positively affected by a settlement with the
Company's insurance carrier ("CNA"). CNA is paying most of Alumet's defense
costs and has made a substantial offer of settlement to Alumet. CNA and Alumet
are currently negotiating a mutual settlement agreement and release, the terms
of which will be subject to a confidentiality agreement.
OTHER
The Company and its subsidiaries have been conducting steel manufacturing and
related operations at numerous locations, including their present facilities,
for over sixty years. Although the Company believes that it has utilized
operating practices that were standard in the industry at the time, hazardous
materials may have been released on or under these currently-or previously-
owned sites. Consequently, the Company potentially may also be required to
remediate contamination at some of these sites. The Company does not have
sufficient information to estimate its potential liability in connection with
any potential future remediation. However, based on its past experience and
the nature of environmental remediation proceedings, the Company believes that
if any such remediation is required, it will occur over an extended period of
time. In addition, the Company believes that many of these sites may also be
subject to indemnities by FOX to the Company.
In addition to the aforementioned proceedings, the Company is or may be
involved in proceedings with various regulatory authorities which may require
the Company to pay various fines and penalties relating to violations of
environmental laws and regulations, comply with applicable standards or other
requirements or incur capital expenditures to add or change certain pollution
control equipment or processes.
Detroit Water and Sewage Department Proceeding. The coke oven by-products
plant at the Great Lakes Division currently discharges wastewater to the
Detroit Water and Sewerage Department ("DWSD") treatment facility pursuant to a
permit issued by the DWSD. The DWSD treats the Company's wastewater along with
large volumes of wastewater from other sources and discharges such treated
wastewaters to the Detroit River. The Company appealed the total cyanide limit
in the permit and requested that the DWSD issue to the Company a variance from
the cyanide limit. The variance was presented to and approved by the Detroit
Water Board on December 20, 1995. The conditions of the variance will be
incorporated into the Great Lakes Division's DWSD permit in the near future.
Great Lakes Division - Opacity Notice of Violation. EPA issued a Notice of
Violation ("NOV") to the Company's Great Lakes Division on or about August
28,1995, alleging violations of specified opacity regulations at the Division's
A blast furnace and basic oxygen furnace shop. The Company requested a
conference with EPA, which was held on September 25, 1995. EPA has asked the
Company to confirm certain information in writing
21
and the Company is preparing a response to this request. No demand or proposal
for penalties or other sanctions was contained in the NOV.
Great Lakes Division Outfalls Proceedings. The United States Coast Guard
("USCG") has issued or proposes to issue a number of penalty assessments with
respect to alleged oil discharges at certain outfalls at the Company's Great
Lakes Division facility. The Company has appealed many of the USCG's
determinations, has paid amounts in settlement of a few, and is engaged in
settlement discussions with respect to the others. The Company does not
believe that its aggregate exposure with respect to these proposed penalty
assessments will exceed $250,000.
The MDEQ, in April 1992, notified the Company of a potential enforcement action
alleging approximately 63 exceedances of limitations at the outfall at the 80-
inch hot strip mill. In July 1994, the MDEQ requested that the Company submit
a comprehensive plan for addressing oil discharges from the 80-inch hot strip
mill. The Company submitted the proposed plan in August 1994, and the plan was
fully implemented by February 1995. The Company has proposed to MDEQ that it
will perform a preliminary engineering and treatability study with respect to
alternate control systems while it simultaneously evaluates the effectiveness
of the comprehensive plan. Under this proposal, the Company would continue
with the installation of alternate control systems only if the comprehensive
plan proved to be unsuccessful. By letter dated June 28, 1995, the MDEQ
accepted the Company's proposal and, by subsequent correspondence, proposed a
one year demonstration period commencing on July 15, 1995. The Company and the
MDEQ will attempt to negotiate a consent order incorporating these concepts and
resolving open issues. In the event that the comprehensive plan were to prove
unsuccessful in addressing the MDEQ's concerns, the cost of installation of
alternative control systems would be approximately $13 million.
Great Lakes Division - Wayne County Air Pollution Control Department. Since
January 1992, the Wayne County Air Pollution Control Department ("Wayne
County") has issued approximately 109 NOVs to the Company in connection with
alleged exceedances of emission standards and work practice standards covering
various process and fugitive emission sources at the Company's Great Lakes
Division. The Company has responded to Wayne County concerning each of the
NOVs. Wayne County and the Company currently are negotiating a consent order
to resolve approximately 68 of these notices of violation. Wayne County has
proposed to settle these claims pursuant to terms that would include the
payment by the Company of a $270,375 penalty and the implementation by the
Company of an environmental credit program valued at $270,375. The Company is
evaluating the Wayne County proposal. There has been no activity with respect
to the other 41 NOVs.
Granite City Division - Alleged Air Violations. On or about March 2, 1995, the
Company received NOVs and Findings of Violation ("FOVs") issued by the EPA
covering alleged violations of various air emission requirements at the Granite
City Division basic oxygen furnace shop, coke oven batteries and by-products
plant. On or about February 6, 1996, the EPA issued an Administrative
Complaint and Notice of Proposed Order Assessing a Penalty (the "ACO") covering
the alleged violations at the coke oven batteries and the by-products plant.
The ACO proposes a penalty of $125,054 and provides for an opportunity for a
settlement conference and an administrative hearing. The Company is in the
process of reviewing the ACO, but intends to request a settlement conference
and an administrative hearing. Contemporaneously with the issuance of the ACO,
the EPA issued a Request for Information under Section 114 of the Clean Air Act
pursuant to which the Company will conduct a series of visible emission
observations at the basic oxygen furnace shop.
In connection with certain of these proceedings, the Company has only commenced
investigation or otherwise does not have sufficient information to estimate its
potential liability, if any. Although the outcomes of the proceedings
described above or any fines or penalties that may be assessed in any such
proceedings, to the extent that they exceed any applicable reserves, could have
a material adverse effect on the Company's results of operations and liquidity
for the applicable period, the Company has no reason to believe that any such
outcomes, fines or penalties, whether considered individually or in the
aggregate, will have a material adverse effect on the Company's financial
condition. The Company's accrued environmental liabilities at December 31,
1995 and 1994 were $18.6 million and $17.1 million, respectively.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1995.
23
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of February 16, 1996, certain information
with respect to the executive officers of the Company. Executive officers are
chosen by the Board of Directors of the Company at the first meeting of the
Board after each annual meeting of stockholders. Officers of the Company serve
at the discretion of the Board of Directors and are subject to removal at any
time.
EXECUTIVE
NAME (AGE) OFFICER SINCE POSITION
- ---------- ------------- --------
Osamu Sawaragi (67) 1990 Chairman of the Board
Kenichiro Sekino (59) 1995 Vice Chairman and Assistant to the Chairman
V. John Goodwin (52) 1994 President and Chief Executive Officer
Hiroshi Matsumoto (44) 1994 Executive Vice President-Corporate Planning and Development
William N. Harper (51) 1995 Senior Vice President and Chief Financial Officer
Bernard D. Henely (52) 1995 Senior Vice President and General Counsel
George D. Lukes (49) 1994 Senior Vice President-Quality Assurance and Customer Satisfaction
David A. Pryzbylski (46) 1994 Senior Vice President - Administration and Corporate Secretary
Kenneth J. Leonard (47) 1993 Vice President and General Manager - Granite City Division
David L. Peterson (45) 1994 Vice President and General Manager-Great Lakes Division
Robert G. Pheanis (60) 1994 Vice President and General Manager - Midwest Division
Richard S. Brzenk (53) 1987 Vice President - Information Systems
Joseph R. Dudak (48) 1995 Vice President - Strategic Sourcing and Environmental Affairs
William E. Goebel (56) 1993 Vice President - Marketing and Sales
Carl M. Apel (40) 1992 Corporate Controller, Accounting and Assistant Secretary
William E. McDonough (37) 1995 Treasurer
Milan J. Chestovich (53) 1985 Assistant Secretary
24
Biographical information concerning the Company's executive officers is
presented below.
Osamu Sawaragi, Chairman of the Board. Mr. Sawaragi, age 67, has been a
Director of the Company since June 1990 and was elected Chairman in 1994. He
is concurrently serving with NKK as Senior Management Counsel. Prior thereto
he was employed by NKK as a Director beginning in 1984, Managing Director in
1986, Senior Managing Director in 1989 and Executive Vice President from 1990
to 1994.
Kenichiro Sekino, Vice Chairman and Assistant to the Chairman. Mr. Sekino, age
59, has been a Director of the Company since January 1994. In July 1995, Mr.
Sekino was elected Vice Chairman and Assistant to the Chairman. Prior thereto
he was employed by NKK beginning in 1962. In 1994 Mr. Sekino served as Senior
General Manager, Steel Division. From 1991 to 1994 he served as Senior General
Manager, International Business Center, and from 1987 to 1991 he was President
of NKK, (UK) LTD.
V. John Goodwin, President and Chief Executive Officer. Mr. Goodwin, age 52,
joined the Company as President and Chief Operating Officer in June 1994. He
was appointed Chief Executive Officer in July 1995. Mr. Goodwin was formerly
employed by U.S. Steel Corporation ("U.S. Steel") for twenty seven years
beginning in 1967 and held a variety of operating assignments at its Fairless
Works. He became General Foreman of the facility's hot strip mill in 1976 and
division superintendent of Rolling Operations in 1981. In 1984, Mr. Goodwin was
promoted to General Manager of U.S. Steel's Mon Valley Works. In 1987, he was
named General Manager of U.S. Steel's Gary Works ("Gary Works"), the country's
largest steel plant.
Hiroshi Matsumoto, Executive Vice President, Corporate Planning and
Development. Mr. Matsumoto, age 44, joined the Company as Vice President and
Assistant to the Chief Operating Officer in June 1994, following eighteen years
with NKK. In July 1995, Mr. Matsumoto was appointed Vice President - Business
and Strategic Planning. He was appointed to his present position in February,
1996. Mr. Matsumoto served as manager of NKK's corporate planning department
from 1982 to 1986. For the following three years, he was a guest fellow at The
Brookings Institution, lecturing on "The Trade Balance Between Japan and the
United States-Problems and Solutions." In 1989 he was appointed to serve as
the first senior representative in the Washington D.C. office of NKK's American
subsidiary, NKK America Inc.
William N. Harper, Senior Vice President and Chief Financial Officer. Mr.
Harper, age 51, joined the Company as Vice President and Chief Financial
Officer in November 1995. He was appointed to his present position in
February, 1996. Mr. Harper was formerly employed by Clark Equipment Company
for over twenty-three years, where he served as Vice President and Controller
from 1986 to 1995.
Bernard D. Henely, Senior Vice President and General Counsel. Mr. Henely, age
52, joined the Company as Vice President and General Counsel in September 1995.
He was appointed to his present position in February, 1996. Mr. Henely was
formerly employed by Clark Equipment Company for over twenty-five years, where
he served as Vice President and General Counsel from 1984 to 1995.
George D. Lukes, Senior Vice President, Quality Assurance and Customer
Satisfaction. Mr. Lukes, age 49, joined the Company in June 1994 to fill the
newly created position of Vice President-Quality Assurance and Customer
Satisfaction. He was appointed to his present position in February, 1996. Mr.
Lukes had previously been employed by U.S. Steel since 1968. He served in a
succession of process, product and administrative metallurgical posts before
being appointed Manager-Quality Assurance at the Fairless Works in 1983.
25
David A. Pryzbylski, Senior Vice President - Administration. Mr. Pryzbylski,
age 46, joined the Company in June 1994 as Vice President-Human Resources and
Secretary. He was appointed to his present position in February 1996. Mr.
Pryzbylski was employed by U.S. Steel for fifteen years, serving since 1987 as
the senior employee relations executive at its Gary Works.
Kenneth J. Leonard, Vice President and General Manager - Granite City Division.
Mr. Leonard, age 47, began his career with the Company in 1983 as Assistant
Engineering Manager-Primary Facilities at the Company's headquarters. A year
later he was promoted to Project Manager-Major Projects. Late in 1984 Mr.
Leonard moved to the Company's Granite City Division as Manager-Engineering,
subsequently being promoted to Director-Ironmaking and Assistant General
Manager-Administration. He was promoted to his present position in 1993.
David L. Peterson, Vice President and General Manager - Great Lakes Division.
Mr. Peterson, age 45, joined the Company in June 1994 as Vice President and
General Manager - Great Lakes Division. Mr. Peterson had formerly been
employed by U.S. Steel since 1971. He was promoted to the plant manager level
at U.S. Steel in 1988 and directed all operating functions from cokemaking to
sheet and tin products. In 1988 he was named Plant Manager - Primary
Operations USX's Gary Works.
Robert G. Pheanis, Vice President and General Manager - Midwest Division. Mr.
Pheanis, age 60, joined the Company in June 1994 as Vice President and General
Manager - Midwest Division. Mr. Pheanis formerly served in various management
positions at U.S. Steel at the Gary Works for 35 years and in 1992 was named
its Plant Manager - Finishing Operations, with responsibility for its total hot
rolled, sheet and tin operations.
Richard S. Brzenk, Vice President - Information Systems. Mr. Brzenk, age 53,
joined the Company as a programmer at its Granite City Division in 1965.
Following several supervisory and management assignments at that division, he
moved to corporate headquarters as General Manager-Data Center Operations and
Program Support, in 1976. He returned to the Granite City Division in 1982 as
Manager-Process Control and later was promoted to Director-Information Systems
in 1983. He returned to headquarters and was promoted to his present position
in 1987.
Joseph R. Dudak, Vice President, Strategic Sourcing and Environmental Affairs.
Mr. Dudak, age 48, began his career with the Company as an engineer at the
Midwest Division in 1970. In 1973 he moved to the Granite City Division and
served as Superintendent of Energy Management & Utilities from 1977 until
moving to corporate headquarters in 1981. He occupied the position of
corporate Director of Energy & Environmental Affairs from 1981 to 1994, when he
was appointed to his present position.
William E. Goebel, Vice President, Marketing and Sales. Mr. Goebel, age 56,
joined the Company in 1968 following employment with Morgan Guaranty Trust
Company and Bethlehem Steel Corporation. After assignments in the Company's New
York and Philadelphia district sales offices, he moved to the Great Lakes
Division as a Product Manager-Cold Rolled in 1979. He transferred to the
corporate marketing and sales department in 1981, holding a succession of
management posts before assuming the Company's top marketing and sales post in
1993.
Carl M. Apel, Corporate Controller, Accounting and Assistant Secretary. Mr.
Apel, age 40, joined the Company in 1986. Mr. Apel has served in various
management capacities of increasing responsibility within the Company's
financial organization for more than the past five years and was promoted to
Controller in 1992.
26
William E. McDonough, Treasurer. Mr. McDonough, age 37, began his career with
the Company in 1985 in the financial department. He has held various positions
of increasing responsibility including Assistant Treasurer and Manager,
Treasury Operations and was promoted to his current position in December 1995.
Milan J. Chestovich, Assistant Secretary. Mr. Chestovich, age 53, joined the
Company in 1972. Mr. Chestovich has served as in-house legal counsel to the
Company for more than the past five years. He assumed his present position in
1985.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Class B Common stock is listed on the New York Stock Exchange (the "NYSE")
and traded under the symbol "NS." The following table sets forth for the
periods indicated the high and low sales prices of the Class B Common Stock as
reported on the NYSE Composite Tape.
SALE PRICE
-------------------
HIGH LOW
-------- ---------
Year Ended December 31, 1995
First Quarter $187/8 $ 145/8
Second Quarter 161/8 125/8
Third Quarter 175/8 141/2
Fourth Quarter 151/2 113/4
Year Ended December 31, 1994
First Quarter 17 111/2
Second Quarter 161/2 113/4
Third Quarter 227/8 153/8
Fourth Quarter 201/4 13
As of December 31, 1995, there were approximately 190 registered holders of
Class B Common Stock. (See Note B - Capital Structure and Primary Offering of
Class B Common Stock.) The Company has not paid dividends on its Common Stock
since 1984, with the exception of an aggregate dividend payment of $6.7 million
in 1989. The decision whether to pay dividends on the Common Stock will be
determined by the Board of Directors in light of the Company's earnings, cash
flows, financial condition, business prospects and other relevant factors.
Holders of Class A Common Stock and Class B Common Stock will be entitled to
share ratably, as a single class, in any dividends paid on the Common Stock.
In addition, dividends with respect to the Common Stock are subject to the
prior payment of cumulative dividends on any outstanding series of Preferred
Stock, including the Series A Preferred Stock and Series B Preferred Stock, and
must be matched by an equal payment into the VEBA Trust, until the asset value
of the VEBA Trust exceeds $100.0 million, as specified under the terms of the
1993 Settlement Agreement. 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 $80.1 million was free of such limitations at December 31,
1995.
28
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PER TON DATA)
YEAR ENDED DECEMBER 31
------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Net sales $ 2,954 $ 2,700 $ 2,419 $ 2,373 $ 2,330
Cost of products sold 2,528 2,354 2,254 2,107 2,103
Depreciation, depletion and amortization 145 142 137 115 117
------- ------- ------- ------- -------
Gross profit 281 204 27 152 110
Selling, general and administrative 154 138 137 133 139
Unusual charges (credits) 5 (25) 111 37 111
Income (loss) from operations 131 97 (218) (12) (131)
Financing costs (net) 39 56 62 62 59
Income (loss) before income taxes,
extraordinary items and cumulative
effect of accounting changes 92 152 (280) (75) (189)
Extraordinary item 5 ---- ---- (50) ----
Cumulative effect of accounting changes ---- ---- (16) 76 ----
Net income (loss) applicable to Common Stock 100 157 (272) (66) (207)
Per share data applicable to Common Stock:
Income (loss) before extraordinary items
and cumulative effect of accounting changes 2.21 4.33 (7.55) (3.61) (8.11)
Net income (loss) 2.34 4.33 (8.04) (2.58) (8.11)
Cash dividends ---- ---- ---- ---- ----
DECEMBER 31
---------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Cash and cash equivalents 128 162 5 55 64
Working capital 224 225 27 74 120
Net property, plant and equipment 1,469 1,394 1,399 1,395 1,249
Total assets 2,668 2,499 2,304 2,189 1,986
Current portion of long term obligations 36 36 28 33 32
Long term obligations 502 671 674 662 486
Redeemable Preferred Stock - Series B 65 67 68 138 141
Stockholders' equity 557 354 190 327 393
YEAR ENDED DECEMBER 31
-----------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
OTHER DATA:
Shipments (net tons, in thousands) 5,564 5,208 5,005 4,974 4,906
Raw steel production (net tons, in thousands) 6,081 5,763 5,551 5,380 5,247
Effective capacity utilization 96.5% 96.1% 100.0% 100.5% 92.5%
Continuously cast percentage 100.0% 100.0% 100.0% 100.0% 99.8%
Man-hours per net ton shipped 3.52 3.68 3.96 4.03 4.27
Number of employees (year end) 9,474 9,711 10,069 10,299 11,176
Capital investments $ 215 $ 138 $ 161 $ 284 $ 178
Operating profit (loss) per net ton shipped
excluding unusual items $ 25 $ 14 $ (21) $ 5 $ (4)
Total debt and redeemable preferred stock
as a percent of total capitalization 52.0% 68.6% 80.2% 71.8% 62.6%
Common shares outstanding at year end
(in thousands) 43,288 36,376 36,361 25,500 25,500
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND
1994
Net Sales
Net sales for 1995 totaled $3.0 billion, an 8.6% increase compared to the same
period in 1994. This increase was attributable to an increase in volume as
well as an increase in realized selling prices. Steel shipments for 1995 were
a record 5,564,000 tons, representing a 6.8% increase compared to the 5,208,000
tons shipped in 1994. Raw steel production increased to 6,081,000 tons, a 5.5%
increase from the 5,763,000 tons produced in 1994.
Cost of Products Sold
Cost of products sold as a percentage of sales declined from 87.2% in 1994 to
85.6% in 1995. This improvement was the result of an increased level of
shipments, higher average selling prices and various cost reduction programs,
and was achieved despite a major blast furnace reline.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $153.7 million in 1995
represent an increase of $15.5 million compared to the preceding year. This
increase is largely attributable to nonrecurring outside professional fees
associated with various strategic initiatives.
Unusual Charges (Credits)
Reduction in Workforce - During the fourth quarter of 1994, the Company
finalized and implemented a plan that resulted in a workforce reduction of
approximately 400 salaried nonrepresented employees, and a restructuring charge
of $34.2 million, or $25.6 million net of tax. During the first quarter of
1995, the Company recorded an additional restructuring charge of $5.3 million,
or $3.6 million net of tax, as a result of the various elections made by the
terminated employees during the first quarter.
The aggregate restructuring charge of $39.5 million was comprised of retiree
postemployment benefits ("OPEB") - $26.5 million; severance - $12.5 million;
pensions - ($2.6) million and other charges - $3.1 million. Substantially all
of the amounts related to severance and other charges have been paid as of
December 31, 1995. The remaining balance of $23.9 million related primarily to
OPEB and pensions and will require the utilization of cash over the retirement
lives of the affected employees.
Other (Income) Expense
Financing Costs - Net financing costs of $39.2 million in 1995 represent a 30%
decrease compared to net financing costs of $55.7 million for the preceding
year. This decrease is attributable to higher short term investment earnings
resulting from the receipt of cash generated by the issuance of 6.9 million
shares of Class B Common Stock in February 1995, coupled with a decrease in
interest expense as a result of debt reduction.
Income Taxes
During 1995, the Company recognized income tax credits and additional deferred
tax assets of $28.6 million based upon future projections of income. These
credits were offset by $8.6 million in alternative minimum tax expense and $6.4
million of state and foreign taxes.
30
The Company's effective tax rate is lower than the federal statutory rate
primarily because of the continued utilization of available operating loss
carryforwards. As such, the Company's effective alternative minimum tax rate
for 1995 was approximately 4.0%.
Extraordinary Item
During the third quarter of 1995, the Company utilized $104.7 million of
proceeds generated from a primary offering of 6,900,000 shares of Class B
Common Stock earlier in the year, along with an additional amount of $20.9
million funded from the Company's available cash, to prepay $133.3 million
aggregate principal amount of the then outstanding $323.3 million related party
debt associated with the rebuild of the No. 5 Coke Oven Battery serving the
Great Lakes Division. This transaction resulted in a $5.4 million
extraordinary item, net of related income tax expense of $.5 million, or $.13
per share.
Discount Rate Assumptions
As a result of the decrease in long term interest rates in the United States,
at December 31, 1995, the Company decreased the discount rate used to calculate
the actuarial present value of its accumulated benefit obligation for OPEB and
pensions by 150 basis points to 7.25%, from the rate used at December 31, 1994.
The effect of these changes did not impact 1995 expense. However, the decrease
in the discount rate used to calculate the pension obligation increased the
minimum pension liability recorded on the Company's balance sheet from $76.7
million at December 31, 1994 to $108.8 million at December 31, 1995, and
resulted in a $1.8 million charge to stockholders' equity at the end of 1995.
Adoption of New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company will adopt SFAS
121 in the first quarter of 1996 and, based on current circumstances, does not
believe the effect of adoption will be material.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation". SFAS 123 is effective for fiscal years beginning after
December 15, 1995 and will require companies to either adopt a fair value based
method of expense recognition for all stock compensation based awards, or
provide proforma net income and EPS information as if the recognition and
measurement provisions of SFAS 123 had been adopted. Upon adoption of SFAS 123
in 1996, the Company intends to continue to account for its stock compensation
based awards following the provisions of Accounting Principles Board Statement
No. 25 and provide the required fair value based proforma information.
Environmental Matters
Clean Air Act
In 1990, Congress passed amendments to the Clean Air Act which impose stringent
standards on air emissions. The Clean Air Act amendments will directly affect
the operations of many of the Company's facilities, including its coke ovens.
Under such amendments, coke ovens generally will be required to comply with
progressively more stringent standards over the next thirty years. The Company
believes that the costs for complying with the Clean Air Act amendments will
not have a material adverse effect, on an individual site basis or in the
aggregate, on the Company's financial position, results of operations or
liquidity.
31
Great Lakes Water Quality Initiative
Since 1989, the United States Environmental Protection Agency (the "EPA") and
the eight Great Lakes states have been developing the Great Lakes Initiative,
which will impose water quality standards that are even more stringent than the
best available technology standards currently being enforced. On March 23,
1995, the EPA published the final "Water Quality Guidance for the Great Lakes
System" (the "Guidance Document"). The Guidance Document establishes minimum
water quality standards and other pollution control policies and procedures for
waters within the Great Lakes System. The Company has conducted a series of
internal analyses concerning the effect of the Guidance Document on the
Company's operations. Based upon these analyses, the Company believes that the
Guidance Document will have a limited impact on the conduct of the Company's
business, and that any such impact will not have a material adverse effect on
the Company's financial position, results of operations or liquidity.
RCRA Corrective Action
In 1990, the EPA released a proposed rule which establishes standards for the
implementation of a corrective action program under the Resource Conservation
Recovery Act of 1976, as amended ("RCRA"). The corrective action program
requires facilities that are operating under a permit, or are seeking a permit,
to treat, store or dispose of hazardous wastes to investigate and remediate
environmental contamination. Currently, the Company is conducting an
investigation at its Midwest Division facility. The Company estimates that the
potential capital costs for implementing corrective actions at such facility
will be approximately $8.0 million payable over the next several years. At the
present time, the Company's other facilities are not subject to corrective
action.
32
RESULTS OF OPERATIONS - COMPARISON OF THE YEARS ENDED DECEMBER 31, 1994 AND
1993
Net Sales
Net sales for 1994 totaled $2.70 billion, a 9.4% increase when compared to
1993. This increase was attributable to both an increase in volume and realized
selling prices, as well as an improvement in product mix to higher margin
coated products from lower margin secondary products. Steel shipments for 1994
were 5,208,000 tons, a 4.1% increase compared to the 5,005,000 tons shipped
during 1993. Raw steel production was 5,763,000 tons, a 3.8% increase compared
to the 5,551,000 tons produced during 1993.
Cost of Products Sold
Cost of products sold as a percentage of net sales decreased to 87.2% in 1994
from 93.2% in 1993. This decrease is primarily the result of improvements in
realized selling prices, product mix and performance yields, as well as a
reduction in products costs.
Unusual Items
During 1994, the Company recorded a net unusual credit aggregating $135.9
million as discussed below.
Reduction in Workforce - See "Results of Operations - Comparison of the Years
Ended December 31, 1995 and 1994" for a discussion of the $34.2 million charge
related to the restructuring of the salaried nonrepresented workforce.
National Steel Pellet Company - NSPC was temporarily idled in October 1993,
following a strike by the USWA which occurred on August 1, 1993. At December
31, 1993, it was previous management's intention to externally satisfy its iron
ore pellet requirements for a period of at least three years, which would have
caused NSPC to remain idle for that period. Accordingly, a liability of $108.6
million related to the idle period was recorded as an unusual charge during the
fourth quarter of 1993. In June 1994, the then new senior management
determined that if a total reduction of $4 per gross ton in delivered pellet
costs from pre-strike costs could be achieved, NSPC could be reopened on a cost
effective basis. After a series of successful negotiations with the USWA and
other stakeholders led to the requisite $4 per gross ton cost reduction, the
facility was reopened in August 1994. The reopening of NSPC during the third
quarter of 1994 resulted in the restoration of $59.1 million of the 1993
unusual charge.
Other (Income) Expense
Financing Costs - Net financing costs of $55.7 million represent a 9.9% decline
compared to the preceding year. This decline is primarily the result of higher
short term investment earnings resulting from the receipt of cash associated
with the Bessemer & Lake Erie Railroad ("B&LE") litigation judgment.
Litigation Judgment - On January 24, 1994, the United States Supreme Court
denied the B&LE petition to hear the appeal in the Iron Ore Antitrust
Litigation, thus sustaining a judgment in favor of the Company against the
B&LE. On February 11, 1994, the Company received $111.0 million, including
interest, in satisfaction of this judgment. This gain was reclassified from
Income from Operations to Other Income to more properly reflect the trend in
operating income and had no effect on net income or earnings per share as
previously reported.
Income Taxes
During 1994, the Company recognized income tax credits and additional deferred
tax assets of $29.8 million based upon future projections of income. These
credits were offset by $3.1 million in alternative minimum tax expense related
to the receipt of the B&LE proceeds and a $10.0 million deferred tax
33
charge reflecting the reversal of a portion of the tax benefit recorded in 1993
related to the temporary idling of NSPC, resulting in a net income tax credit
of $16.7 million for the year ended December 31, 1994.
34
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity needs arise primarily from capital investments, working
capital requirements and principal and interest payments on its indebtedness.
The Company has generally satisfied these liquidity needs with funds provided
by long term borrowings and cash provided by operations, in addition to the
Company's 1995 and 1993 public offerings of Class B Common Stock and the
receipt of approximately $111.0 million in February 1994 from the satisfaction
of a judgment in favor of the Company against the B&LE. Available sources of
liquidity consist of a Receivables Purchase Agreement (the "Receivables
Purchase Agreement") with commitments of up to $200.0 million and a $15.0
million in an uncommitted, unsecured line of credit (the "Uncommitted Line of
Credit"). The Uncommitted Line of Credit permits the Company to borrow up to
$15.0 million on an unsecured, short-term basis for periods of up to thirty
days. This arrangement has no fixed expiration date but may be withdrawn at
any time without notice. The Company is currently in compliance with all
material covenants of, and obligations under, the Receivables Purchase
Agreement, the Uncommitted Line of Credit and other debt instruments. The
Company has satisfied its liquidity needs with minimal use of its credit
facilities.
Cash and cash equivalents totaled $127.6 million and $161.9 million as of
December 31, 1995 and 1994, respectively. This decrease is primarily the
result of the Company's prepayment of $133.3 million aggregate principal
amount of related party debt associated with the rebuild of the No. 5 Coke Oven
Battery serving the Great Lakes Division, along with internally funded capital
expenditures. Cash from the Company's operations, as well as the proceeds
realized in connection with the primary offering of 6.9 million shares of Class
B Common Stock completed on February 1, 1995, were utilized to prepay the
aforementioned related party debt.
Cash Flows from Operating Activities
For the year ended December 31, 1995, cash provided from operating activities
decreased by $51.7 compared to the same 1994 period. However, excluding the
after tax effect of the 1994 B&LE gain of $107.9 million, cash provided by
operating activities increased by $56.2 million. The increase is primarily
attributable to increased sales and improvements in operating results.
For the year ended December 31, 1994, cash provided from operating activities
increased by $257.9 million compared to the same 1993 period. This increase
was primarily attributable to the receipt of approximately $111.0 of proceeds
from the satisfaction of the judgment in favor of the Company against the B&LE.
However, excluding the after tax effect of the 1994 B&LE gain, cash provided by
operating activities increased by $150.0 million, which is attributable to
improvements in operating results.
Cash Flows from Investing Activities
Capital investments for the years ended December 31, 1995 and 1994 amounted to
$215.4 million and $137.5 million, respectively. The 1995 spending included
the installation of the Triple G galvanizing line at the Granite City Division,
which amounted to approximately $75.0 million. Other significant projects
include the "B" furnace reline totaling approximately $40.0 million and the Hot
Strip Mill modernization project totaling approximately $12.0 million, both at
the Granite City Division. The capital expenditures during 1994 were
principally related to the completion of a pickle line servicing the Great
Lakes Division, which was financed under a turnkey contract and became the
property of the Company during the first quarter of 1994.
Budgeted capital expenditures approximating $268.0 million, of which $21.6
million is committed at December 31, 1995, are expected to be made during 1996
and 1997. These budgeted capital expenditures relate primarily to the
construction of the new galvanizing line at the Midwest Division and completion
of the Triple G galvanizing line at the Granite City Division.
35
Cash Flows from Financing Activities
On February 1, 1995, the Company completed a primary offering of 6,900,000
shares of Class B Common Stock, bringing the total number of shares of Class B
Common Stock issued and outstanding to 21,176,156. Subsequent to the offering,
NKK Corporation, through its ownership of all 22,100,000 outstanding shares of
Class A Common Stock, holds 67.6% of the combined voting power of the Company.
The remaining 32.4% of the combined voting power is publicly held. The
issuance of this stock generated net proceeds of $104.7 million, which was used
along with an additional amount of $20.9 million funded from the Company's
available cash, to prepay $133.3 million aggregate principal of related party
debt associated with the rebuild of the No. 5 Coke Oven Battery servicing the
Great Lakes Division. This early extinguishment of debt resulted in an
extraordinary item of $5.4 million, net of related income tax expense of $.5
million.
Total borrowings for the year ended December 31, 1994 amounted to $88.0 million
representing primarily the commencement of the permanent financing for the
pickle line servicing the Great Lakes Division. The 1994 borrowing was largely
offset by the repurchase of $40.6 million aggregate principal amount of the
Company's 8.375% First Mortgage Bonds and $14.0 million aggregate principal
amount of Series 1985 River Rouge Pollution Control Bonds. There were no
borrowings in 1995.
Sources of Financing
Effective May 16, 1994, the Company entered into a Purchase and Sale Agreement
with National Steel Funding Corporation ("NSFC"), a newly created wholly owned
subsidiary. Effective on that same date, NSFC entered into the Receivables
Purchase Agreement with a group of twelve banks. The total commitment of the
banks was $180.0 million, including up to $150.0 million in letters of credit.
On May 16, 1995, the Receivables Purchase Agreement was amended to increase the
amount available under this agreement from a maximum of $180.0 million to a
maximum of $200.0 million. Additionally, the expiration date was extended
from May 16, 1997 to May 16, 2000. To implement the arrangement, the Company
sold substantially all of its accounts receivable, and will sell additional
receivables as they are generated, to NSFC. NSFC will finance its ongoing
purchase of receivables from a combination of cash received from receivables
already in the pool, short-term intercompany notes and the cash proceeds
derived from selling interests in the receivables to the participating banks
from time to time.
The Certificates of Participation, which will be sold to the banks by NSFC,
have been rated AAA by Standard & Poor's Corporation, resulting in lower
borrowing costs to the Company when such participations are sold. For both 1995
and 1994, no funded participation interests had been sold under the facility,
although $81.6 million and $89.7 million in letters of credit had been issued
in 1995 and 1994, respectively. With respect to the pool of receivables at
December 31, 1995 and 1994, after reduction for letters of credit outstanding,
the amount of participating interests eligible for sale was $113.9 million and
$90.3 million, respectively. During 1995, the eligible amount ranged from
$82.0 million to $116.0 million. During 1994, the eligible amount ranged from
$69.5 million to $91.0 million. The Company will continue to act as servicer of
the assets sold into the program and will continue to make billings and
collections in the ordinary course of business according to established
practices.
The Company terminated a $100.0 million revolving secured credit arrangement,
which included a letter of credit facility, on May 16, 1994. On the same date,
the Company also terminated a $150.0 million subordinated loan agreement. No
borrowings were outstanding under the Revolver from 1987 until its termination.
On February 7, 1994, the Company borrowed $20.0 million under the Subordinated
Loan Agreement and a maximum of $5.0 million under the Uncommitted Line of
Credit, all of which was repaid on February 17, 1994.
Weirton Liabilities and Preferred Stock
In connection with the Company's June 1990 recapitalization, the Company
received $146.6 million from FOX in cash and recorded a net present value
equivalent liability with respect to certain released Weirton Benefit
Liabilities, primarily healthcare and life insurance. As a result of this
transaction, the
36
Company's future cash flow will decrease as the released Weirton Benefit
Liabilities are paid. During 1995, such cash payments were $15.4 million
compared to $16.6 million during 1994.
The Series B Preferred Stock is presently subject to mandatory redemption by
the Company on August 5, 2000 at a total redemption price of $58.3 million and
may be redeemed beginning January 1, 1998 without the consent of FOX at a total
redemption price of $62.2 million. Based upon the Company's actuarial
analysis, the unreleased Weirton Benefit Liabilities approximate the aggregate
remaining dividend and redemption payments with respect to the Series B
Preferred Stock and accordingly, such payments are expected to be made in the
form of releases of FOX from its obligations to indemnify the Company for
corresponding amounts of the remaining unreleased Weirton Benefit Liabilities.
Dividend and redemption payments with respect to the Series B Preferred Stock
reduce the Company's cash flow, even though they are paid in the form of a
release of FOX from such obligations, because the Company is obligated, subject
to certain limited exceptions, to pay such amounts to the trustee of the
pension plan included in the Weirton Benefit Liabilities.
If any dividend or redemption payment otherwise required pursuant to the terms
of the Series B Preferred Stock is less than the amount required to satisfy
FOX's then current indemnification obligation, FOX would be required to pay
such shortfall in cash to the Company. The Company's ability to fully realize
the benefits of FOX's indemnification obligations is necessarily dependent upon
FOX's financial condition at the time of any claim with respect to such
obligations.
In January 1996, the Company authorized the repurchase of up to one million
shares of its Class B Common Stock. Any shares repurchased will be used in
connection with the Company's stock based benefit plans or for other corporate
purposes.
Miscellaneous
At December 31, 1995, obligations guaranteed by the Company approximated $35.6
million, compared to $37.7 million at December 31, 1994.
Total debt and redeemable preferred stock as a percentage of total
capitalization improved to 52.0% at December 31, 1995 as compared to 68.6% at
December 31, 1994, primarily as a result of an improvement in operating
results, the 1995 primary offering of Class B Common Stock of $104.7 million,
and the resulting repayment of $133.3 million aggregate principal amount of
related party debt.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and financial statement
schedule of the Company are submitted pursuant to the requirements of Item 8:
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Report of Ernst & Young LLP Independent Auditors 39
Statements of Consolidated Income - Years Ended
December 31, 1995, 1994 and 1993 40
Consolidated Balance Sheets - December 31, 1995 and 1994 41
Statements of Consolidated Cash Flows - Years Ended
December 31, 1995, 1994 and 1993 42
Statements of Changes in Consolidated Stockholders'
Equity and Redeemable Preferred Stock - Series B -
Years Ended December 31, 1995, 1994 and 1993 43
Notes to Consolidated Financial Statements 44
Schedule II - Valuation and Qualifying Accounts 63
38
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, 1995 and 1994,
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, 1995. Our audits also included
the financial statement schedule listed in the Index at Item 8. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 1995 and 1994, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in Note A to the Consolidated Financial Statements, the Company
made certain accounting changes in 1993.
Ernst & Young LLP
Fort Wayne, Indiana
January 24, 1996
39
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
NET SALES $2,954,218 $2,700,273 $2,418,800
Cost of products sold 2,527,521 2,353,970 2,253,972
Selling, general and administrative 153,690 138,223 136,656
Depreciation, depletion and amortization 145,452 141,869 137,500
Equity income of affiliates (8,767) (5,464) (2,160)
Unusual charges (credits) 5,336 (24,888) 110,966
---------- ---------- ---------
INCOME (LOSS) FROM OPERATIONS 130,986 96,563 (218,134)
Other (income) expense
Interest and other financial income (11,736) (5,542) (1,862)
Interest and other financial expense 50,950 61,241 63,647
Litigation judgment income ----- (110,972) -----
---------- ---------- ----------
39,214 (55,273) 61,785
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 91,772 151,836 (279,919)
Income tax credit (13,651) (16,676) (37,511)
---------- ---------- ----------
Income (Loss) before Extraordinary Item
and Cumulative Effect of Accounting Change 105,423 168,512 (242,408)
Extraordinary item 5,373 ----- -----
Cumulative effect of accounting change ----- ----- (16,453)
---------- ---------- ----------
NET INCOME (LOSS) 110,796 168,512 (258,861)
Less preferred stock dividends (10,958) (11,038) (13,364)
---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK $ 99,838 $ 157,474 $ (272,225)
========== ========== ===========
PER SHARE DATA APPLICABLE TO COMMON STOCK:
Income (Loss) before Extraordinary Item and
Cumulative Effect of Accounting Change $ 2.21 $ 4.33 $ (7.55)
Extraordinary item .13 ----- -----
Cumulative effect of accounting change ----- ----- (.49)
---------- ---------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 2.34 $ 4.33 $ (8.04)
========== ========== ===========
Weighted average shares outstanding
(in thousands) 42,707 36,367 33,879
See notes to consolidated financial statements.
40
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
----------------------
1995 1994
---------- ----------
ASSETS:
Current assets
Cash and cash equivalents $ 127,616 $ 161,946
Receivables, less allowances (1995-$19,986; 1994-$15,185) 316,662 292,869
Inventories:
Finished and semi-finished products 276,162 261,480
Raw materials and supplies 135,852 106,532
---------- ----------
412,014 368,012
---------- ----------
Total current assets 856,292 822,827
Investments in affiliated companies 59,885 57,676
Property, plant and equipment
Land and land improvements 234,693 232,667
Buildings 259,391 252,797
Machinery and equipment 3,046,130 2,875,003
---------- ----------
3,540,214 3,360,467
Less: allowance for depreciation, depletion and amortization 2,071,511 1,966,539
---------- ----------
Net property, plant and equipment 1,468,703 1,393,928
Deferred tax assets 129,900 101,300
Intangible pension asset 108,822 76,677
Other assets 44,277 46,977
---------- ----------
TOTAL ASSETS $2,667,879 $2,499,385
========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY:
Current liabilities
Accounts payable $ 255,574 $ 272,586
Salaries and wages 89,987 54,207
Withheld and accrued taxes 82,076 77,637
Pension and other employee benefits 96,894 93,902
Other accrued liabilities 68,373 61,422
Income taxes 3,912 2,775
Current portion of long term obligations 35,750 35,669
---------- ----------
Total current liabilities 632,566 598,198
Long term obligations 339,613 360,375
Long term obligations to related parties 161,912 310,409
Long term pension liability 326,151 267,478
Postretirement benefits other than pensions 221,627 179,507
Other long term liabilities 364,423 363,307
Commitments and contingencies
Redeemable Preferred Stock - Series B 65,030 66,530
Stockholders' equity
Common Stock, par value $.01:
Class A - authorized 30,000,000 shares; issued and outstanding
22,100,000 shares in 1995 and 1994 221 221
Class B - authorized 65,000,000 shares; issued and outstanding
21,188,240 shares in 1995 and 14,276,156 in 1994 212 143
Preferred Stock - Series A 36,650 36,650
Additional paid-in capital 465,359 360,525
Retained earnings (deficit) 54,115 (43,958)
---------- ----------
Total stockholders' equity 556,557 353,581
---------- ----------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY $2,667,879 $2,499,385
========== ==========
See notes to consolidated financial statements.
41
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31,
1995 1994 1993
--------- --------- ---------
Cash Flows from Operating Activities:
Net income (loss) $ 110,796 $ 168,512 $(258,861)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 145,452 141,869 137,500
Carrying charges related to facility sales and plant closings 24,307 24,337 35,597
Unusual items (excluding pensions and OPEB) -- (5,887) 37,900
Equity income of affiliates (8,767) (5,464) (2,160)
Dividends from affiliates 6,332 6,252 5,765
Long term pension liability (net of change in intangible pension asset) 24,763 36,707 51,909
Postretirement benefits 42,120 22,072 97,562
Extraordinary item (5,373) -- --
Deferred income taxes (28,600) (20,700) (37,600)
Cumulative effect of accounting changes -- -- 16,453
Changes in working capital items:
Receivables (23,793) (68,160) (6,627)
Inventories (44,002) 3,085 729
Accounts payable (17,012) 30,292 (14,923)
Accrued liabilities 50,936 (28,441) (6,336)
Other (12,063) 12,368 2,063
--------- --------- ---------
Net Cash Provided by Operating Activities 265,096 316,842 58,971
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of property, plant and equipment (215,442) (137,519) (160,708)
Proceeds from sale of assets 110 1,694 7,182
--------- --------- ---------
Net Cash Used in Investing Activities (215,332) (135,825) (153,526)
--------- --------- ---------
Cash Flows from Financing Activities:
Exercise of stock options 169 211 --
Issuance of Class B Common Shares 104,734 -- 141,432
Redemption of Preferred Stock - Series B -- -- (67,804)
Prepayment of related party debt (125,624) -- --
Debt repayments (35,849) (83,845) (33,469)
Borrowings -- 87,950 84
Borrowings from related parties -- -- 40,500
Payment of released Weirton Benefit Liabilities (15,429) (16,614) (20,001)
Payment of unreleased Weirton Liabilities and
their release in lieu of cash dividends on
Preferred Stock - Series B (7,099) (7,055) (10,594)
Dividend payments on Preferred Stock - Series A (4,032) (4,032) (4,030)
Dividend payments on Preferred Stock - Series B (964) (1,008) (1,461)
--------- --------- ---------
Net Cash Provided by (Used in) Financing Activities (84,094) (24,393) 44,657
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (34,330) 156,624 (49,898)
Cash and cash equivalents at beginning of the year 161,946 5,322 55,220
--------- --------- ---------
Cash and cash equivalents at end of the year $ 127,616 $ 161,946 $ 5,322
========= ========= =========
Supplemental Cash Payment Information:
Interest and other financing costs paid $ 45,627 $ 60,342 $ 51,886
Income taxes paid 22,229 5,338 72
See notes to consolidated financial statements.
42
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK - SERIES B
(IN THOUSANDS OF DOLLARS)
COMMON COMMON PREFERRED ADDITIONAL RETAINED TOTAL REDEEMABLE
STOCK - STOCK - STOCK - PAID-IN EARNINGS STOCKHOLDERS' PREFERRED STOCK -
CLASS A CLASS B SERIES A CAPITAL (DEFICIT) EQUITY SERIES B
------- ------- --------- --------- --------- ------------- -----------------
BALANCE AT JANUARY 1, 1993 $255 $ -- $36,650 $218,991 $ 70,795 $ 326,691 $137,802
Net loss (258,861) (258,861)
Redemption of Redeemable Preferred
Stock - Series B (67,804)
Amortization of excess of book value
over redemption value of Redeemable
Preferred Stock - Series B 1,968 1,968 (1,968)
Cumulative dividends on Preferred
Stock - Series A and B (15,332) (15,332)
Issuance of Common Stock - Class B 109 141,323 141,432
Conversion of 3,400,000 shares of
Common Stock - Class A to
Common Stock - Class B (34) 34
Minimum pension liability (5,936) (5,936)
---- ---- ------- -------- --------- --------- --------
BALANCE AT DECEMBER 31, 1993 221 143 36,650 360,314 (207,366) 189,962 68,030
Net income 168,512 168,512
Amortization of excess of book value
over redemption value of
Redeemable Preferred Stock - Series B 1,500 1,500 (1,500)
Cumulative dividends on Preferred
Stock - Series A and B (12,538) (12,538)
Exercise of stock options 211 211
Minimum pension liability 5,934 5,934
---- ---- ------- -------- --------- --------- --------
BALANCE AT DECEMBER 31, 1994 221 143 36,650 360,525 (43,958) 353,581 66,530
Net income 110,796 110,796
Amortization of excess of book value
over redemption value of
Redeemable Preferred Stock - Series B 1,500 1,500 (1,500)
Cumulative dividends on Preferred
Stock - Series A and B (12,458) (12,458)
Issuance of Common Stock - Class B 69 104,665 104,734
Exercise of stock options 169 169
Minimum pension liability (1,765) (1,765)
---- ---- ------- -------- --------- --------- --------
BALANCE AT DECEMBER 31, 1995 $221 $212 $36,650 $465,359 $ 54,115 $ 556,557 $ 65,030
==== ==== ======= ======== ========= ========= ========
See notes to consolidated financial statements.
43
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: National Steel Corporation 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 to the automotive, metal buildings and container markets. The Company
also sells hot and cold rolled steel to a wide variety of other users including
the pipe and tube industry and independent steel service centers. The Company's
principal markets are located in the U.S.
In 1995, no single customer accounted for more than 10% of net sales. In 1994
and 1993, a single customer accounted for approximately 10% and 11% of net
sales, respectively. Sales to the automotive market accounted for approximately
28%, 29% and 29% of the Company's total net sales in 1995, 1994 and 1993,
respectively. Concentration of credit risk related to trade receivables is
limited due to the large numbers of customers in differing industries and
geographic areas and management's credit practices.
Since 1986, the Company has had cooperative labor agreements with the United
Steelworkers of America (the "USWA") and other labor organizations, which
collectively represent approximately 82.5% of the Company's employees. The
Company entered into a six year agreement with these labor organizations
effective as of August 1, 1993 (the "1993 Settlement Agreement"). Negotiations
will reopen in 1996, except with respect to pensions and certain other matters,
with any unresolved issues subject to binding arbitration. Additionally, the
1993 Settlement Agreement contains a no-strike clause also effective through
1999.
Principles of Consolidation: The consolidated financial statements include the
accounts of National Steel Corporation and its majority owned subsidiaries (the
"Company"). Significant intercompany accounts and transactions have been
eliminated.
Cash Equivalents: Cash equivalents are short-term liquid investments which
consist principally of time deposits and commercial paper at cost which
approximates market. These investments have maturities of three months or less
at the time of purchase.
Inventories: Inventories are stated at the lower of last-in, first-out ("LIFO")
cost or market. If the first-in, first-out ("FIFO") cost method of inventory
accounting had been used, inventories would have been approximately $146.0
million and $150.2 million higher than reported at December 31, 1995 and 1994,
respectively. During each of the last three years certain inventory quantity
reductions caused liquidations of LIFO inventory values. These liquidations
decreased net income for the quarter and year ended December 31, 1995 by $1.2
million, increased net income for the quarter and year ended December 31, 1994
by $.3 million and decreased net income for the quarter and year ended December
31, 1993 by $3.0 million.
Investments in Affiliated Companies: Investments in affiliated companies
(corporate joint ventures and 20% to 50% owned companies) are stated at cost
plus equity in undistributed earnings since acquisition. Undistributed earnings
of affiliated companies included in retained earnings (deficit) at December 31,
1995 and 1994 amounted to $8.9 million and $6.2 million, respectively.
44
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 $6.3 million in 1995, $3.7 million in 1994 and $5.8 million
in 1993. Amortization of capitalized interest amounted to $5.6 million in 1995
and 1994, and $5.7 million in 1993.
Depreciation, Depletion and Amortization: Depreciation of production facilities
and amortization related to capitalized lease obligations are generally provided
by charges to income computed by the straight-line method. Provisions for
depreciation and depletion of certain raw material facilities and furnace
relinings are computed on the basis of tonnage produced in relation to estimated
total production to be obtained from such facilities.
Environmental: Estimated losses from environmental contingencies are accrued and
charged to income when it is probable that a liability has been incurred and the
amount of loss can be reasonably estimated. (See Note L - Environmental
Liabilities.)
Research and Development: Research and development costs are expensed when
incurred and are charged to cost of products sold. Expenses for 1995, 1994 and
1993 amounted to approximately $9.8 million, $7.9 million and $9.4 million,
respectively.
Financial Instruments: Financial instruments consist of cash and cash
equivalents, long term obligations (excluding capitalized lease obligations),
and the Series B Redeemable Preferred Stock. The fair value of these financial
instruments approximates their carrying amounts at December 31, 1995. At
December 31, 1995 and 1994, the Company had not invested in any derivative
financial instruments.
Accounting Changes: During 1993, the Company adopted two new Financial
Accounting Standards Board Statements, "Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS 106" or "OPEB") and "Employer's Accounting for
Postemployment Benefits" ("SFAS 112"). (See Note E - Postretirement Benefits
Other Than Pensions and Note F - Postemployment Benefits.)
In March 1995, the Financial Accounting Standards Board issued Statement No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," which requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company will adopt SFAS
121 in the first quarter of 1996 and, based on current circumstances, does not
believe the effect of adoption will be material.
Earnings per Share: Earnings (loss) per share of Common Stock ("EPS") is
computed by dividing net income or loss applicable to common stock by the sum of
the weighted average of the shares of common stock outstanding during the period
plus common stock equivalents, if dilutive.
Use of Estimates: The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Reclassifications: Certain items in prior years have been reclassified to
conform with the current year presentation.
45
NOTE B - CAPITAL STRUCTURE AND PRIMARY OFFERING OF CLASS B COMMON STOCK
OWNERSHIP: In April 1993, the Company completed an initial public offering of
10,861,100 shares of its Class B Common Stock, par value $.01 per share, which
generated net proceeds of $141.4 million.
On February 1, 1995, the Company completed a primary offering of 6,900,000
shares of Class B Common Stock, bringing the total number of shares of Class B
Common Stock issued and outstanding to 21,176,156 at that time. The issuance of
this stock generated net proceeds of $104.7 million, all of which was used for
related party debt reduction. Subsequent to the offering, NKK Corporation
(collectively with its subsidiaries "NKK"), through its ownership of all
22,100,000 issued and outstanding shares of Class A Common Stock, holds 67.6% of
the combined voting power of the Company. The remaining 32.4% of the combined
voting power is held by the public. At December 31, 1994, 75.6% and 24.4% of the
combined voting power was held by NKK and the public, respectively. At December
31, 1995 the Company's capital structure was as follows:
SERIES A PREFERRED STOCK
At December 31, 1995, there were 5,000 shares of Series A Preferred Stock, par
value $1.00 per share (the "Series A Preferred Stock"), issued and outstanding.
Annual dividends of $806.30 per share on the Series A Preferred Stock are
cumulative and payable quarterly. The Series A Preferred Stock is not subject to
mandatory redemption by the Company and is non-voting. All outstanding Shares of
Series A Preferred Stock are owned by NKK. In 1995 and 1994, cash dividends of
approximately $4.0 million were paid on the Series A Preferred Stock.
SERIES B REDEEMABLE PREFERRED STOCK
At December 31, 1995, there were 10,000 redeemable shares of Series B Preferred
Stock issued and outstanding and held by FoxMeyer Health Corporation
(collectively with its subsidiaries "FOX"). Annual dividends of $806.30 per
share on the Series B Redeemable Preferred Stock are cumulative and payable
quarterly. Dividends and redemption proceeds, to the extent required by the
Stock Purchase and Recapitalization Agreement (the "Recapitalization
Agreement"), are used to release FOX from its indemnification obligations with
respect to the remaining unreleased liabilities for certain employee benefits of
its former Weirton Steel Division employees (the "Weirton Benefit Liabilities").
The Series B Redeemable Preferred Stock dividend permitted release and payment
of $7.1 million of previously unreleased Weirton Benefit Liabilities during 1995
and 1994, and a cash payment of $1.0 million during 1995 and 1994, to reimburse
FOX for an obligation previously incurred in connection with the Weirton Benefit
Liabilities. Upon the occurrence of certain events detailed in the
Recapitalization Agreement, prior to or coincident with the Series B Redeemable
Preferred Stock final redemption, the released Weirton Benefit Liabilities will
be recalculated by an independent actuary. Any adjustment to bring the balances
of the released Weirton Benefit Liabilities to such recalculated amount will be
dealt with in the Series B Redeemable Preferred Stock redemption proceeds or
otherwise settled. If the Company does not meet its preferred stock dividend and
redemption obligations when due, FOX has the right to cause NKK to purchase the
Company's preferred stock dividend and redemption obligations. The Series B
Redeemable Preferred Stock is nontransferable and nonvoting. (See Note I -
Weirton Liabilities.)
The Series B Redeemable Preferred Stock is subject to mandatory redemption on
August 5, 2000 at a redemption price of $58.3 million and may not be redeemed
prior to January 1, 1998 without the consent of FOX. On January 1, 1998, the
redemption price for the Series B Redeemable Preferred Stock would be $62.2
million.
Periodic adjustments are made to retained earnings for the excess of the book
value of the Series B Redeemable Preferred Stock at the date of issuance over
the redemption value. Based upon the Company's actuarial analysis, the
unreleased Weirton Benefit Liabilities approximate the aggregate remaining
dividend and redemption payments with respect to the Series B Redeemable
Preferred Stock and accordingly, such payments are expected to be made in the
form of releases of FOX from its obligations to indemnify the Company for
corresponding amounts of the remaining unreleased Weirton
46
Benefit Liabilities. At that time, the Company will be required to deposit cash
equal to the redemption amount in the Weirton Retirement Trust, thus leaving the
Company's net liability position unchanged. The Series B Redeemable Preferred
Stock, with respect to dividend rights and rights on liquidation, ranks senior
to the Company's common stock and equal to the Series A Preferred Stock.
CLASS A COMMON STOCK
At December 31, 1995, the Company had 30,000,000 shares of $.01 par value Class
A Common Stock authorized, of which 22,100,000 shares were issued and
outstanding and owned by NKK. Each share of Class A Common Stock is entitled to
two votes. No cash dividends were paid on the Class A Common Stock in 1995, 1994
or 1993.
CLASS B COMMON STOCK
At December 31, 1995, 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 1995, 1994 or 1993. All of
the issued and outstanding shares of Class B Common Stock are publicly traded.
In January 1996, the Company authorized the repurchase of up to 1,000,000 shares
of the Class B Common Stock. Any repurchased shares will be used in connection
with the Company's stock based benefit plans or for other corporate purposes.
47
NOTE C - LONG TERM OBLIGATIONS
Long term obligations were as follows:
DECEMBER 31,
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
First Mortgage Bonds, 8.375% Series due August 1, 2006,
with general first liens on principal plants, properties,
certain subsidiaries, and an affiliated company $ 75,000 $ 75,000
Vacuum Degassing Facility Loan, 10.336% fixed rate due
in semi-annual installments through 2000, with a first
mortgage in favor of the lenders 32,357 37,769
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 119,428 124,424
Coke Battery Loan, 7.540% fixed rate with semi-annual
payments due through 2008. Lenders are wholly-owned
subsidiaries of NKK and are unsecured 177,080 329,995
Headquarters Building Loan, current interest rate 6.884%,
reset semi-annually through 1999, with a first mortgage
in favor of the lender 5,769 6,846
Pickle Line Loan, 7.726% fixed rate due in equal semi-
annual installments through 2007, with a first mortgage
in favor of the lender 87,901 90,000
Capitalized lease obligations 28,485 31,055
Other 11,255 11,364
-------- --------
Total long term obligations 537,275 706,453
Less long term obligations due within one year 35,750 35,669
-------- --------
Long term obligations $501,525 $670,784
======== ========
Future minimum payments for all long term obligations and leases as of December
31, 1995 are as follows:
OTHER
CAPITALIZED OPERATING LONG TERM
LEASES LEASES OBLIGATIONS
----------- --------- -----------
(DOLLARS IN THOUSANDS)
1996 $ 6,712 $ 60,255 $ 32,228
1997 6,712 57,945 33,792
1998 6,712 53,910 35,486
1999 6,712 48,749 38,797
2000 6,712 45,698 36,901
Thereafter 6,711 182,916 331,586
------- -------- --------
Total payments 40,271 $449,473 $508,790
======== ========
Less amount representing interest 11,786
Less current portion of obligation under
capitalized lease 3,520
-------
Long term obligation under capitalized
lease $24,965
=======
48
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 $71.8 million
in 1995, $70.4 million in 1994 and $70.7 million in 1993.
The Company borrowed a total of $350.0 million over a three year period ended
in 1993 from a United States subsidiary of NKK for the rebuild of the No. 5
coke oven battery servicing the Great Lakes Division. During 1995, the Company
utilized proceeds from the 6.9 million share primary offering, along with other
cash funds, to prepay $133.3 million aggregate principal amount of the
aforementioned loan. During 1995, the Company made principal payments of
$152.9 million, which includes the 1995 prepayment, and recorded $19.7 million
in interest expense on the coke battery loan. During 1994, the principal and
interest payments on the coke battery loan totaled $13.3 million and $25.2
million, respectively. Accrued interest on the loan as of December 31, 1995
and 1994 was $5.1 million and $10.1 million, respectively. Additionally,
deferred financing costs related to the loan were $2.5 million and $4.2
million, respectively, as of December 31, 1995 and 1994. (See Note J -
Nonrecurring and Extraordinary Items.)
In January 1994, upon completion and acceptance of the Pickle Line servicing
the Great Lakes Division, the permanent financing commenced with repayment to
occur over a fourteen-year period. The Pickle Line is not subject to the lien
securing the Company's First Mortgage Bonds, but is subject to a first mortgage
in favor of the lender.
During 1994, the Company utilized a portion of the proceeds from the antitrust
litigation judgment in favor of the Company against the Bessemer & Lake Erie
Railroad ("B&LE") to repurchase $40.6 million aggregate principal amount of its
outstanding 8.375% First Mortgage Bonds. (See Note J - Nonrecurring and
Extraordinary Items.)
CREDIT ARRANGEMENTS
Effective May 16, 1994, the Company entered into a Purchase and Sale Agreement
with National Steel Funding Corporation ("NSFC"), a newly created wholly-owned
subsidiary. Effective on the same date, NSFC entered into a Receivables
Purchase Agreement with a group of twelve banks. The total maximum commitment
of the banks is $200.0 million, including up to $150.0 million in letters of
credit. To implement the arrangement, the Company sold substantially all of
its accounts receivable, and will sell additional receivables as they are
generated, to NSFC. NSFC will finance its ongoing purchase of receivables from
a combination of cash received from receivables already in the pool, short-term
intercompany notes and the cash proceeds derived from selling interests in the
receivables to the participating banks from time to time.
The Certificates of Participation, which will be sold to the banks by NSFC,
have been rated AAA by Standard & Poor's Corporation, resulting in lower
borrowing costs to the Company when such participations are sold. As of
December 31, 1995, no funded participation interests had been sold under the
facility, although $81.6 million in letters of credit had been issued. With
respect to the pool of receivables at December 31, 1995, after reduction for
letters of credit outstanding, the amount of participating interests eligible
for sale was $113.9 million. During the year ended December 31, 1995, the
eligible amount ranged from $82.0 million to $116.0 million. The banks'
commitments are currently scheduled to expire on May 16, 2000. The Company
will continue to act as servicer of the assets sold into the program and will
continue to make billings and collections in the ordinary course of business
according to established practices.
The Company has a $15.0 million, uncommitted, unsecured line of credit (the
"Uncommitted Line of Credit"). The Uncommitted Line of Credit permits the
Company to borrow up to $15.0 million on an unsecured, short-term basis for
periods of up to thirty days. This arrangement has no fixed expiration date
but may be withdrawn at any time without notice.
49
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 $80.1
million was free of such limitations at December 31, 1995. The Company is
currently in compliance with all material covenants of, and obligations under,
the Receivables Purchase Agreement, the Uncommitted Line of Credit and other
debts instruments.
NOTE D - PENSIONS
The Company has various non-contributory defined benefit pension plans covering
substantially all employees. Benefit payments for salaried employees are based
upon a formula which utilizes employee age, years of credited service and the
highest sixty consecutive months of pensionable earnings during the last ten
years preceding normal retirement. Benefit payments to most hourly employees
are the greater of a benefit calculation utilizing fixed rates per year of
service or the highest sixty consecutive months of pensionable earnings during
the last ten years preceding retirement, with a premium paid for years of
service in excess of thirty years. The Company's funding policy is to
contribute, at a minimum, the amount necessary to meet minimum funding
standards as prescribed by applicable law. The Company utilizes a long term
rate of return of 8.5% for funding purposes. The Company's minimum pension
contributions for the 1995 and 1994 plan years were $39.3 million and $18.3
million, respectively.
Pension expense and related actuarial assumptions utilized are summarized
below:
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Assumptions:
Discount rate 8.75% 7.50% 8.75%
Return on assets 8.50% 8.50% 9.50%
Average rate of compensation increase 4.70% 4.55% 5.50%
Pension expense:
Service cost $ 19,143 $ 24,713 $ 21,537
Interest cost 110,683 104,320 100,783
Actual return on plan assets (234,792) 51,240 (160,561)
Net amortization and deferral 169,756 (114,855) 89,567
--------- --------- ---------
Net pension expense 64,790 65,418 51,326
Curtailment and special termination charges (credits) ----- (17,372) 35,174
--------- --------- ---------
Total pension expense $ 64,790 $ 48,046 $ 86,500
========= ========= =========
In connection with the temporary idling of National Steel Pellet Company
("NSPC"), a wholly-owned subsidiary of the Company, special termination
benefits of $31.9 million related to hourly NSPC plan participants were
recorded at December 31, 1993 and included in 1993 pension expense. In August
1994, NSPC was re-opened and $13.3 million of the special termination benefits
reserve was reversed during the third quarter of 1994. The remaining portion
of the NSPC curtailment charge, or $18.6 million, relates to an early
retirement window offered by NSPC during the third quarter of 1994. In 1994,
the Company recorded a special termination credit of $1.8 million related to
the restructuring of the salaried workforce. (See Note J - Nonrecurring and
Extraordinary Items.)
50
The funded status of the Company's plans at year end along with the actuarial
assumptions utilized are as follows:
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Assumptions:
Discount rate 7.25% 8.75%
Average rate of compensation increase 4.70% 4.71%
Funded status:
Accumulated benefit obligations ("ABO") including vested
benefits of $1,328,302 and $1,093,091 for 1995 and 1994,
respectively $1,441,579 $1,188,012
Effect of future pensionable earnings increases 116,474 75,017
---------- ----------
Projected benefit obligations ("PBO") 1,558,053 1,263,029
Plans' assets at fair market value 1,132,077 976,654
---------- ----------
PBO in excess of plan assets at fair market value 425,976 286,375
Unrecognized transition obligation (56,770) (66,827)
Unrecognized net gain (loss) (16,613) 91,170
Unrecognized prior service cost (106,694) (119,917)
Adjustment required to recognize minimum pension liability 110,587 76,677
---------- ----------
Total pension liability 356,486 267,478
Less pension liability due within one year 30,335 --
---------- ----------
Long term pension liability $ 326,151 $ 267,478
========== ==========
As a result of a decrease in long term interest rates at December 31, 1995, the
Company decreased the discount rate used to calculate the actuarial present
value of its ABO by 150 basis points to 7.25% from the rate used at December
31, 1994. This is the primary reason for the increase in the ABO.
The adjustment required to recognize the minimum pension liability of $110.6
million and $76.7 million at December 31, 1995 and 1994, respectively,
represents the excess of the ABO over the fair value of plan assets, including
unfunded accrued pension cost, in underfunded plans. The unfunded liability in
excess of the unrecognized prior service cost of $1.8 million was recorded as a
reduction in stockholders' equity at December 31, 1995.
At December 31, 1995, the Company's pension plans' assets were comprised of
approximately 52% equity investments, 41% fixed income investments, 2% cash and
5% in other investments including real estate.
NOTE E - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides contributory health care and life insurance benefits for
certain retirees and their dependents. Generally, employees are eligible to
participate in the medical benefit plans if they retired under one of the
Company's pension plans on other than a deferred vested basis, and at the time
of retirement had at least 15 years of continuous service. However, salaried
employees hired after January 1, 1993 are not eligible to participate in the
plans.
Effective January 1, 1993, the Company implemented SFAS 106 which requires
accrual of retiree medical and life insurance benefits as these benefits are
earned rather than recognition of these costs as claims are paid. The Company
has elected to amortize its transition obligation over 20 years, 17 of which
remain at December 31, 1995. In 1993, the excess of total postretirement
benefit expense recorded under SFAS 106 over the Company's former method of
accounting for these benefits was $97.6 million, or $59.5 million excluding
curtailment charges, or $1.77 and $1.08 per share net of tax, respectively.
51
The components of postretirement benefit cost and related actuarial assumptions
were as follows:
1995 1994 1993
-------- -------- ---------
(DOLLARS IN THOUSANDS)
Assumptions:
Discount rate 8.75% 7.75% 8.75%
Health care trend rate 7.80% 10.10% 11.20%
Postretirement benefit cost:
Service cost $10,573 $13,737 $ 12,912
Interest cost 52,700 53,577 52,811
Amortization of transition obligation 26,274 26,510 28,071
Other (5,003) (2,162) (8,176)
------- ------- --------
Net periodic benefit cost 84,544 91,662 85,618
Curtailment charges and special termination
charges (credits) ----- (4,081) 38,061
------- ------- --------
Total postretirement benefit cost $84,544 $87,581 $123,679
======= ======= ========
In connection with the temporary idling of NSPC, curtailment charges of $36.7
million related to hourly NSPC plan participants were recorded at December 31,
1993. In August 1994, NSPC was re-opened and $26.0 million of the OPEB
curtailment reserve was reversed during the third quarter of 1994. The
remaining portion of the NSPC curtailment charge, or $10.7 million, related
primarily to an early retirement window offered by NSPC during the third
quarter of 1994. In 1994, the Company recorded special termination benefits of
$22.0 million related to the restructuring of the salaried workforce. (See
Note J - Nonrecurring and Extraordinary Items.)
The following represents the plans' funded status reconciled with amounts
recognized in the Company's balance sheet and related actuarial assumptions:
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Assumptions:
Discount rate 7.25% 8.75%
Health care trend rate 7.20% 7.80%
Accumulated postretirement benefit obligation ("APBO"):
Retirees $ 525,567 $ 476,950
Fully eligible active participants 85,871 78,161
Other active participants 107,388 90,514
--------- ---------
Total 718,826 645,625
Plan assets at fair value 33,201 21,105
--------- ---------
APBO in excess of plan assets 685,625 624,520
Unrecognized transition obligation (446,654) (477,489)
Unrecognized net gain (loss) (7,344) 42,476
--------- ---------
Total postretirement benefit liability 231,627 189,507
Less postretirement benefit liability due within one year 10,000 10,000
--------- ---------
Long term postretirement benefit liability $ 221,627 $ 179,507
========= =========
As a result of the decrease in the long term interest rates at December 31,
1995, the Company decreased the discount rate used to calculate the actuarial
present value of its APBO by 150 basis points to 7.25% from the rate used at
December 31, 1994. This is the primary reason for the increase in the APBO.
The assumed health care cost trend rate of 7.2% in 1996 decreases gradually to
the ultimate trend rate of 5.0% in 2002 and thereafter. A 1.0% increase in the
assumed health care cost trend rate would have increased
52
the APBO at December 31, 1995, and postretirement benefit cost for 1995 by
$60.3 million and $55.7 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 in 1994. Pursuant to the terms of the 1993 Settlement
Agreement, a Voluntary Employee Benefit Association trust (the "VEBA Trust")
was established. Under the terms of the agreement, the Company agreed to
contribute a minimum of $10.0 million annually and, under certain
circumstances, additional amounts calculated as set forth in the 1993
Settlement Agreement. In 1995, the Company contributed $10.0 million to the
VEBA Trust. In 1994 the Company contributed $21.0 million to the VEBA Trust,
comprised of the $10.0 million annual minimum contribution together with $11.0
million related to the proceeds received in connection with the B&LE litigation
settlement. VEBA Trust assets of $33.2 million at December 31, 1995, were
comprised of 60% equity investments and 40% fixed income investments. (See
Note J - Nonrecurring and Extraordinary Items.)
NOTE F - POSTEMPLOYMENT BENEFITS
During the fourth quarter of 1993, the Company adopted SFAS 112 which requires
accrual accounting for benefits payable to inactive employees who are not
retired. Among the more significant benefits included are worker's
compensation, long term disability and continued medical coverage for disabled
employees and surviving spouses. The Company previously followed the practice
of accruing for many of these benefits but did not base these accruals on
actuarial analyses. The cumulative effect as of January 1, 1993 of this change
was to increase the net loss by $16.5 million, or $.49 per share.
NOTE G - OTHER LONG TERM LIABILITIES
Other long term liabilities at December 31 consisted of the following:
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
Capital lease obligations $ 24,179 $ 26,670
Insurance and employee benefits (excluding pensions
and OPEB) 128,179 122,573
Plant closings 61,521 64,767
Released Weirton Benefit Liabilities 121,373 120,120
Other 29,171 29,177
-------- --------
Total other long term liabilities $364,423 $363,307
======== ========
53
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 are as follows:
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Reserves $ 156,900 $ 191,700
Employee benefits 198,400 135,100
Net operating loss ("NOL") carryforwards 67,100 105,500
Leases 17,500 20,000
Federal tax credits 13,100 9,900
Other 22,600 24,800
--------- ---------
Total deferred tax assets 475,600 487,000
Valuation allowance (159,400) (208,000)
--------- ---------
Deferred tax assets net of valuation allowance 316,200 279,000
Deferred tax liabilities:
Book basis of property in excess of tax basis (138,500) (130,800)
Excess tax LIFO over book (29,100) (28,800)
Other (18,700) (18,100)
--------- ---------
Total deferred tax liabilities (186,300) (177,700)
--------- ---------
Net deferred tax assets after valuation allowance $ 129,900 $ 101,300
========= =========
In 1995, 1994, and 1993, the Company determined that it was more likely than
not that sufficient future taxable income would be generated and tax planning
strategies are available to justify increasing the net deferred tax assets
after valuation allowance. Accordingly, the Company recognized additional
deferred tax assets of $28.6 million, $20.7 million and $37.5 million in 1995,
1994 and 1993, respectively.
Significant components of the provision for income taxes are as follows:
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Current taxes payable:
Federal (alternative minimum tax) $ 8,584 $ 4,016 $ -----
State and foreign 6,365 8 89
Deferred taxes (28,600) (20,700) (37,600)
-------- -------- --------
Total tax credit $(13,651) $(16,676) $(37,511)
======== ======== ========
54
The reconciliation of the income tax computed at the federal statutory tax
rates to the recorded total tax credit is:
1995 1994 1993
--------- --------- ----------
(DOLLARS IN THOUSANDS)
Tax at federal statutory rates $ 32,100 $ 53,100 $(103,700)
Benefit of operating loss carryforward (58,400) (84,100) -----
NOL carryforward for which no benefit was recognized ----- ----- 51,500
Temporary deductible differences for which no benefit
was recognized (net) 9,700 20,600 22,600
Depletion (4,300) ----- -----
Dividend exclusion (1,800) (1,600) (1,600)
Alternative minimum tax 8,584 4,016 -----
Other 465 (8,692) (6,311)
-------- -------- ---------
Total tax credit $(13,651) $(16,676) $ (37,511)
======== ======== =========
At December 31, 1995, the Company had unused NOL carryforwards of approximately
$179.2 million which expire as follows: $62.2 million in 2007 and $117.0
million in 2008.
To date, the Company believes that it has not undergone an ownership change for
federal income tax purposes, as described in Section 382 of the Internal
Revenue Code. However, there can be no assurance that the Company will not
undergo such a change in the future. Future events, some of which may be
beyond the Company's control, could cause an ownership change. An ownership
change may substantially limit the Company's ability to offset future taxable
income with its net operating loss carryforwards.
At December 31, 1995, the Company had unused alternative minimum tax credit
carryforwards of approximately $11.1 million which may be applied to offset its
future regular federal income tax liabilities. These tax credits may be carried
forward indefinitely.
NOTE I - WEIRTON LIABILITIES
On January 11, 1984, the Company completed the sale of substantially all of the
assets of its Weirton Steel Division ("Weirton") to Weirton Steel Corporation.
In connection with the sale of Weirton, the Company retained certain existing
and contingent liabilities (the "Weirton Liabilities") including the Weirton
Benefit Liabilities, which consist of, among other things, pension benefits for
the then active employees based on service prior to the sale, pension, life and
health insurance benefits for the then retired employees and certain
environmental liabilities.
As part of the 1984 sale of a 50% interest in the Company to NKK, FOX agreed,
as between FOX and the Company, to provide in advance sufficient funds for
payment and discharge of, and to indemnify the Company against, all obligations
and liabilities of the Company, whether direct, indirect, absolute or
contingent, incurred or retained by the Company in connection with the sale of
Weirton. As part of the 1990 ownership transaction whereby NKK purchased an
additional 20% ownership in the Company, the Company released FOX from
indemnification of $146.6 million of certain defined Weirton Benefit
Liabilities. FOX also reaffirmed its agreement to indemnify the Company for
Weirton environmental liabilities as to which the Company is obligated to
Weirton Steel Corporation. On May 4, 1993, the Company released FOX from an
additional $67.8 million of previously unreleased Weirton Benefit Liabilities
in connection with an early redemption of 10,000 shares of Series B Redeemable
Preferred Stock. During the first quarter of 1994, FOX sold all of its
3,400,000 shares of Class B Common Stock. In connection with the initial
public stock offering, the Company entered into an agreement (the "Definitive
Agreement") with FOX and NKK which amends certain terms and conditions of the
Recapitalization Agreement. Pursuant to the Definitive Agreement, FOX paid the
Company the $10.0 million as an
55
unrestricted prepayment for environmental obligations which may arise after
such prepayment and for which FOX has previously agreed to indemnify the
Company. Such prepayment accrues interest at a variable interest rate based
upon prime rate. The interest on such prepayment was 11% at December 31, 1995.
The Company is required to repay to FOX portions of the $10.0 million to the
extent the Company's expenditures for such environmental liabilities do not
reach specified levels by certain dates over a twenty year period. FOX retains
responsibility to indemnify the Company for remaining environmental liabilities
arising after such prepayment and in excess of $10.0 million (as reduced by any
above described repayments to FOX). At December 31, 1995 and 1994, the
Company's recorded liability payable to FOX totaled $7.2 million and $10.0
million, respectively.
At December 31, 1995, the net present value of the released Weirton Benefit
Liabilities, based upon a discount factor of 12.0% per annum, is $139.4
million. FOX continues to indemnify the Company for the remaining unreleased
Weirton Benefit Liabilities and other liabilities. The Company is indemnified
by FOX for such remaining liabilities and, therefore, they are not recorded in
the Company's consolidated balance sheet. Such Weirton Liabilities are
comprised of (i) the unreleased Weirton Benefit Liabilities, the amount of
which, based on the Company's actuarial analysis, approximates the aggregate
remaining dividend and redemption payments of $96.7 million with respect to the
Series B Redeemable Preferred Stock and (ii) other contingent liabilities, such
as environmental liabilities, that are not currently estimable.
NOTE J - NONRECURRING AND EXTRAORDINARY ITEMS
Reduction in Workforce - During the fourth quarter of 1994, the Company
finalized and implemented a plan that resulted in a workforce reduction of
approximately 400 salaried nonrepresented employees, and a restructuring charge
of $34.2 million, or $25.6 million net of tax. During the first quarter of
1995, the Company recorded an additional restructuring charge of $5.3 million,
or $3.6 million net of tax, as a result of the various elections made by
certain terminated employees during that quarter.
The aggregate restructuring charge of $39.5 million was comprised of retiree
postemployment benefits ("OPEB") - $26.5 million; severance $12.5 million;
pensions - ($2.6) million and other - $3.1 million. Substantially all of the
amounts related to severance and other have been paid as of December 31, 1995.
The remaining balance of $23.9 million related primarily to OPEB and pensions
will require the utilization of cash over the retirement lives of the affected
employees.
National Steel Pellet Company - NSPC was temporarily idled in October 1993,
following a strike by the USWA which occurred on August 1, 1993. At December
31, 1993, it was previous management's intention to externally satisfy its iron
ore pellet requirements for a period of at least three years, which would have
caused NSPC to remain idle for that period. Accordingly, a liability of $108.6
million related to the idle period was recorded as an unusual charge during the
fourth quarter of 1993. In June 1994, the then new senior management
determined that if a total reduction of $4 per gross ton in delivered pellet
costs from pre-strike costs could be achieved, NSPC could be reopened on a cost
effective basis. After a series of successful negotiations with the USWA and
other stakeholders that led to the requisite $4 per gross ton cost reduction,
the facility was reopened in August 1994. The reopening of NSPC during the
third quarter of 1994 resulted in the restoration of $59.1 million of the 1993
unusual charge.
Litigation Judgment - On January 24, 1994, the United States Supreme Court
denied the B&LE petition to hear the appeal in the Iron Ore Antitrust
Litigation, thus sustaining a judgment in favor of the Company against the
B&LE. On February 11, 1994, the Company received $111.0 million, including
interest, in satisfaction of this judgment. This gain was reclassified from
Income from Operations to Other Income to more properly reflect the trend in
operating income and had no effect on net income or earnings per share as
previously reported.
Extraordinary Item - On August 7, 1995, the Company utilized $104.7 million of
proceeds from a primary stock offering, along with $20.9 million of available
cash, to prepay $133.3 million aggregate principal amount of the related party
debt associated with the No. 5 Coke Oven Battery serving the Great Lakes
Division. This early extinguishment of debt resulted in an extraordinary item
of $5.4 million, net of related
56
income tax expense of $.5 million. (See Note B- Capital Structure and Primary
Offering of Class B Common Stock, Note C - Long Term Obligations and Note K -
Related Party Transactions.)
NOTE K - RELATED PARTY TRANSACTIONS
Summarized below are transactions between the Company and NKK, and the
Company's affiliated companies accounted for under the equity method.
The Company had borrowings outstanding with an NKK affiliate totaling $177.1
million and $330.0 million as of December 31, 1995 and 1994, respectively.
(See Notes C - Long Term Obligations and Note J - Nonrecurring and
Extraordinary Items.) Accounts receivable with related parties totaled $3.2
million at December 31, 1995 and 1994. Accounts payable with related parties
totaled $2.5 million at December 31, 1995 and 1994. During 1994, the Company
purchased approximately $20.8 million of slabs produced by NKK. These
purchases were made with trading companies in arms' length transactions.
Effective May 1, 1995, the Company entered into the Agreement for the Transfer
of Employees (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 Company has agreed to
reimburse NKK for the costs and expenses incurred by NKK in connection with the
transfer of the employees. The total amount of reimbursable expenses which the
Company is obligated to pay is capped at $11.7 million for the initial term of
the agreement which runs from May 1, 1995 through December 31, 1996. The
agreement can be extended from year to year thereafter if approved by NKK and
by a majority of those directors of the Company who are not then, and have
never been, employees of NKK. In addition to paying salaries and benefits of
the transferred employees, the Company expensed $5.1 million under this
contract in 1995.
In both 1995 and 1994, cash dividends of approximately $4.0 million were paid
on the Series A Preferred Stock. Accrued dividends of $0.6 million were
recorded as of December 31, 1995 and 1994 related to the Series A Preferred
Stock.
The Company is contractually required to purchase its proportionate share of
raw material production from certain affiliated companies. Such purchases of
raw materials and services aggregated $86.5 million in 1995, $87.0 million in
1994 and $65.9 million in 1993. 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, 1995 and
1994 included amounts with affiliated companies accounted for by the equity
method of $19.0 million and $24.1 million, respectively.
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 factual 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 recorded approximately $2.4 million and $1.2 million for these
items at December 31, 1995 and 1994, respectively.
57
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state superfund statutes generally
impose joint and several liability on present and former owners and operators,
transporters and generators for remediation of contaminated properties
regardless of fault. The Company and certain of its subsidiaries are involved
as a potentially responsible party ("PRP") at a number of off-site CERCLA or
state superfund site proceedings. At some of these sites, any remediation
costs incurred by the Company would constitute liabilities for which FOX is
required to indemnify the Company ("FOX Environmental Liabilities"). In
addition, at some of these sites, the Company does not have sufficient
information regarding the nature and extent of the contamination, the wastes
contributed by other PRPs, or the required remediation activity to estimate its
potential liability. With respect to those sites for which the Company has
sufficient information to estimate its potential liability, the Company has
recorded an aggregate liability for CERCLA claims of approximately $4.6 million
and $4.1 million as of December 31, 1995 and 1994, respectively, which it
anticipates paying over the next several years.
In connection with those sites involving FOX Environmental Liabilities, in
January 1994, the Company received $10.0 million from FOX as an unrestricted
prepayment for such liabilities for which the Company recorded $10.0 million as
a liability in its consolidated balance sheet. The Company is required to
repay FOX portions of the $10.0 million to the extent the Company's
expenditures for such FOX Environmental Liabilities do not meet specified
levels by certain dates over a twenty year period. FOX will continue to be
obligated to indemnify the Company for all other FOX Environmental Liabilities
(i) arising before such prepayment or (ii) arising after such prepayment and
exceeding the $10.0 million prepayment. (See Note I - Weirton Liabilities.)
The balance of this liability totaled $7.2 million and $10.0 million at
December 31, 1995 and 1994, respectively.
The Company has also recorded the reclamation and other costs to restore its
coal and iron ore mines at its shutdown locations to their original and natural
state, as required by various federal and state mining statutes. The Company
has recorded an aggregate liability of approximately $11.6 million and $11.8
million at December 31, 1995 and 1994, respectively, relating to these
properties.
Since the Company has been conducting steel manufacturing and related
operations at numerous locations for over sixty years, the Company potentially
may be required to remediate or reclaim any contamination that may be present
at these sites. The Company does not have sufficient information to estimate
its potential liability in connection with any potential future remediation at
such sites. Accordingly, the Company has not accrued for such potential
liabilities.
As these matters progress or the Company becomes aware of additional matters,
the Company may be required to accrue charges in excess of those previously
accrued. However, although the outcome of any of the matters described, to the
extent they exceed any applicable reserves, could have a material adverse
effect on the Company's results of operations and liquidity for the applicable
period, the Company has no reason to believe that such outcomes, whether
considered individually or in the aggregate, will have a material adverse
effect on the Company's financial condition.
Since 1989, the United States Environmental Protection Agency (the "EPA") and
the eight Great Lakes states have been developing the Great Lakes Initiative,
which will impose water quality standards that are even more stringent than the
best available technology standards currently being enforced. On March 23,
1995, the EPA published the final "Water Quality Guidance for the Great Lakes
System" (the "Guidance Document"). The Guidance Document establishes minimum
water quality standards and other pollution control policies and procedures for
waters within the Great Lakes System. The Company has conducted a series of
internal analyses concerning the effect of the Guidance Document on the
Company's operations. Based upon these analyses, the Company believes that the
Guidance Document will have a limited impact on the conduct of the Company's
business, and that any such impact will not have a material adverse effect on
the Company's financial position, results of operations or liquidity.
58
NOTE M - OTHER COMMITMENTS AND CONTINGENCIES
The Company has an agreement providing for the availability of raw material
loading and docking facilities through 2002. Under this agreement, the Company
must make advance freight payments if shipments fall below the contract
requirements. At December 31, 1995, the maximum amount of such payments,
before giving effect to certain credits provided in the agreement, totaled
approximately $14 million or $2 million per year. During the three years ended
December 31, 1995, no advance freight payments were made as the Company met all
of the contract requirements. The Company anticipates meeting the specified
contract requirements in 1996.
In September 1990, the Company entered into a joint venture agreement to build
a $240 million continuous galvanizing line to serve North American automakers.
This joint venture, which was completed in 1993, coats steel products for the
Company and an unrelated third party. The Company is a 10% equity owner of the
facility, an unrelated third party is a 50% owner, and a subsidiary of NKK owns
the remaining 40%. The Company has contributed $5.9 million in equity capital,
which represents its total equity requirement. In addition, the Company is
committed to utilize and pay a tolling fee in connection with 50% of the
available line-time of the facility. The agreement extends for 20 years after
the start of production, which commenced in January 1993.
The Company has a 50% interest in a joint venture with an unrelated third
party. The joint venture, Double G Coatings Company, L.P. ("Double G"),
constructed a $90 million steel coating facility near Jackson, Mississippi to
produce galvanized and Galvalume(R) steel sheet for the metal buildings market.
Approximately 20% of the total cost was financed equally through partners'
capital contributions with the remaining 80% financed by a group of third party
lenders. As of December 31, 1995, the Company has invested $8.8 million in
capital contributions. The Company is committed to utilize and pay a tolling
fee in connection with 50% of the available line time at the facility through
May 10, 2004. This facility commenced production in May 1994. Upon completion
and acceptance of the facility, Double G borrowed $59.7 million pursuant to a
ten year term loan agreement, repayment of which commenced in November 1995.
Double G provided a first mortgage on its property, plant and equipment and the
Company has separately guaranteed $26.4 million of the debt as of December 31,
1995.
The Company has agreements to purchase 1.8 million gross tons of iron ore
pellets in 1996 and .9 million gross tons of iron ore pellets each subsequent
year thereafter, through the year 2004, from an affiliated company. The
Company also has agreements to purchase .5 million gross tons of iron ore
pellets from a non-affiliated company. In 1996, purchases under the agreements
with the affiliated company will approximate $66.8 million, while the
agreements with the non-affiliated company will approximate $17.5 million. In
addition to the iron ore agreements, the Company has agreed to purchase its
proportionate share of the limestone production from an affiliated company,
which will approximate $2 million per year.
The Company has signed a letter of intent to enter into a take-or-pay
arrangement to accept pulverized coal from Edison Energy Services ("EES"). In
the event a definitive agreement is not entered into, the Company has committed
to reimburse EES approximately $20 million for their costs related to the
project.
The Company is guarantor of specific obligations of ProCoil Corporation, an
affiliated company, approximating $9.2 million and $10.3 million at December
31, 1995 and 1994, respectively.
59
NOTE N - INVESTMENT IN IRON ORE COMPANY OF CANADA
Summarized financial information for Iron Ore Company of Canada, an affiliated
company, accounted for by the equity method, is presented below:
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Current assets $151,868 $151,480 $132,663
Property, plant and equipment and other assets 331,881 354,857 372,467
Current liabilities 115,178 108,689 95,336
Long term obligations and other liabilities 116,168 141,268 157,273
Sales and operating revenues 434,357 444,519 382,465
Gross profit 111,367 87,729 53,892
Income before cumulative effect of accounting changes 44,869 30,668 26,215
Cumulative effect of accounting changes ----- ----- (15,097)
Net income 44,869 30,668 11,118
Company's equity in:
Net assets 54,847 55,711 50,403
Net income 9,750 6,664 2,219
Ownership percentage 21.73% 19.96% 19.96%
NOTE O - LONG TERM INCENTIVE PLAN
The Long Term Incentive Plan established in 1993 has authorized the grant of
options for up to 3,400,000 shares of Class B Common Stock to certain executive
officers, non-employee directors 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 grant. All
options granted have ten year terms and generally vest and become fully
exercisable at the end of three years of continued employment. However, in the
event that termination is by reason of retirement, permanent disability or
death, the option must be exercised in whole or in part within 24 months of
such occurrences.
The Company currently follows the provisions of Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," which
requires compensation expense for the Company's options to be recognized only
if the market price of the underlying stock exceeds the exercise price on the
date of grant. Accordingly, the Company has not recognized compensation
expense for its options granted in 1995, 1994 or 1993.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation". SFAS 123 is effective for fiscal years beginning after
December 15, 1995 and will require companies to either adopt a fair value based
method of expense recognition for all stock compensation based awards, or
provide proforma net income and EPS information as if the recognition and
measurement provisions of SFAS 123 had been adopted. Upon the adoption of SFAS
123 in 1996, the Company intends to continue to account for its stock
compensation based awards following the provisions of APB 25 and provide the
required fair value based proforma information.
60
A reconciliation of the Company's stock option activity and related information
follows:
NUMBER EXERCISE PRICE
OF OPTIONS (WEIGHTED AVERAGE)
----------- ------------------
Balance outstanding at January 1, 1993 ----- -----
Granted 755,000 $13.99
Exercised -----
Forfeited (170,832)
--------
Balance outstanding at January 1, 1994 584,168 13.99
Granted 304,500 14.00
Exercised (15,056) 14.00
Forfeited (155,139)
--------
Balance outstanding at December 31, 1994 718,473 14.00
Granted 427,500 15.02
Exercised (12,084) 14.00
Forfeited (165,973)
--------
Balance outstanding at December 31, 1995 967,916 14.38
========
Exercisable at December 31, 1993 5,418
========
Exercisable at December 31, 1994 213,973
========
Exercisable at December 31, 1995 324,249
========
Outstanding stock options did not enter into the determination of EPS in 1995,
1994, or 1993 as their dilutive effect was less than 3%.
61
NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following are the unaudited quarterly results of operations for the years 1995
and 1994. Reference should be made to Note J - Nonrecurring and Extraordinary
Items concerning adjustments affecting the first and third quarters of 1995 and
the third and fourth quarters of 1994.
1995
THREE MONTHS ENDED,
----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ------------ ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $752,676 $736,611 $724,798 $740,133
Gross profit 97,127 80,459 53,632 50,027
Unusual charges 5,336 ----- ----- -----
Income before extraordinary item 44,694 30,317 15,608 14,804
Extraordinary item ----- ----- 5,373 -----
Net income 44,694 30,317 20,981 14,804
PER SHARE EARNINGS APPLICABLE TO
COMMON STOCK:
Income before extraordinary item $ 1.02 $ .64 $ .30 $ .28
Extraordinary item ----- ----- .12 -----
Net income $ 1.02 $ .64 $ .42 $ .28
1994
THREE MONTHS ENDED,
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $622,738 $650,682 $683,546 $743,307
Gross profit 16,978 41,174 56,013 90,269
Unusual charges (credits) ----- ----- (59,101) 34,213
Net income 78,011 841 62,483 27,177
PER SHARE EARNINGS APPLICABLE TO
COMMON STOCK:
Net income (loss) $ 2.07 $ (0.05) $ 1.64 $ 0.67
62
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ------------------------------------ ----------- -------------
ADDITIONS
------------------------------------
BALANCE AT CHARGED TO
BEGINNING CHARGED TO OTHER ACCOUNTS - DEDUCTIONS - BALANCE AT
DESCRIPTION OF PERIOD COSTS AND EXPENSE DESCRIBE DESCRIBE END OF PERIOD
----------- ---------- ----------------- --------------- ----------- -------------
YEAR ENDED DECEMBER 31, 1995
- ----------------------------
RESERVES DEDUCTED FROM ASSETS
Allowances and discounts on trade
notes and accounts receivable $ 15,185 $21,046 (3) $ ----- $16,245 (1) $ 19,986
Valuation allowance on deferred
tax assets 208,000 ----- (48,600) (2) ----- 159,400
YEAR ENDED DECEMBER 31, 1994
- ----------------------------
RESERVES DEDUCTED FROM ASSETS
Allowances and discounts on trade
notes and accounts receivable $ 21,380 $28,504 (3) $ ----- $34,699 (1) $ 15,185
Valuation allowance on deferred
tax assets 263,200 ----- (55,200) (2) ----- 208,000
YEAR ENDED DECEMBER 31, 1993
- ----------------------------
RESERVES DEDUCTED FROM ASSETS
Allowances and discounts on trade
notes and accounts receivable $ 26,385 $10,565 (3) $ ----- $15,570(1) $ 21,380
Valuation allowance on deferred
tax assets 189,100 ----- 74,100 (2) ----- 263,200
NOTE 1 - Doubtful accounts charged off, net of recoveries, claims and discounts allowed and reclassification to other assets.
NOTE 2 - Represents the increase or (decrease) in the net deferred tax asset.
NOTE 3 - Provision for doubtful accounts of $4,854, $(3,155) and $(2,693) for 1995, 1994 and 1993, respectively and other charges
consisting primarily of claims for pricing adjustments and discounts allowed.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from the
section captioned "Executive Officers" in Part I of this report and from the
sections captioned "Information Concerning Nominees for Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Company's Proxy Statement for the 1996 Annual Meeting of Stockholders. With
the exception of the information specifically incorporated by reference, the
Company's Proxy Statement is not to be deemed filed as part of this report for
purposes of this Item.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
sections captioned "Executive Compensation", "Summary Compensation Table",
"Stock Option Tables", "Option Grants in 1995", "Aggregated Option Exercises in
1995 and December 31, 1995 Option Values", "Pension Plans", "Pension Plan
Table", "Employment Agreements" and "Compensation of Directors" in the
Company's Proxy Statement for the 1996 Annual Meeting of Stockholders. With
the exception of the information specifically incorporated by reference, the
Company's Proxy Statement is not to be deemed filed as part of this report for
purposes of this Item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
sections captioned "Security Ownership of Directors and Management" and
"Additional Information Relating to Voting Securities" in the Company's Proxy
Statement for the 1996 Annual Meeting of Stockholders. With the exception of
the information specifically incorporated by reference, the Company's Proxy
Statement is not to be deemed filed as part of this report for purposes of this
Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
section captioned "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for the 1996 Annual Meeting of Stockholders. With
the exception of the information specifically incorporated by reference, the
Company's Proxy Statement is not to be deemed filed as part of this report for
purposes of this Item.
65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The list of financial statements filed as part of this report is
submitted as a separate section, the index to which is located on
page 38.
(2) The financial statement schedule required to be filed by Item 8 is
listed on page 63.
All other schedules of National Steel Corporation and subsidiaries for which
provision is made in the applicable accounting regulations of the Securities
and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(3) EXHIBITS: See the attached Exhibit Index. Exhibits 10-N, 10-O, 10-P and
10-Y are management contracts or compensatory plans or
arrangements.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Mishawaka, State
of Indiana, on March 20, 1996.
NATIONAL STEEL CORPORATION
By: /s/ William N. Harper
-------------------------------------------------
William N. Harper
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated on March 20, 1996.
Name Title
---- -----
/s/ Osamu Sawaragi Director and Chairman of the Board
------------------------
Osamu Sawaragi
/s/ Kenichiro Sekino Director; Vice Chairman and Assistant to the
------------------------ Chairman of the Board
Kenichiro Sekino
/s/ V. John Goodwin Director; President and Chief Executive Officer
------------------------
V. John Goodwin
/s/ Hiroshi Matsumoto Director; Executive Vice President - Corporate
------------------------ Planning and Development
Hiroshi Matsumoto
/s/ William N. Harper Senior Vice President and Chief Financial Officer
------------------------
William N. Harper
/s/ Edwin V. Clarke, Jr. Director
------------------------
Edwin V. Clarke, Jr.
/s/ Frank J. Lucchino Director
------------------------
Frank J. Lucchino
/s/ Masayuki Hanmyo Director
------------------------
Masayuki Hanmyo
/s/ Susumu Terao Director; Director of Finance
------------------------
Susumu Terao
/s/ Robert J. Slater Director
------------------------
Robert J. Slater
/s/ Carl M. Apel Corporate Controller, Accounting and Assistant
------------------------ Secretary
Carl M. Apel
67
EXHIBIT INDEX
Except for those exibits which are incorporated by reference, as indicated
below, all exhibits are being filed along with this Form 10-K either in
electronic format or in paper format pursuant to Form SE. Those exhibits being
filed in paper format are designated by the letter "P" in the index below.
Exhibit Is Being
EXHIBIT Filed in Paper
NUMBER EXHIBIT DESCRIPTION Pursuant to Form SE
------ ------------------- -------------------
2-A Assets Purchase Agreement between Weirton Steel Corporation and the P
Company, dated as of April 29, 1983, together with collateral
agreements incident to such Assets Purchase Agreement.
2-B Stock Purchase Agreement by and among NKK Corporation, National P
Intergroup, Inc. and the Company, dated August 22, 1984, together
with certain collateral agreements incident to such Stock Purchase
Agreement and certain schedules to such agreements.
2-C Stock Purchase and Recapitalization Agreement by and among National P
Intergroup, Inc., NII Capital Corporation, NKK Corporation, NKK
U.S.A. Corporation and the Company, dated as of June 26, 1990.
2-D Amendment to Stock Purchase and Recapitalization Agreement by and
among, National Intergroup, Inc., NII Capital Corporation, NKK
Corporation, NKK U.S.A. Corporation and the Company, dated July 31,
1991, filed as Exhibit 2-F to the annual report of the Company on
Form 10-K, for the year ended December 31, 1991, is incorporated
herein by reference.
3-A The Sixth Restated Certificate of Incorporation of the Company, filed
as Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-57952, is incorporated herein by reference.
3-B Form of Amended and Restated By-laws of the Company, filed as Exhibit
3-A to the quarterly report of the Company on Form 10-Q for the
quarter ended June 30, 1994, is incorporated herein by reference.
4-A NSC Stock Transfer Agreement between National Intergroup, Inc., the P
Company, NKK Corporation and NII Capital Corporation dated December
24, 1985.
68
4-B Certificate of Designation of Series A Preferred Stock P
dated June 26, 1990.
4-C Certificate of Designation of Series B Preferred Stock P
dated June 26, 1990.
4-D The Company is a party to certain long term debt
agreements where the amount involved does not exceed
10% of the Company's total assets. The Company agrees
to furnish a copy of any such agreement to the
Commission upon request.
10-A Amended and Restated Lease Agreement between the P
Company and Wilmington Trust Company, dated as of
December 20, 1985, relating to the Electrolytic
Galvanizing Line.
10-B Lease Agreement between The Connecticut National P
Bank as Owner Trustee and Lessor and National
Acquisition Corporation as Lessee dated as of
September 1, 1987 for the Ladle Metallurgy and Caster
Facility located at Ecorse, Michigan.
10-C Lease Supplement No. 1 dated as of September 1, 1987 P
between The Connecticut National Bank as Owner Trustee
and National Acquisition Corporation as the Lessee for
the Ladle Metallurgy and Caster Facility located at
Ecorse, Michigan.
10-D Lease Supplement No. 2 dated as of November 18, 1987 P
between The Connecticut National Bank as Owner Trustee
and National Acquisition Corporation as Lessee for the
Ladle Metallurgy and Caster Facility located at Ecorse,
Michigan.
10-E Purchase Agreement dated as of March 25, 1988 relating P
to the Stinson Motor Vessel among Skar-Ore Steamship
Corporation, Wilmington Trust Company, General Foods
Credit Investors No. 1 Corporation, Stinson, Inc. and
the Company, and Time Charter between Stinson, Inc.
and the Company.
10-F Amended and Restated Weirton Agreement dated June 26,
1990, between National Intergroup, Inc., NII Capital
Corporation and the Company, filed as Exhibit 10-F to
the annual report of the Company on Form 10-K for the
year ended December 31, 1991, is incorporated herein by
reference.
10-G Amended and Restated Weirton Liabilities Agreement
dated July 31, 1991 between National Intergroup, Inc.,
NII Capital Corporation and the Company, filed as Exhibit
10-H to the annual report of the Company on Form 10-K for
the year ended December 31, 1991, is incorporated herein
by reference.
69
10-H Put Agreement by and among NII Capital Corporation, NKK U.S.A. P
Corporation and the Company, dated June 26, 1990, filed as
Exhibit 4-O to the annual report of the Company on Form 10-K,
for the year ended December 31, 1990.
10-I Subordinated Loan Agreement dated May 8, 1991, between NUF
Corporation and the Company, filed as Exhibit 4-P to the
annual report of the Company on Form 10-K, for the year ended
December 31, 1991, is incorporated herein by reference.
10-J First Amendment to Subordinated Loan Agreement dated
December 9, 1991, between NUF Corporation and the Company,
filed as Exhibit 4-Q to the annual report of the Company on
Form 10-K, for the year ended December 31, 1991, is
incorporated herein by reference.
10-K Second Amendment to Subordinated Loan Agreement, dated
December 29, 1992, between NUF Corporation and the Company,
filed as Exhibit 10-S to the annual report of the Company on
Form 10-K, dated February 5, 1993, is incorporated herein by
reference.
70
10-L Amended and Restated Loan Agreement, dated October 30, 1992, between
NUF Corporation and the Company filed as Exhibit 10-T to the annual
report of the Company on Form 10-K, dated February 5, 1993, is
incorporated herein by reference.
10-M First Amendment to Amended and Restated Loan Agreement dated February
1, 1993, between NUF Corporation and the Company filed as Exhibit
10-U to the annual report of the Company on Form 10-K, dated
February 5, 1993, is incorporated herein by reference.
10-N 1993 National Steel Corporation Long-Term Incentive Plan, filed as
Exhibit 10.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-57952, is incorporated herein by reference.
10-O 1993 National Steel Corporation Non-Employee Directors' Stock Option
Plan, filed as Exhibit 10.2 to the Company's Registration Statement
on Form S-1, Registration No. 33-57952, is incorporated herein by
reference.
10-P National Steel Corporation Management Incentive Compensation Plan
dated January 30, 1989, filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1, Registration No. 33-57952, is
incorporated herein by reference.
10-Q Purchase and Sale Agreement, dated as of May 16, 1994 between the
Company and National Steel Funding Corporation, filed as Exhibit 10-A
to the quarterly report of the Company on Form 10-Q/A for the quarter
ended March 31, 1994, is incorporated herein by reference.
10-R Form of Indemnification Agreement, filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-1, Registration No. 33-
57952, is incorporated herein by reference.
10-S Shareholders' Agreement, dated as of September 18, 1990, among DNN
Galvanizing Corporation, 904153 Ontario Inc., National Ontario
Corporation and Galvatek America Corporation, filed as Exhibit 10.27
to the Company's Registration Statement on Form S-1, Registration No.
33-57952, is incorporated herein by reference.
10-T Partnership Agreement, dated as of September 18, 1990, among Dofasco,
Inc., National Ontario II, Limited, Galvatek Ontario Corporation and
DNN Galvanizing Corporation, filed as Exhibit 10.28 to the Company's
Registration Statement on Form S-1, Registration No. 33-57952, is
incorporated herein by reference.
10-U Amendment No. 1 to the Partnership Agreement, dated as of September
18, 1990, among Dofasco, Inc., National Ontario II, Limited, Galvatek
Ontario Corporation and DNN Galvanizing Corporation, filed as Exhibit
10.29 to the Company's Registration Statement on Form S-1,
Registration No. 33-57952, is incorporated herein by reference.
10-V Agreement, dated as of February 3, 1993, among the Company, NKK, NKK
U.S.A. Corporation, NII and NII Capital Corporation, filed as Exhibit
10.30 to the Company's Registration Statement on Form S-1,
Registration No. 33-57952, is incorporated herein by reference.
10-W Second Amendment to Amended and Restated Loan Agreement dated May 19,
1993, between NUF Corporation and the Company, filed as Exhibit 10-EE
to the annual report of the Company on Form 10-K for the year ended
December 31, 1993, is incorporated herein by reference.
71
10-X Agreement, dated as of May 19, 1993, among the Company and NKK
Capital of America, Inc., filed as Exhibit 10-FF to the annual report
of the Company on Form 10-K for the year ended December 31, 1993, is
incorporated herein by reference.
10-Y Amended and Restated Employment Agreement, dated as of May 31, 1994,
between the Company and V. John Goodwin, filed as Exhibit 10-A to the
quarterly report of the Company on Form 10-Q for the quarter ended
June 30, 1994, is incorporated herein by reference.
10-Z Receivables Purchase Agreement, dated as of March 16, 1994, between
the Company and National Steel Funding Corporation, filed as exhibit
10-A to the quarterly report of the Company on Form 10-Q/A for the
quarter ended June 30, 1994, is incorporated herein by reference.
10-AA Amendment Number One to the Receivables Purchase Agreement, dated as
of May 31, 1995, between the Company and National Steel Funding
Corporation, filed as exhibit 10-A to the quarterly report of the
Company on Form 10-Q for the quarter ended June 30, 1995, is
incorporated herein by reference.
10-BB Third Amendment to Amended and Restated Loan Agreement dated August
2, 1995, between NUF Corporation and the Company, filed as exhibit
10-A to the quarterly report on Form 10-Q for the quarter ended
September 30, 1995, is incorporated herein by reference.
10-CC Agreement for the Transfer of Employees by and between NKK
Corporation and the Company, dated as of May 1, 1995.
21 List of Subsidiaries of the Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the last quarter of 1995.
72