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1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[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, 1998
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
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NATIONAL STEEL CORPORATION
(Exact name of registrant as specified in its charter)
25-0687210
Incorporated under the Laws of the (I.R.S. Employer Identification No.)
State of Delaware
(State or other jurisdiction of
incorporation or organization)
4100 Edison Lakes Parkway, 46545-3440
Mishawaka, IN (Zip Code)
(Address of principal executive
offices)
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
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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)
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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 February 1, 1999, there were 41,906,040 shares of the registrant's common
stock outstanding.
Aggregate market value of voting stock held by non-affiliates: $182,965,639.
The amount shown is based on the closing price of National Steel
Corporation's Common Stock on the New York Stock Exchange on February 1, 1999.
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 1999 Proxy Statement of National Steel Corporation
are incorporated by reference into Part III of this Report on Form 10-K.
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NATIONAL STEEL CORPORATION
TABLE OF CONTENTS
Page
----
Part I
Item 1 Business.............................................................................. 3
Item 2 Properties............................................................................ 12
Item 3 Legal Proceedings..................................................................... 14
Item 4 Submission of Matters to a Vote of Security Holders................................... 19
Part II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters.................. 21
Item 6 Selected Financial Data............................................................... 22
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. 23
Item 7A Quantitative and Qualitative Disclosures about Market Risk............................ 33
Item 8 Financial Statements and Supplementary Data........................................... 34
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 62
Part III
Item 10 Directors and Executive Officers of the Registrant.................................... 62
Item 11 Executive Compensation................................................................ 62
Item 12 Security Ownership of Certain Beneficial Owners and Management........................ 63
Item 13 Certain Relationships and Related Transactions........................................ 63
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 63
2
PART I
Item 1. Business
Introduction
National Steel Corporation, a Delaware corporation, (together with its
consolidated subsidiaries, the "Company") is the fourth largest integrated
steel producer in the United States 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 primarily
to the automotive, construction and container markets. The Company's principal
executive offices are located at 4100 Edison Lakes Parkway, Mishawaka, Indiana
46545-3440; telephone (219) 273-7000.
The Company was formed through the merger of Great Lakes Steel Corporation,
Weirton Steel Corporation and Hanna Iron Ore Company and was incorporated in
Delaware on November 7, 1929. The Company built a finishing facility, now the
Midwest operations in Portage, Indiana ("Midwest"), in 1961, and in 1971
purchased Granite City Steel Corporation, now the Granite City Division. On
September 13, 1983, the Company became a wholly-owned subsidiary of National
Intergroup, Inc., (which subsequently changed its name to FoxMeyer Health
Corporation and then to Avatex Corporation and is hereinafter referred to as
"Avatex"). On January 11, 1984, the Company sold the principal assets of its
Weirton Steel Division and retained certain liabilities related thereto. On
August 31, 1984, NKK Corporation (collectively, with its subsidiaries, "NKK")
purchased a 50% equity interest in the Company from Avatex. In connection with
this purchase, Avatex agreed to indemnify the Company for (i) certain
environmental liabilities related to the Company's former Weirton Steel
Division and the Company's subsidiary, Hanna Furnace Corporation and (ii)
certain pension and employee benefit liabilities related to the Weirton Steel
Division (together, the "Indemnification Obligations"). On June 26, 1990, NKK
purchased an additional 20% equity interest in the Company from Avatex. In
connection with this purchase, Avatex was issued shares of the Company's
Series B Redeemable Preferred Stock and NKK was issued shares of the Company's
Series A Preferred Stock. In April 1993, the Company completed an initial
public offering of its Class B Common Stock. In October 1993, Avatex converted
all of its shares of Class A Common Stock to an equal number of shares of
Class B Common Stock and subsequently sold substantially all of its shares of
Class B Common Stock in the market in January 1994, resulting in NKK owning a
75.6% voting interest in the Company at December 31, 1994. On February 1,
1995, the Company completed a primary offering of 6.9 million shares of Class
B Common Stock. Subsequent to that transaction, NKK's voting interest
decreased to 67.6%. In November 1997, the Company entered into an agreement
with Avatex to redeem all of the Series B Redeemable Preferred Stock held by
Avatex and to release Avatex from the Indemnification Obligations. In December
1997, the Company completed the redemption of the Series A Preferred Stock
held by NKK for a redemption price of $36.7 million, plus accrued dividends of
approximately $0.6 million. Following this transaction, and the settlement
with Avatex described above, the Company no longer has any preferred stock
outstanding.
Recent Developments
Trade Cases. During 1998, imports of steel mill products, which had soared
to record levels in 1997, continued to escalate. New monthly records were set
in 1998 as imports captured over 34% of apparent steel supply in the third
quarter of 1998. This surge in imports led to a significant decline in
operating rates for many steel manufacturers. On September 30, 1998 the
Company joined a number of other U.S. steel producers in filing certain unfair
trade petitions before the Department of Commerce and International Trade
Commission. These unfair trade petitions were filed against foreign steel
companies in Brazil, Japan, and Russia alleging widespread dumping of imported
hot-rolled carbon steel flat products and in the case of Brazil, substantial
subsidization of those products. The Company joined as a petitioner in these
cases except the one involving Japan. A final resolution to these trade cases
is expected on or shortly before June 19, 1999. (See Item 3. Legal
Proceedings).
3
Expansion of Value-Added Processing Capacity. During 1998 the Company
continued to strengthen its value-added processing capacity. In February 1998,
the Company announced that it had entered into a joint venture with Robinson
Steel Co., Inc. to form National Robinson L.L.C. which will produce value
added cut-to-length steel plates and sheets with superior quality, flatness
and dimensional tolerances. In April 1998, construction was completed and
production began on a new galvanizing line at Midwest with a capacity of
270,000 tons. In October 1998, the Company entered into a contract for the
construction of a new 450,000 ton hot dip galvanizing facility at its Great
Lakes operations in Ecorse and River Rouge, Michigan ("Great Lakes"), which
will serve the automotive industry.
Property Tax Settlement. During the third quarter of 1998, the Company
recorded an unusual credit of $26.6 million resulting from the settlement of a
lawsuit seeking a reduction in the assessed value of the Company's real and
personal property at Great Lakes relating to the 1991 through 1997 tax years.
The Company received tax refunds and was granted a lower assessment base that
is expected to result in future tax savings.
Common Stock Repurchase Program and Common Stock Dividends. On August 26,
1998, the Board of Directors authorized the repurchase of up to two million
shares of the Company's Class B Common Stock. As of December 31, 1998, the
Company had acquired 1,109,700 shares at a cost of $8.4 million. In addition,
the Company purchased 272,500 shares through February 1, 1999 at a cost of
$2.6 million. Also during 1998, the Company paid quarterly dividends of $0.07
per common share (or a total in 1998 of $0.28 per common share or $12.1
million). On February 9, 1999, the Board of Directors authorized a quarterly
dividend of $0.07 per common share, payable on March 10, 1999 to stockholders
of record on February 23, 1999.
Strategy
The Company's strategy is to improve and sustain overall profitability,
thereby enhancing stockholder value, by reducing the cost of production,
improving productivity and product quality, shifting its product mix to higher
value-added products and strengthening its overall capital structure.
Management has developed a number of strategic initiatives designed to achieve
the Company's goals.
Continued Reduction of Production Costs. Reducing all costs associated with
the production process is essential to the Company's overall cost reduction
program. It is management's ongoing focus to reduce the total cost of
producing finished steel, of which the single largest component remains the
production of hot rolled bands. Specific initiatives have included (i)
improving labor productivity and production yields; (ii) installing a
predictive maintenance program designed to maximize production time and
equipment life while minimizing unscheduled outages; (iii) reducing shipments
of secondary and limited warranty steel; (iv) enhancing production capacity;
and (v) reducing overall headcount.
Capital Investments in Higher Value-Added Processing Capacity. In order to
improve productivity, operating costs and product quality, the Company has
made substantial investments in capital improvements at the Company's
steelmaking and finishing operations. Specific capital projects to enhance
value-added processing capacity have included (i) the construction of the
270,000 ton #3 galvanizing line at Midwest completed in 1998, (ii) a
substantial upgrade of the Company's existing 72-inch galvanizing facility at
Midwest, including a capacity increase to 450,000 tons completed in 1997,
(iii) the construction of a 270,000 ton galvanizing facility ("Triple G") at
Granite City completed in 1996, (iv) the construction of a 270,000 ton joint
venture galvanizing facility near Jackson, Mississippi, which commenced
operations in 1994 ("Double G"), and (v) the construction of a 400,000 ton
joint venture hot dip galvanizing facility in Windsor, Ontario, which
commenced operations in 1993 ("DNN"). The Company is committed to utilize 50%
of each of Double G's and DNN's line time. The Company entered into a contract
for the construction of a new 450,000 ton hot dip galvanizing line at Great
Lakes to serve the automotive industry. Total expenditures for this facility
are expected to be approximately $175 million, and start-up is scheduled for
the first half of 2000. Including the new facility, the Company's total annual
coated products capacity is expected to exceed 3.5 million tons in 2001, an
increase of over 45% since 1994. With the completion of this facility, the
Company believes that total annual coated shipments could account for
approximately 60% of total shipments in 2001 as compared to approximately 38%
in 1994.
4
Investments in Downstream Processing Businesses. To further increase the
Company's shipments of higher value-added products, enhance profitability and
reduce competitive threats, the Company has invested in several downstream
businesses, including (i) a 50% interest in National Robinson LLC, formed in
1998 to construct and operate a temper mill and provide other value-added
processing for 200,000 tons of the Company's hot rolled bands annually; (ii) a
56% interest in ProCoil Corporation ("ProCoil"), a joint venture formed to
provide blanking, slitting, cutting-to-length and laser welding for the
automotive markets, to which the Company ships approximately 250,000 tons of
steel coils per year; and (iii) a 25% interest in Tinplate Holdings, Inc.
("Tinplate"), a tin mill service center for which the Company is the largest
supplier.
Increased Focus on the Growing Construction Market. This market demands
high-quality products, on-time delivery and effective, efficient technical
support and customer service. In recent years, the Company has increased its
focus on the construction market. This increased focus on the construction
market is designed to increase operating margins, reduce competitive threats
and maintain high capacity utilization rates while diversifying the Company's
dependence on any one market. Of the Company's coating capacity constructed
since 1994, 675,000 tons are targeted towards the construction industry. Since
1994, the Company has increased shipments to the construction industry by 47%
from 0.8 million tons to 1.1 million tons in the year ended December 31, 1998.
The Company believes it is the largest U.S. supplier of flat rolled steel to
the construction industry, with a market share of approximately 23%. The
construction market has historically been a growing and important customer
base for the Company, accounting for approximately 27% of net sales in 1998.
Increased Penetration in Higher Value-Added Sectors of the Automotive
Market. In order to better serve this customer group while enhancing margins,
the Company has targeted additional opportunities to sell higher value-added
products, including galvanized products and steel used in exposed automotive
applications. The Company's initiatives have included: (i) upgrading its 72-
inch galvanizing line at Midwest to service demand for critically exposed
automotive applications; (ii) investing in ProCoil to provide laser welding
and blanking; (iii) establishing the Product Application Center and Technical
Research Center near Great Lakes, centrally located near the major automotive
manufacturers; and (iv) constructing a new hot dip galvanizing facility at
Great Lakes. The Company believes it is one of the largest U.S. suppliers of
flat rolled steel to the automotive industry with a market share of
approximately 11%. The automotive industry has historically been an important
customer base for the Company, accounting for approximately 30% of net sales
in 1998.
Strengthened Capital Structure. Management intends to continue to strengthen
the Company's financial position with cash from operations as well as
evaluating alternatives for the monetization of certain assets. Since 1994,
the Company has decreased debt and preferred stock obligations from $774.0
million to $323.0 million primarily by prepaying certain obligations,
including the Great Lakes No. 5 coke battery loans, and redeeming the
Company's 11% Series A Preferred Stock and the 11% Series B Redeemable
Preferred Stock. Funding for these prepayments has been provided from cash
flow from operations and the proceeds from the sale of certain assets. In
addition, the Company has reduced its net unfunded pension and other
postretirement employee benefit liabilities primarily by prefunding its
obligations and benefiting from favorable investment returns.
Overall Quality Improvement. An important element of the Company's strategy
is to reduce the cost of poor quality production which currently results in
the sale of nonprime products at lower prices and requires substantial
additional processing costs. The Company has made significant improvements in
this area by changing certain work practices, increasing process control and
utilizing employee-based problem solving, thus eliminating dependence on final
inspection and reducing internal rejections and additional processing. Since
1994, the Company has reduced its shipment of secondary and limited warranty
steel from approximately 12% of total shipments to approximately 8% of total
shipments for the year ended December 31, 1998. The Company is currently ISO
9002/QS 9000 registered.
Alliance with NKK
The Company has a strong alliance with its principal stockholder, NKK, the
second largest steel company in Japan. Since 1984, the Company has had access
to a wide range of NKK's steelmaking, processing and
5
applications technology. The Company's engineers include approximately 31
engineers transferred from NKK, who serve primarily at the Company's
divisions. These engineers, as well as engineers and technical support
personnel at NKK's facilities in Japan, assist in improving operating
practices and developing new manufacturing processes. This support also
includes providing input on ways to improve raw steel production and finished
product yields and enhance overall productivity. 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 assurance given as to the extent of NKK's future
financial support beyond existing contractual commitments.
This alliance with NKK was further strengthened by the Agreement for the
Transfer of Employees with NKK Corporation entered into by the Company and NKK
effective as of May 1, 1995 (superseding a prior arrangement). The agreement
was unanimously approved by all directors of the Company who were not then,
and never have been, employees of NKK. Pursuant to the terms of this
agreement, technical and business advice is provided through NKK employees who
are transferred to the employ of the Company. The agreement further provides
that the initial term can be extended from year to year after expiration of
the initial term, if approved by NKK and a majority of the directors of the
Company who were not then, and never have been, employees of NKK. The
agreement has been extended through the calendar year 1999 in accordance with
this provision. Pursuant to the terms of the agreement, the Company will
reimburse NKK for the costs and expenses incurred by NKK in connection with
the transfer of these employees, subject to an agreed upon cap. The cap was
$11.7 million during the initial term and $7.0 million during each of 1999,
1998, and 1997. The Company incurred approximately $6.0 million, $6.6 million
and $6.4 million under this agreement, during 1998, 1997 and 1996,
respectively. In addition, the Company utilized various other engineering
services provided by NKK outside of the agreement and incurred approximately
$0.9 million, $1.3 million and $0.3 million for these services during 1998,
1997 and 1996, respectively.
Customers
Automotive. The Company is a major supplier of hot and cold rolled steel and
higher value-added galvanized coils to the automotive industry, one of the
most demanding group of steel consumers. The Company's steel has been used in
a variety of automotive applications including exposed and unexposed panels,
wheels and bumpers. Automotive 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.
Construction. The Company is also a leading supplier of steel to the
construction market. Roof and building panels are the principal applications
for galvanized and Galvalume(R) steel in this market. Steel framing is growing
in popularity with contractors. 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 its additional capacity referred to
above.
Container. The Company produces chrome and tin plated steels to exacting
tolerances of gauge, shape, surface flatness and cleanliness for the container
industry. Tin and chrome plated steels are used to produce a wide variety of
food and non-food containers. In recent years, the market for tin and chrome
plated steels has been relatively stable and profitable for the Company.
Pipe and Tube. The Company supplies the pipe and tube market with hot
rolled, cold rolled and coated sheet. The Company is a key supplier to
transmission pipeline, downhole casing and structural pipe producers.
Service Centers. The Company also supplies the service center market with
hot rolled, cold rolled and coated sheet. Service centers generally purchase
steel coils from the Company and may process them further or sell them
directly to third parties without further processing.
6
The following table sets forth the percentage of the Company's revenues from
various markets for the past three years.
1998 1997 1996
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Automotive........................................... 29.5% 27.0% 27.6%
Construction......................................... 26.6 24.8 21.6
Containers........................................... 11.3 11.0 10.6
Pipe and Tube........................................ 5.6 7.3 6.5
Service Centers...................................... 19.5 21.3 20.2
All Other............................................ 7.5 8.6 13.5
----- ----- -----
100.0% 100.0% 100.0%
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No customer accounted for more than 10% of net sales in 1998, 1997 or 1996.
Export sales accounted for approximately 2.1% of revenues in 1998, 2.0% in
1997 and 0.8% in 1996.
The Company's products are sold through sales offices located in Chicago,
Detroit, Houston, Indianapolis, Kansas City, Cleveland and St. Louis.
Substantially all of the Company's orders are for short-term delivery.
Accordingly, backlog is not meaningful when assessing future results of
operations.
Approximately two-thirds of the Company's products are sold under long-term
sales arrangements, most of which are negotiated on an annual basis. Any sales
arrangements with a term of six months or more are considered to be "long-
term." A significant amount of the Company's flat rolled steel sales to larger
customers in the automotive and container markets are made pursuant to such
sales arrangements. The Company's sales arrangements generally provide for set
prices for the products ordered during the period that they are in effect. As
a result, the Company may experience a delay in realizing price changes
related to its long-term business. Much of the remainder of the Company's
products are sold under contracts covering shorter periods at the then
prevailing market prices for such product.
Customer Partnership. The Company's customer partnership program provides
superior quality and service through technical assistance, local customer
service and sales support. Management believes it is able to further
differentiate the Company's products and to promote customer loyalty by
establishing close relationships through early customer involvement, providing
technical services and support and utilizing its Product Application Center
and Technical Research Center facilities while exposing a customer to a number
of Company personnel.
The Company's Technical Research Center near Great Lakes develops new
products, improves existing products and develops more efficient operating
procedures to meet the constantly increasing demands of the automotive,
construction and container markets. The Company employs approximately 55
chemists, physicists, metallurgists and engineers in connection with its
research activities. The research center is responsible for, among other
things, the development of five new high strength steels for automotive weight
reduction and a new galvanized steel for the construction market. In addition,
the Company operates a Product Application Center near Detroit dedicated to
providing product and technical support to customers. The Product Application
Center assists customers with application engineering (selecting optimum metal
and manufacturing methods), application technology (evaluating product
performance) and technical developments (performing problem solving at
plants). The Company spent $11.0 million, $10.9 million and $11.1 million for
research and development in 1998, 1997 and 1996, respectively. In addition,
the Company participates in various research efforts through the American Iron
and Steel Institute (the "AISI").
Operations
The Company operates three principal facilities: two integrated steel
plants, the Granite City Division in Granite City, Illinois, near St. Louis,
and Great Lakes in Ecorse and River Rouge, Michigan, near Detroit, and a
finishing facility, Midwest in Portage, Indiana, near Chicago. Great Lakes and
Midwest operate as the Regional Division, a single business enterprise, in
order to improve the planning and coordination of production at both plants
and enhance the ability of the Company to monitor its costs and utilize its
resources, thereby allowing the Company to more effectively meet customer
needs.
7
The Company's centralized corporate structure, the close proximity of the
Company's principal steel facilities and the complementary balance of
processing equipment shared by them, will enable the Company to closely
coordinate the operations of these facilities in order to maintain high
operating rates throughout its processing facilities and to maximize the
return on its capital investments.
The following table details effective steelmaking capacity, actual
production, effective capacity utilization and percentage of steel
continuously cast for the Company and the domestic steel industry for the
years indicated.
Raw Steel Production Data
---------------------------------------------
Effective Percentage
Effective Actual Capacity Continuously
Capacity Production Utilization Cast
--------- ---------- ----------- ------------
(Thousands of net tons)
The Company
1998......................... 6,600 6,087 92.2% 100.0%
1997......................... 6,800 6,527 96.0 100.0
1996......................... 7,000 6,557 93.7 100.0
1995......................... 6,300 6,081 96.5 100.0
1994......................... 6,000 5,763 96.1 100.0
Domestic Steel Industry*
1998......................... 125,300 107,643 85.9 95.3
1997......................... 121,400 108,561 89.4 94.7
1996......................... 116,100 105,309 90.7 93.2
1995......................... 112,500 104,930 93.3 91.1
1994......................... 108,200 100,579 93.0 89.5
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*Information as reported by the AISI. The 1998 industry information is
preliminary.
In 1998, effective capacity decreased to 6.6 million net tons primarily as a
result of the scheduled reline of the Great Lakes "A" blast furnace. Effective
capacity in 1997 was lowered from 1996 to reflect more realistic operating
levels based on the Company's operating practices in 1996. In 1996, effective
capacity increased to 7 million net tons primarily due to successfully
negotiated environmental relief at the Granite City Division. In 1995,
effective capacity increased to 6.3 million net tons due to improved operating
efficiencies, primarily at Great Lakes.
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, through its wholly owned subsidiary, National Steel
Pellet Company ("NSPC"), has reserves of iron ore adequate to produce
approximately 353 million gross tons of iron ore pellets. The Company's iron
ore reserves are located in Minnesota and Michigan. Excluding the effects of
the thirteen month period from August 1, 1993 through August 28, 1994 when
NSPC was idled, a significant portion of the Company's average annual
consumption of iron ore pellets was obtained from the deposits of the Company
during the last five years. The remaining iron ore pellets consumed by the
Company were purchased from third parties. Iron ore pellets available to the
Company from its own deposits and outside suppliers are expected to be
sufficient to meet the Company's total iron ore requirements at competitive
market prices for the foreseeable future.
The Company previously owned a minority equity interest in Iron Ore Company
of Canada ("IOC"). On April 1, 1997, the Company completed the sale of that
equity interest to North Limited. The Company continues to purchase iron ore
at fair market value from IOC pursuant to long-term supply agreements.
Coal. In 1992, the Company decided to exit the coal mining business and sell
or dispose of its coal reserves and related assets. The remaining coal assets
constitute less than 0.3% of the Company's total assets.
8
The Company believes that supplies of coal, adequate to meet the Company's
needs, are readily available from third parties at competitive market prices.
Coke. On June 12, 1997, the Company sold the machinery, equipment,
improvements and other personal property and fixtures constituting the Great
Lakes No. 5 coke battery, together with the related coal inventories, to a
subsidiary of DTE Energy Company, and received proceeds (net of taxes and
expenses) of approximately $234 million. The Company will continue to operate
and maintain the coke battery on a contract basis and will purchase the
majority of the coke produced from the battery under a requirements contract,
with the price being adjusted during the term of the contract, primarily to
reflect changes in production costs.
The Company also operates two efficient coke batteries servicing the Granite
City Division. Approximately 60% of the Company's annual coke requirements can
be supplied by the Great Lakes and Granite City coke batteries. The remaining
coke requirements are met through competitive market purchases.
The Company fully implemented a pulverized coal injection process in
February 1997 at its blast furnaces at Great Lakes, which continues to reduce
the Company's dependency on outside coke supplies.
Limestone. An affiliated company in which the Company holds a minority
equity interest has limestone reserves of approximately 70 million gross tons
located in Michigan. During the last five years, approximately 70% of the
Company's average annual consumption of limestone was derived from these
reserves. The Company's remaining limestone requirements were purchased at
competitive market prices from unaffiliated third parties.
Scrap and Other Materials. Supplies of steel scrap, tin, zinc and other
alloying and coating materials are readily available at competitive market
prices.
Patents and Trademarks
The Company has the patents and licenses necessary for the operation of its
business as now conducted. The Company does not consider its patents and
trademarks to be material to the business of the Company.
Employees
As of December 31, 1998, the Company employed 9,230 people. The Company has
labor agreements with the United Steelworkers of America ("USWA"), the
International Chemical Workers Council of the United Food and Commercial
Workers and other labor organizations which collectively represent
approximately 82% of the Company's employees. In 1993, the Company entered
into labor agreements, which expire on July 31, 1999, with these various labor
organizations ("1993 Settlement Agreement"). Scheduled negotiations reopened
in 1996 and were ultimately resolved utilizing the arbitration provisions
provided for in the 1993 Settlement Agreement, without any disruption to the
Company's operations.
The Company's ability to operate could be impacted by strike or work
stoppage if it is unable to negotiate a new agreement with its represented
employees when the existing agreement expires on July 31, 1999. The USWA's
labor agreements with certain other domestic integrated steel producers also
expire on July 31, 1999. There can be no assurances that work stoppages will
not occur in the future in connection with contract negotiations or otherwise,
or as to the financial impact of such a stoppage. A prolonged general work
stoppage would have a material adverse effect on the Company's results of
operations and financial condition. Also, the Company's profitability could be
adversely affected if increased costs associated with any future contract are
not recoverable through productivity improvements, price increases or other
cost reductions.
9
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. Steel industry
participants compete primarily on price, service and quality. The Company
believes it is able to differentiate its products from those of its
competitors by, among other things, providing technical services and support,
utilizing its Product Application Center and Technical Research Center
facilities, and by its focus on improving product quality through, among other
things, capital investment and research and development, as previously
described. The Company competes with domestic integrated and mini-mill steel
producers, some of which have greater resources than the Company.
Imports. Domestic steel producers face significant competition from foreign
producers and, from time to time, have been adversely affected by what the
Company believes to be unfairly traded imports. The intensity of foreign
competition is substantially affected by the relative strength of foreign
economies and fluctuations in the value of the United States dollar against
foreign currencies. Steel imports increase when the value of the dollar is
strong in relation to foreign currencies. The recent economic slowdown in
certain foreign markets, particularly Japan, has resulted in an increase in
imports at depressed prices over recent months. Imports of finished steel
products accounted for approximately 19% of the domestic market during 1993 to
1997 and approximately 26% in 1998. Some 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. Mini-mills also provide significant competition in certain
product lines, including hot rolled and cold rolled sheets, which represented,
in the aggregate, approximately 53% of the Company's shipments in 1998. Mini-
mills are relatively efficient, low-cost producers which make steel from scrap
in electric furnaces, with lower employment and environmental costs and
targeted regional markets. Thin slab casting technologies have allowed mini-
mills to enter certain sheet markets which have traditionally been supplied by
integrated producers. Certain companies have announced plans for, or have
indicated that they are currently considering, additional mini-mill plants for
sheet products in the United States.
Steel Substitutes. In the case of many steel products, there is substantial
competition from manufacturers of other products, including plastics,
aluminum, ceramics, glass, wood and concrete. Conversely, the Company and
certain other manufacturers of steel products have begun to compete in recent
years in markets not traditionally served by steel producers.
Environmental Matters
The Company's operations are subject to numerous laws and regulations
relating to the protection of human health and the environment. The Company
has made capital expenditures of $1.0 million in connection with matters
relating to environmental control during 1998. The Company currently estimates
that it will incur capital expenditures in connection with matters relating to
environmental control of approximately $8 million and $20 million for 1999 and
2000, respectively. In addition, the Company recorded expenses for
environmental compliance, including depreciation, of $62.5 million in 1998 and
expects to record expenses of approximately $63 million in each of 1999 and
2000. Since environmental laws and regulations are becoming increasingly
stringent, the Company's environmental capital expenditures and costs for
environmental compliance may increase in the future. In addition, due to the
possibility of future changes in circumstances or regulatory
10
requirements, the amount and timing of future environmental expenditures could
vary substantially from those currently anticipated. The costs for
environmental compliance may also place the Company at a competitive
disadvantage with respect to foreign steel producers, as well as manufacturers
of steel substitutes, that are subject to less stringent environmental
requirements.
In 1990, Congress passed amendments to the Clean Air Act which impose
stringent standards on air emissions. The Clean Air Act amendments will
directly affect the operations of many of the Company's facilities, including
its coke ovens. Under such amendments, coke ovens generally will be required
to comply with progressively more stringent standards over the thirty-year
period beginning on the date of enactment of the amendments. 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.
The Resource Conservation Recovery Act of 1976, as amended ("RCRA") imposes
certain investigation and corrective action obligations on facilities that are
operating under a permit, or are seeking a permit, to treat, store or dispose
of hazardous wastes. The Company has conducted an investigation at its Midwest
facility and is currently waiting for approval from the United States
Environmental Protection Agency ("EPA") regarding the results of the
investigation and proposed corrective actions. Upon final approval of the RCRA
corrective action program by the EPA, the Company will begin the remediation.
The Company has accrued approximately $2 million as a liability for this
project, which represents the minimum amount that can be reasonably estimated,
as of December 31, 1998. At the present time, the Company's other facilities
are not subject to corrective action.
The Company has recorded an aggregate liability of approximately $2.0
million at December 31, 1998 for the reclamation costs to restore its coal and
iron ore mines at its shut down locations to their original and natural state,
as required by various federal and state mining statutes. These matters are
discussed under the caption "Coal Mine Reclamation Proceedings" in Item 3,
"Legal Proceedings".
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state statutes generally impose joint
and several liability on present and former owners and operators, transporters
and generators for remediation of contaminated properties regardless of fault.
The Company and certain of its subsidiaries are involved as potentially
responsible parties ("PRPs") in a number of CERCLA and other environmental
cleanup proceedings. These matters are discussed under the caption "CERCLA and
Other Environmental Cleanup Proceedings" in Item 3, "Legal Proceedings". With
respect to those sites, the Company has accrued an aggregate liability of
$11.2 million as of December 31, 1998.
During 1997, the Company settled substantially all of the claims it had
previously filed against certain of its insurance carriers seeking coverage
under its comprehensive general liability insurance policies for its
environmental liabilities. In connection with this settlement, the Company
recognized insurance proceeds (net of taxes and expenses) aggregating
approximately $13.6 million. The settlement with the insurance carriers also
included an agreement by certain carriers to provide partial insurance
coverage for certain existing and future major environmental liabilities.
Forward Looking Statements
Statements made by the Company in this Form 10-K that are not historical
facts constitute "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward looking statements,
by their nature, involve risk and uncertainty. A variety of factors could
cause business conditions and the Company's actual results and experience to
differ materially from those expected by the Company or expressed in the
Company's forward looking statements. These factors include, but are not
limited to, (1) changes in market prices and market demand for the Company's
products; (2) changes in the costs or availability of raw materials and other
supplies used by the Company in the manufacture of its products; (3) equipment
failures or outages at the Company's steelmaking, mining and processing
facilities; (4) losses of customers; (5) changes in
11
the levels of the Company's operating costs and expenses; (6) collective
bargaining agreement negotiations, strikes, labor stoppages or other labor
difficulties; (7) actions by the Company's competitors, including domestic
integrated steel producers, foreign competitors, mini-mills and manufacturers
of steel substitutes such as plastics, aluminum, ceramics, glass, wood and
concrete; (8) changes in industry capacity; (9) changes in economic conditions
in the United States and other major international economies, including rates
of economic growth and inflation; (10) worldwide changes in trade, monetary or
fiscal policies, including changes in interest rates; (11) changes in the
legal and regulatory requirements applicable to the Company; and (12) the
effects of extreme weather conditions.
Item 2. Properties
The Granite City Division.
The Granite City Division, located in Granite City, Illinois, has an annual
hot rolled band production capacity of approximately 3.6 million tons. All
steel at Granite City is continuous cast. Granite City also uses ladle
metallurgy to refine the steel chemistry to enable it to meet the exacting
specifications of its customers. The facility's ironmaking facilities consist
of two coke batteries and two blast furnaces. Finishing facilities include an
80-inch hot strip mill, a continuous pickler, a tandem mill and three hot dip
galvanizing lines. Construction of the third hot dip galvanizing line, a
270,000 ton coating facility producing higher value added products for the
construction market, was completed in 1996. This facility, known as Triple G,
cost approximately $85.0 million. Granite City ships approximately 10% of its
total production to Midwest for finishing. Principal products of the Granite
City Division include hot rolled, hot dipped galvanized and Galvalume(R),
grain bin and high strength, low alloy steels.
The Granite City Division is located on 1,540 acres and employs 2,990
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 Regional Division.
Great Lakes
Great Lakes, located in Ecorse and River Rouge, Michigan, is an integrated
facility engaged in steelmaking primarily for use in the automotive market
with an annual hot rolled band production capacity of approximately 4.4
million tons. All steel at this location is continuous cast. Great Lakes
ironmaking facilities consist of three blast furnaces, and a rebuilt 85-oven
coke battery which was sold in 1997 to a subsidiary of DTE Energy Company.
Great Lakes also operates two basic oxygen process vessels, a vacuum degasser
and a ladle metallurgy station. Finishing facilities include a hot strip mill,
a skinpass mill, a shear line, a high speed pickle line, a tandem mill, a
batch annealing station, two temper mills, two customer service lines, and an
electrolytic galvanizing line. Great Lakes ships approximately 45% of its
production to Midwest and to joint venture coating operations for value-added
processing. Principal products include hot rolled, cold rolled, electrolytic
galvanized, and high strength, low alloy steels.
Great Lakes is located on 1,100 acres and employs 3,636 people. The facility
is strategically located with easy access to water, rail and highway transit
systems for receiving raw materials and supplying finished steel products to
customers.
Midwest
Midwest, located in Portage, Indiana, finishes hot rolled bands produced at
Great Lakes and Granite City primarily for use in the automotive, construction
and container markets. All of the processes performed at Midwest help enhance
the Company's profitability by turning commodity grades of hot rolled steel
into higher value-added products. Midwest facilities include a continuous
pickling line, two cold reduction mills, two continuous galvanizing lines, a
48 inch wide line which can produce galvanized or Galvalume(R) steel products
12
and which services the construction market, and a 72 inch wide line which
services the automotive market; finishing facilities for cold rolled products
consisting of a batch annealing station, a sheet temper mill and a continuous
stretcher leveling line, an electrolytic cleaning line, a continuous annealing
line, two tin temper mills, two tin recoil lines, an electrolytic tinning line
and a chrome line which services the container markets. During 1997, the
Company completed an expansion of the 72^ galvanizing line. In addition, in
the second quarter of 1998, Midwest completed construction of a 270,000 ton
coating line to serve the construction market. Principal products include tin
mill products, hot dipped galvanized and Galvalume(R) steel, cold rolled, and
electrical lamination steels.
Midwest is located on 1,100 acres and employs 1,557 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
National Steel Pellet Company ("NSPC") is located on the western end of the
Mesabi Iron Ore Range in Keewatin, Minnesota, and 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 approximately 5.3 million gross tons and reserves
in excess of 350 million gross tons. NSPC also has a combination of rail and
vessel access to the Company's integrated steel mills.
Joint Ventures and Equity Investments
In order to increase its production of higher value-added products, the
Company has entered into the following joint ventures.
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 Company owns a 10% equity interest in
DNN, NKK owns a 40% equity interest and Dofasco owns the remaining 50%. 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 capacity. The Company's steel substrate requirements
are provided to DNN by Great Lakes.
Double G Coatings, L.P. To continue to meet the needs of the growing
construction market, the Company and Bethlehem Steel Corporation formed a
joint venture to build and operate Double G Coatings, L.P. ("Double G"). The
Company owns a 50% equity interest in Double G. Double G is a 270,000 ton per
year hot dip galvanizing and Galvalume(R) steel facility near Jackson,
Mississippi. The facility is capable of coating 48 inch wide steel coils with
zinc to produce a product known as galvanized steel and with a zinc and
aluminum coating to produce a product known as Galvalume(R) steel. Double G
primarily serves the metal buildings segment of the construction market in the
south central United States. The Company is committed to utilize 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 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 Great Lakes.
ProCoil Corporation. ProCoil Corporation ("ProCoil") is a joint venture
between the Company and Marubeni Corporation, located in Canton, Michigan.
ProCoil operates a steel processing facility to which the Company ships
approximately 250,000 tons of steel coil per year. ProCoil began operations in
1988 and a warehousing facility which began operations in 1992. The Company
owns a 56% equity interest in ProCoil, and Marubeni Corporation owns the
remaining 44%. ProCoil blanks, slits and cuts steel coils to desired lengths
to
13
service automotive market customers and will provide laser welding services in
1999. In addition, ProCoil warehouses material to assist the Company in
providing just-in-time delivery to customers. Effective as of May 31, 1997,
the consolidated financial statements of the Company include the accounts of
ProCoil.
Tinplate Holdings, Inc. In April 1997, a wholly owned subsidiary of the
Company purchased 25% of the outstanding common stock of Tinplate Holdings,
Inc. ("Tinplate"). Tinplate operates a tin mill service center in Gary,
Indiana. In connection with this transaction, the Company also entered into a
supply agreement pursuant to which Tinplate will purchase certain minimum
quantities of tin mill products from the Company through 2001.
National Robinson LLC. In February 1998, the Company entered into an
agreement with Robinson Steel Co., Inc. to form a joint venture company, named
National Robinson LLC. The Company owns a 50% equity interest in National
Robinson LLC. This new company will operate a temper mill, leveler and cut to
length facility in Granite City, Illinois to produce high value added cut-to-
length steel plates and sheets with superior quality, flatness and dimensional
tolerances. National Robinson LLC is expected to process approximately 200,000
tons of hot rolled steel supplied by the Company. Construction of the new
facility is expected to be completed in the first quarter of 1999.
Other Information With Respect to the Company's Properties
In addition to the properties described above, the Company owns its
corporate headquarters facility in Mishawaka, Indiana. Generally, the
Company's properties are well maintained, considered adequate and being
utilized for their intended purposes. The Company's steel production
facilities are owned in fee by the Company except for (i) a continuous caster
and related ladle metallurgy facility which service Great Lakes, (ii) an
electrolytic galvanizing line, which services Great Lakes, and (iii) a portion
of the coke battery, which services the Granite City Division, each of which
are owned by third parties and leased to the Company pursuant to the terms of
operating leases. The electrolytic galvanizing line lease, the coke battery
lease and the continuous caster and related metallurgy facility lease are
scheduled to expire in 2001, 2004, and 2008, respectively. Upon expiration,
the Company has the option to extend the respective lease or purchase the
facility at fair market value.
Substantially all of the land (excluding certain unimproved land), buildings
and equipment (excluding, generally, mobile equipment) that are owned in fee
by the Company at Great Lakes, Midwest and the Granite City Division are
subject to a lien securing the Company's First Mortgage Bonds, 8 3/8% Series
due 2006 ("First Mortgage Bonds"). Included among the items which are not
subject to this lien are a vacuum degassing facility and a pickle line which
service Great Lakes and a continuous caster facility which services the
Granite City Division; however, each of these items is subject to a mortgage
granted to the respective lender that financed the construction of the
facility. The Company has also agreed to grant to the Voluntary Employees'
Benefit Association Trust ("VEBA Trust") a second mortgage on that portion of
the property which is covered by the lien securing the First Mortgage Bonds
and which is located at Great Lakes. The VEBA Trust was established in
connection with the 1993 Settlement Agreement for the purpose of prefunding
certain postretirement employee benefit obligations for USWA represented
employees.
For a description of certain properties related to the Company's production
of raw materials, see the discussion under the caption "Raw Materials" in Item
1, "Business".
Item 3. Legal Proceedings
In addition to the matters discussed below, the Company is involved in
various legal proceedings occurring in the normal course of its business. In
the opinion of the Company's management, adequate provision has been made for
losses that are likely to result from these actions.
Securities and Exchange Commission Investigation
In the third quarter of 1997, the Audit Committee of the Company's Board of
Directors was informed of allegations about managed earnings, including excess
reserves and the accretion of such reserves to income over multiple periods,
as well as allegations about deficiencies in the Company's system of internal
controls. The
14
Audit Committee engaged legal counsel who, with the assistance of an
accounting firm, inquired into these matters. Based upon this inquiry, the
Company determined the need to restate its financial statements for certain
prior periods. On January 29, 1998, the Company filed an amended Form 10-K for
1996 and amended Forms 10-Q for the first, second and third quarters of 1997
reflecting the restatements. On December 15, 1997, the Board of Directors
approved the termination of the Company's Vice President--Finance in
connection with the Audit Committee inquiry. During January 1998, legal
counsel to the Audit Committee issued its report to the Audit Committee, and
the Audit Committee approved the report and concluded its inquiry. On January
21, 1998, the Board of Directors accepted the report and approved the
recommendations, except for the recommendation to revise the Audit Committee
Charter, which was approved on February 9, 1998. The report found certain
misapplications of generally accepted accounting principles and accounting
errors, including excess reserves, which have been corrected by the
restatements referred to above. The report found that the accretion of excess
reserves to income during the first, second and third quarters of 1997, as
described in the amended Forms 10-Q for those quarters, may have had the
appearance of management of earnings as the result of errors in judgment and
misapplication of generally accepted accounting principles. However, the
report concluded that these errors do not appear to have involved the
intentional misstatement of the Company's accounts. The report also found
weaknesses in internal controls and recommended various improvements in the
Company's system of internal control, a comprehensive review of such controls,
a restructuring of the Company's finance and accounting department, and
expansion of the role of the internal audit function, as well as corrective
measures to be taken related to the specific causes of the accounting errors.
The Company is in the process of implementing these recommendations with the
involvement of the Audit Committee. In accordance with the recommendations, a
major independent accounting and consulting firm was engaged in early 1998 to
examine and report on the Company's written assertion about the effectiveness
of the internal control over financial reporting. Its report is expected to be
completed in March 1999. The Securities and Exchange Commission ("Commission")
has authorized an investigation pursuant to a formal order of investigation
relating to the matters described above. The Company has been cooperating with
the Staff of the Commission and intends to continue to do so.
Steinmetz v. National Steel Corporation, et. al.
A complaint was filed on May 13, 1998 in the United States District Court
for the Northern District of Indiana by Hyman Steinmetz seeking shareholder
class action status and alleging violations of the federal securities laws
against the Company, its majority shareholder, NKK U.S.A. Corporation, Osamu
Sawaragi, the Company's former chairman and chief executive officer, and
another former officer of the Company. The complaint generally relates to the
Company's restatement of its financial statements for certain prior periods
which was announced in October 1997. The complaint seeks unspecified money
damages, interest, costs and fees. The Company believes that the lawsuit is
without merit and intends to defend against it vigorously.
Trade Litigation
On September 30, 1998, the Company joined a number of other U.S. steel
producers in filing certain unfair trade petitions before the Department of
Commerce and the International Trade Commission (the "ITC"). These unfair
trade petitions were filed against foreign steel companies in Brazil, Japan
and Russia, alleging widespread dumping of imported hot-rolled carbon steel
flat products ("hot rolled steel") and in the case of Brazil, substantial
subsidization of those products. The Company joined as a petitioner in these
cases, except the one involving Japan. On November 13, 1998, the ITC made
affirmative preliminary determinations in the cases, finding that there is a
reasonable indication that the domestic hot-rolled steel industry is
threatened with material injury by the imports in question. On February 12,
1999, the Department of Commerce preliminarily determined that the imported
products at issue have been dumped and, in the case of Brazil, subsidized. The
affected imports are now subject to bonding requirements, with the amount of
security calculated based on preliminary duty rates. Antidumping duties and,
in the case of Brazil, countervailing duties, will be imposed against those
imports for which the Department of Commerce makes an affirmative final
dumping or countervailing duty determination and for which the ITC makes an
affirmative injury determination. Such duties are designed to offset dumping
15
and the advantages of subsidies and create a level playing field for domestic
producers. The final Department of Commerce decisions are expected to be made
on May 5, 1999, and the final ITC determination is expected to be made on or
shortly before June 19, 1999.
Environmental Matters
CERCLA and Other Environmental Cleanup Proceedings
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state statutes generally impose joint
and several liability on present and former owners and operators, transporters
and generators for remediation of contaminated properties, regardless of
fault. Currently, an inactive site located at the Great Lakes facility is
listed on the Michigan Environmental Response Act Site List, but remediation
activity has not been required by the Michigan Department of Environmental
Quality ("MDEQ"). 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 be
required to remediate contamination at some of these sites. However, based on
its past experience and the nature of environmental remediation proceedings,
the Company believes that if any such remediation is required, it will occur
over an extended period of time.
In addition, the Company and certain of its subsidiaries are involved as
potentially responsible parties ("PRPs") in a number of off-site CERCLA and
other environmental cleanup proceedings. 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. The more significant of
these matters are described below:
Ilada Energy Company Site. The Company and certain other PRPs have performed
a removal action pursuant to an order issued by the U.S. Environmental
Protection Agency ("EPA") under Section 106 of CERCLA at this waste
oil/solvent reclamation site located in East Cape Girardeau, Illinois. The
Company and the other PRPs also entered into an Administrative Order of
Consent ("AOC") pursuant to which they agreed to perform a remedial
investigation and feasibility study ("RI/FS") at this site to determine
whether the residual levels of contamination of soil and groundwater remaining
after the removal action pose any threat to either human health or the
environment and therefore whether or not the site will require further
remediation. The PRPs submitted a draft RI/FS to the EPA and the Illinois
Environmental Protection Agency ("IEPA") and have responded to the agencies'
comments on that document. The EPA and IEPA have not yet approved the RI/FS
report, and it is therefore not known whether any further remediation will be
required at the site. To date, the Company has paid approximately $2 million
for work and oversight costs. The Company estimates that it will cost
approximately $100,000 to complete the RI/FS. In addition, the PRPs remain
obligated to reimburse the EPA for approximately $200,000 of oversight costs.
Under the terms of the PRP Agreement, the Company is obligated to pay
approximately 33% of these RI/FS and oversight costs.
Buck Mine Complex. This is a proceeding involving a large site in Iron
County, Michigan, called the Buck Mine Complex, two discrete portions of which
were formerly owned or operated by a subsidiary of the Company, which has
since been merged into the Company. The MDEQ alleges that this site
discharged, and continues to discharge, heavy metals into the environment,
including the Iron River. The MDEQ has conducted an RI/FS at the site and has
implemented a remedy for the acid mine drainage. Prior to implementation, the
MDEQ estimated that the cost of the remedy, including past costs, as well as
future operating and maintenance costs, but excluding natural resource
damages, would be approximately $750,000. It is expected that the MDEQ will
seek recovery of these amounts from the Company and approximately 8 other PRPs
at the site. The Company has advised the MDEQ that it is interested in
pursuing a "cash-out" settlement of this matter; however, the MDEQ has advised
that it is not prepared to discuss settlement at this time.
16
Port of Monroe Site. In February 1992, the Company received a notice of
potential liability from the MDEQ with respect to this landfill located near
the Port of Monroe in Michigan. In 1994, the Company, along with certain other
PRPs, entered into a Consent Decree that resolved MDEQ's claim for response
costs that it had incurred at the site through October 1993. The MDEQ agreed
to accept $500,000 as reimbursement for these costs, and the Company's share
of the settlement was $50,000. The owner/operator PRPs have performed an RI/FS
for the site at an estimated cost of $280,000. The Company did not contribute
to the cost of the RI/FS, and it is likely that the owner/operator PRPs will
seek contribution from the Company and other non-participating PRPs. Although
a final remedy for the site has not yet been selected, the owner/operator PRPs
have advised the Company that the overall cost of the remedy is expected to be
less than $10 million; however, the Company does not have sufficient
information to determine whether this 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 pursuant to which they have agreed to implement the
remedial action at this disposal site located in Livingston, Michigan.
Pursuant to a participation agreement among the PRPs, the Company's share of
the costs of the remedial action is 2.25%. To date, the Company has paid
approximately $285,000. The PRP Group has estimated that the remaining costs
of the remedial action will be approximately $4.2 million. Therefore, the
Company's estimated future liability is approximately $95,000.
Buckeye Site. The Company and certain other PRPs have entered into a Consent
Decree with EPA to perform the remedial action at this site. Pursuant to this
Consent Decree, the Company has agreed to pay 2.8 percent of the response
costs associated with the site. Total response costs for the site are
estimated to be approximately $30.0 million. Approximately $10.0 million of
that total has already been paid by the settling PRPs, with the Company having
paid approximately $200,000. The Company's share of the projected future costs
is expected to be approximately $560,000, a significant portion of which is
expected to be paid by the Company over the next two to three years.
Weirton Steel--WVDEP Investigation. 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 ("Weirton Steel"). The WVDEP
alleged that samples taken from four groundwater monitoring wells located at
this site contained elevated levels of contamination. WVDEP informed Weirton
Steel that additional investigation, possible groundwater and soil
remediation, and on-site housecleaning were required at the site. Weirton
Steel has spent approximately $210,000 to date on remediation of an emergency
wastewater lagoon located on Brown's Island. The Company has reimbursed
Weirton Steel for that amount pursuant to certain indemnity provisions
contained in the agreements between Weirton Steel and the Company which were
entered into at the time that the Company sold the assets of its former
Weirton Steel Division to Weirton Steel ("Weirton Indemnification"). It is
likely that Weirton Steel will seek reimbursement of any additional
investigation and remediation costs involving this lagoon from the Company
pursuant to the Weirton Indemnification. The Company can not yet determine
whether WVDEP will require any additional investigation or remediation at the
Brown's Island facility. Weirton Steel has completed a three-year groundwater
monitoring program at the facility; however, no groundwater remediation has
been required to date.
Weirton Steel--EPA Order. On September 16, 1996, EPA issued a unilateral
administrative order under the Resource Conservation and Recovery Act
("RCRA"), requiring Weirton Steel to undertake certain investigative
activities with regard to cleanup of possible environmental contamination on
Weirton Steel property. Weirton Steel has informed the Company that the
Mainland Coke Plant, Brown's Island, and the Avenue H Disposal Site are likely
to be included within the areas of investigation required by EPA and that
Weirton Steel considers these areas to be within the scope of the Weirton
Indemnification. Weirton Steel has forwarded to the Company an initial claim
for reimbursement of costs which it incurred in the remediation of
environmental hazards during the demolition of the Mainland Coke Plant and by-
products area totaling approximately $2.5 million. The Company is currently
evaluating the documentation submitted by Weirton Steel
17
in support of this claim. Additional costs are likely to be incurred by
Weirton Steel as a result of the unilateral administrative order under RCRA.
In that event, it is also likely that Weirton Steel will make additional
claims against the Company for reimbursement pursuant to the Weirton
Indemnification.
Donner Hanna Coke Plant. The Donner Hanna coke plant was operated from
approximately 1920 to 1982, and for the majority of that time was a part of a
joint venture between the Company and LTV Steel Company, Inc. (or its
predecessor). In 1989 and 1990, the plant was demolished. The City of Buffalo,
in partnership with the City of Lackawanna, Erie County and the Erie County
Industrial Development Agency, has developed a conceptual plan for
redevelopment of over 1,200 acres of inactive industrial properties in South
Buffalo, including the Donner Hanna coke plant. The Company, through its
subsidiary, The Hanna Furnace Corporation, is participating in a voluntary
effort with LTV to perform a site assessment and cleanup at Donner Hanna, with
a goal of eventually transferring ownership of the property to either the City
of Buffalo or a third party. Preliminary cost estimates for the voluntary site
assessment and cleanup are approximately $12.7 million over a two year period.
Hanna Furnace's share of these costs would be approximately $6.3 million, as a
result of LTV's equal contribution to the costs of the cleanup.
Other Sites. The Company has been notified that it may be a PRP at eleven
other CERCLA or state superfund sites. At these sites, either (i) the
Company's liability is not expected to be material or (ii) 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.
Coal Mine Reclamation Proceedings
The Company is involved in the following reclamation proceedings with
respect to its former coal mining properties:
Isabella Mine. National Mines Corporation ("NMC"), a wholly-owned subsidiary
of the Company, previously owned and operated a coal mine and coal refuse
disposal area in Pennsylvania commonly known as the Isabella Mine. The area
covered under NMC's mining permit was approximately 140 acres. A reclamation
bond in the amount of $1.2 million was held by the Pennsylvania Department of
Environmental Protection ("DEP") in connection with NMC's activities. In June
1993, NMC sold the Isabella property to Global Coal Recovery, Inc. ("Global"),
a coal refuse reprocessor. Global applied for and received a new mining permit
from DEP for a total area of approximately 375 acres, including the area
previously covered under NMC's permit. In connection with the sale, NMC agreed
to allow Global to use NMC's $1.2 million reclamation bond as security to
obtain the new permit from the DEP. Global was obligated to repay NMC the $1.2
million. Global also assumed all environmental liability associated with the
Isabella Mine as part of the transaction. Global was ultimately unable to
operate the Isabella Mine at a profit. As a result, it defaulted on its
agreements with NMC and abandoned the site in October 1995. The DEP
subsequently took enforcement actions against Global and revoked its mining
permit. Additionally, on November 1, 1996, the DEP issued a notice of
forfeiture with respect to the $1.2 million reclamation bond posted by NMC.
NMC has appealed this forfeiture to the Environmental Hearing Board. NMC has
presented DEP with a plan pursuant to which NMC would perform reclamation of
the site, in lieu of the forfeiture of the bond. Negotiations with DEP are
ongoing.
Environmental Regulatory Enforcement Proceedings
From time to time, the Company is involved in proceedings with various
regulatory authorities relating to violations of environmental laws and
regulations which may require the Company to pay various fines and penalties,
comply with applicable standards or other requirements or incur capital
expenditures to add or change certain pollution control equipment or
processes. The more significant of these proceedings which are currently
pending are described below:
Great Lakes--Wayne County Air Pollution Control Department
Proceeding. During 1997, the Wayne County Air Quality Management Division
issued 28 Notices of Violations ("NOVs") to the Company at the Great Lakes
facility. Settlement discussions are ongoing.
18
Great Lakes--Particulate Standards NOV. On March 9, 1998, the Company's
Great Lakes facility received an NOV from the EPA which alleged nine
violations of the particulate standards at the No. 2 Basic Oxygen Furnace Shop
and the D-4 Blast Furnace Casthouse. Six of the days on which exceedances
allegedly occurred are covered by the Wayne County NOVs described immediately
above. No demand or proposal for penalties or other sanctions was contained in
the Notice. The Company met with EPA on May 7, 1998 to discuss the NOV. EPA
has indicated that it will review the settlement between Wayne County and the
Company, when it is finalized, to determine whether it will also serve to
resolve this NOV.
Granite City Division--IEPA Violation Notice. On October 18, 1996, the IEPA
issued a Violation Notice alleging (1) releases to the environment between
1990 and 1996; (2) violations of solid waste requirements; and (3) violations
of the National Pollutant Discharge Elimination System ("NPDES") water permit
limitations, at the Company's Granite City Division. No demand or proposal for
penalties or other sanctions was contained in the Notice; however, the Notice
does contain a recommendation by IEPA that the Company conduct an
investigation of these releases and, if necessary, remediate any contamination
discovered during that investigation. The Company submitted a written response
to the Notice on December 4, 1996 and met with IEPA on December 18, 1996. The
Company submitted certain additional information requested by IEPA in 1997.
IEPA has not responded to the Company since receiving this additional
information.
Midwest--NPDES Permit Violations. On October 1, 1998, the Company received a
Notice of Violation from the Indiana Department of Environmental Management
("IDEM") which alleges exceedances of the Company's NPDES permit limitations
between September 1995 and August 1998. IDEM has proposed a penalty of
$354,250 for these alleged violations. Additionally, under IDEM's proposal,
the Company would be required to install certain equipment to help prevent
future violations. Settlement negotiations with IDEM are ongoing.
Detroit Water and Sewerage Department NOVs. The Detroit Water and Sewerage
Department ("DWSD") issued NOVs to the Company's Great Lakes facility on
November 25, 1998 and January 8, 1999. The NOVs allege that the Company's
discharge to the DWSD contained levels of cyanide and mercury in excess of the
permitted limits. No demand or proposal for penalties or other sanctions was
contained in the NOVs. Settlement negotiations with the DWSD are ongoing.
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 1998.
Executive Officers of the Registrant
The following sets forth certain information with respect to the executive
officers of the Company. Executive officers are elected by the Board of
Directors of the Company, generally at the first meeting of the Board after
each annual meeting of stockholders. Officers of the Company serve at the
discretion of the Board of Directors and are subject to removal at any time.
Yutaka Tanaka, Chairman and Chief Executive Officer. Mr. Tanaka, age 62, has
been a director of the Company since April 1, 1998. Mr. Tanaka was appointed
Vice Chairman of the Company in April 1998 and Chairman of the Board and Chief
Executive Officer in September 1998. Mr. Tanaka served as President of
Adchemco Corporation, a manufacturer of chemical products and a wholly owned
subsidiary of NKK, from June 1996 to April 1998. Prior thereto, he was
employed in various capacities by NKK, where he most recently served as
Managing Director from June 1992 to June 1996.
John A. Maczuzak, President and Chief Operating Officer. Mr. Maczuzak, age
57, joined the Company as Vice President and General Manager--Granite City
Division in May 1996. He was appointed Executive Vice President and Acting
Chief Operating Officer in August 1996 and assumed his present position in
December, 1996. Mr. Maczuzak was formerly employed by ProTec Coating Company
as General Manager and USS/Kobe Steel Company as Vice President of Operations
and has more than 31 years of broad-based experience in the steel industry.
19
Glenn H. Gage, Senior Vice President and Chief Financial Officer. Mr. Gage,
age 56, joined the Company in August 1998 as Senior Vice President and Chief
Financial Officer. Mr. Gage was formerly Senior Vice President--Finance at
Uarco Incorporated from 1995 until August 1998, and was a partner with Ernst &
Young LLP from 1981 to 1995.
John F. Kaloski, Senior Vice President--Regional Division. Mr. Kaloski, age
49, joined the Company in August 1998 as Senior Vice President--Regional
Operations and was appointed to his present position in October 1998. Prior to
joining the Company, Mr. Kaloski served in various capacities at U.S. Steel,
including General Manager--U.S. Steel--Gary Works from 1996 to 1998, General
Manager--U.S. Steel Mon Valley Works from 1994 to 1996 and General Manager--
U.S. Steel Minnesota Ore Operations, from 1992 to 1994.
David L. Peterson, Senior Vice President--Business Development, Production
Planning and Technical Services. Mr. Peterson, age 49, joined the Company in
June 1994 as Vice President and General Manager--Great Lakes Division. In
January 1997 he was appointed to the position of Group Vice President--
Regional Operations, and he assumed his present position in August of 1998.
Mr. Peterson had formerly been employed by U.S. Steel since 1971. He was
promoted to the plant manager level at U.S. Steel in 1988 and directed all
operating functions from cokemaking to sheet and tin products. In 1988 he was
named Plant Manager--Primary Operations at U.S. Steel's Gary Works facility.
James H. Squires, Senior Vice President and General Manager--Granite City
Division. Mr. Squires, age 60, began his career with the Company in 1956 as a
laborer in the blast furnace area and went on to hold numerous positions as an
hourly worker. In 1964, he accepted a salaried position and advanced through
the operating organization. In October 1996, he was appointed Vice President
and General Manager--Granite City Division and assumed his current position in
October 1998.
Thomas A. Baird, Vice President, Automotive and Container Sales. Mr. Baird,
age 57, began his career with the Company in 1964. He has held numerous
positions in the marketing and sales organization of the Company, including
General Manager, Automotive Sales from October 1993 to October 1998. He was
appointed to his present position in October 1998.
LeRoy A. Bordeaux, Vice President, Construction and Sheet Sales. Mr.
Bordeaux, age 54, began his career with the Company in 1968. He has held
numerous positions in the marketing and sales organization of the Company,
including General Manager, Sheet Sales from August 1997 to October 1998,
Manager, Sheet Sales from May 1994 to August 1997, and Manager, Customer
Service from March 1992 to May 1994. He was appointed to his present position
in October 1998.
Joseph R. Dudak, Vice President, Strategic Sourcing. Mr. Dudak, age 51,
began his career with the Company as an engineer at Midwest in 1970. In 1973,
he moved to Granite City Division and served as Superintendent of Energy
Management & Utilities from 1977 until moving to corporate headquarters in
1981. He served as Director of Energy & Environmental Affairs from 1981 to
1994, when he was appointed General Manager, Strategic Sourcing. He was
appointed to his present position in 1995.
Leon L. Judd, Vice President, Human Resources. Mr. Judd, age 55, joined the
Company in 1966. He has held various positions of increasing responsibility
including Assistant General Manager Administration--Great Lakes Division from
September 1990 to March 1995, Director--Human Resources Planning and
Communications from March 1995 to August 1996, and Director--Human Resources
and Corporate Affairs from August 1996 to August 1998. Mr. Judd was appointed
to his present position in August 1998.
Ronald J. Werhnyak, Vice President, General Counsel and Secretary. Mr.
Werhnyak, age 53, joined the Company in January 1996 as Senior Counsel. He had
previously served as the Company's Assistant General Counsel commencing in
1989 through an independent contractual arrangement with the Company. Mr.
Werhnyak was appointed Acting General Counsel and Secretary in August 1998,
and to his current position in December 1998.
20
Robert G. Pheanis, Vice President and General Manager--Midwest Division. Mr.
Pheanis, age 65, joined the Company in June 1994 as Vice President and General
Manager--Midwest Division. Mr. Pheanis formerly served in various management
positions at U.S. Steel at the Gary Works facility for 35 years and in 1992
was named its Plant Manager--Finishing Operations, with responsibility for its
total hot rolled, sheet and tin operations.
William E. McDonough, Treasurer. Mr. McDonough, age 40, 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 elected to his present position in
December 1995.
Kirk A. Sobecki, Corporate Controller. Mr. Sobecki, age 37, joined the
Company in January 1999 as Corporate Controller. From September 1997 to
December 1998, he served as Chief Financial Officer of Luitpold
Pharmaceuticals, Inc. From June 1986 to August 1997 Mr. Sobecki held various
positions with Zimmer, Inc., a Division of Bristol-Myers Squibb, including
Director of Finance/Controller from 1995 to 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Class B Common Stock is traded under the symbol "NS" on the
New York Stock Exchange. The following table sets forth, for the periods
indicated, the high and low sales prices of the Class B Common Stock on a
quarterly basis as reported on the New York Stock Exchange Composite Tape.
Period High Low
------ ------- --------
1998
First Quarter.......................................... $21 3/4 $10 9/16
Second Quarter......................................... 19 3/4 11
Third Quarter.......................................... 13 6 1/8
Fourth Quarter......................................... 8 5/8 5 1/16
1997
First Quarter.......................................... $10 1/8 $ 7 5/8
Second Quarter......................................... 16 7/8 7 1/2
Third Quarter.......................................... 21 1/2 14
Fourth Quarter......................................... 18 3/4 10 3/4
As of December 31, 1998, there were approximately 213 registered holders of
Class B Common Stock. (See Note 3. Capital Structure for further discussion).
The Company did not pay any dividends on its Class A Common Stock or Class B
Common Stock in 1997. During 1998, the Company paid quarterly dividends of
$0.07 per common share (or a total in 1998 of $0.28 per common share). The
decision whether to continue to pay dividends on the Common Stock will be
determined by the Board of Directors in light of the Company's earnings, cash
flows, financial condition, business prospects and other relevant factors.
Holders of Class A Common Stock and Class B Common Stock are entitled to share
ratably, as a single class, in any dividends paid on the Common Stock.
In addition, any dividend payments must be matched by a like contribution
into the VEBA Trust, the amount of which is calculated under the terms of the
1993 Settlement Agreement between the Company and the USWA, until the asset
value of the VEBA Trust exceeds $100.0 million. The asset value of the VEBA
Trust at December 31, 1998 was approximately $112.6 million. No matching
dividend contribution to the VEBA Trust was required for the year ended
December 31, 1998. 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 $454.6 million was free of such limitations at
December 31, 1998.
21
Item 6. Selected Financial Data
Years Ended December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in millions, except per
share data)
Statement of Operations Data:
Net sales.............................. $2,848 $3,140 $2,954 $2,954 $2,700
Cost of products sold.................. 2,497 2,674 2,618 2,529 2,337
Depreciation........................... 129 135 144 146 142
Gross margin........................... 222 331 192 279 221
Selling, general and administrative
expense............................... 154 141 137 154 138
Unusual charges (credits).............. (27) -- -- 5 (25)
Income from operations................. 96 191 65 129 113
Financing costs (net).................. 11 15 36 39 56
Income before income taxes,
extraordinary items and cumulative
effect of accounting change........... 88 235 32 90 169
Extraordinary items.................... -- (5) -- 5 --
Cumulative effect of accounting
changes............................... -- -- 11 -- --
Net income............................. 84 214 54 108 185
Net income applicable to common stock.. 84 203 43 97 174
Basic and diluted per share data:
Income before extraordinary items and
cumulative effect of accounting
change.............................. 1.94 4.82 .74 2.13 4.79
Net income........................... 1.94 4.70 .99 2.26 4.79
Diluted earnings per share applicable
to common stock....................... 1.94 4.64 .99 2.22 4.70
Cash dividends paid per common share... 0.28 -- -- -- --
December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in millions)
Balance Sheet Data:
Cash and cash equivalents.............. $ 138 $ 313 $ 109 $ 128 $ 162
Working capital........................ 333 367 279 250 252
Net property, plant and equipment...... 1,271 1,229 1,456 1,469 1,394
Total assets........................... 2,484 2,453 2,558 2,669 2,500
Current maturities of long term
obligations........................... 37 32 38 36 36
Long-term obligations.................. 286 311 470 502 671
Redeemable Preferred Stock--Series B... -- -- 64 65 67
Stockholders' equity................... 850 837 645 600 401
Years Ended December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in millions)
Other Data:
Shipments (net tons, in thousands)..... 5,587 6,144 5,895 5,564 5,208
Raw steel production (net tons, in
thousands)............................ 6,087 6,527 6,557 6,081 5,763
Effective capacity utilization......... 92.2% 96.0% 93.7% 96.5% 96.1%
Number of employees (year end)......... 9,230 9,417 9,579 9,474 9,711
Capital investments.................... $ 171 $ 152 $ 129 $ 215 $ 138
Total debt and redeemable preferred
stock as a percent of total
capitalization........................ 27.5% 29.0% 47.0% 50.1% 65.9%
Common shares outstanding at year end
(in thousands)........................ 42,178 43,288 43,288 43,288 36,376
22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
National Steel Corporation (together with its majority owned subsidiaries,
the "Company") is a domestic manufacturer engaged in a single line of
business, the production and processing of steel. The Company targets high
value-added applications of flat rolled carbon steel for sale primarily to the
automotive, construction and container markets. The Company has two principal
divisions: The Granite City Division which is a fully integrated steelmaking
facility located near St. Louis; and The Regional Division comprised of Great
Lakes, a fully integrated steelmaking facility located near Detroit, and
Midwest, a steel finishing facility located near Chicago. These two divisions
have been aggregated for financial reporting purposes and represent the
Company's only reportable segment--Steel. (See Note 4. Segment Information for
further discussion.) The discussion and analysis which follows is on a
consolidated basis, but due to its significance, focuses primarily on factors
relating to the Steel segment.
General Overview
Comparative operating results for the three years ended December 31, are as
follows:
1998 1997 1996
-------- -------- --------
Dollars and tons in
millions
(except earnings per share
amounts)
Net sales..................................... $2,848.0 $3,139.7 $2,954.0
Income from operations........................ 96.3 191.0 64.5
Net income.................................... 83.8 213.5 53.9
Basic earnings per share...................... 1.94 4.70 .99
Diluted earnings per share.................... 1.94 4.64 .99
Net tons shipped.............................. 5.587 6.144 5.895
The Company's 1998 operating results are indicative of the challenges
encountered by the domestic steel industry this year. Steel shipments fell to
5.587 million net tons, 9.1% below the record set in 1997. This reduction in
steel shipments, along with a decrease in selling prices offset by an improved
product mix, resulted in a similar 9.3% decrease in our net sales and a
decrease in net income as compared to 1997. The primary factors contributing
to the decrease in tons shipped were (i) the Great Lakes "A" blast furnace
reline early in the year, (ii) high levels of low-priced imported steel, and
(iii) above normal steel inventory levels at service centers.
Income from operations and net income were positively affected by continuing
cost reduction efforts and an unusual credit of $26.6 million. Cost reductions
resulted primarily from improved yields and material usage and reduced
spending, particularly the emphasis on minimizing overtime. These efforts were
overshadowed by lower shipment and production levels along with increased
spending on Year 2000 remediation and professional services that negatively
impacted both income from operations and net income in 1998. The unusual
credit of $26.6 million related to the settlement of a lawsuit, which resulted
in refunds of property taxes associated with the 1991 through 1997 tax years.
Lower property tax assessment bases attributable to the settlement are
expected to result in future tax savings for Great Lakes.
The Company has experienced significant competition from low-priced foreign
imports in 1998 and is uncertain as to the effect such competition from
foreign imports may have on the Company's results of operations in 1999. The
final outcome of trade cases pending with the Department of Commerce and the
International Trade Commission are expected shortly on or before June 19,
1999. It is hoped that the outcome of these trade cases will have a positive
impact on the Company's shipments and pricing, although there can be no
assurances as to such favorable outcome. In the meantime, the Company
continues to emphasize increasing shipments of higher value-added products,
many of which do not compete directly with imports, as well as additional cost
reduction initiatives along with implementing customer-focused strategies that
are intended to enhance operating performance.
23
Results of Operations
Net Sales
Net sales for 1998 decreased $291.7 million or 9.3% compared to record net
sales in 1997. A decrease in net tons shipped of 557,000 tons combined with a
net $1 per ton decrease in average selling price as compared to 1997 are the
primary reasons for the decrease in net sales. Increased competition from low-
priced imports is the primary cause of the decrease in net tons shipped and
the decrease in average selling price. The Great Lakes "A" blast furnace
outage also contributed to the reduction in net tons shipped.
Net sales for 1997 increased $185.7 million or 6.3%, and net tons shipped
increased 249,000 as compared to 1996. Higher shipment levels resulted in
approximately $122.0 million of higher sales in 1997 compared to 1996. Also
contributing to the sales increase in 1997, as compared to 1996, was higher
pricing as a result of improved market conditions which increased sales by
approximately $34.0 million and the impact of improved customer and product
mix which increased sales by approximately $66.0 million. Non-steel related
revenues fell by approximately $36.0 million in 1997 due to lower pellet
shipments and lower by-product sales.
Gross Margin
The table below compares gross margin, calculated as net sales less cost of
products sold and depreciation for the last three years.
Years Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
Gross margin (dollars in millions)................ $222.1 $330.7 $191.5
Gross margin as a percentage of net sales......... 7.8% 10.5% 6.5%
Gross margin in 1998 decreased $108.6 million as compared to 1997. The
decreases in shipments and average selling price and the Great Lakes "A" blast
furnace outage had a negative impact of approximately $183.0 million on gross
margin. This was partially offset by continued cost reductions, improved
operating unit yield performances, lower costs as a result of the 1997
settlement with Avatex Corporation, and lower depreciation expense which, in
the aggregate, positively impacted gross margin by approximately $75.0
million.
The improved gross margin level in 1997 as compared to 1996 was a result of
the net sales improvements discussed above, cost reductions, reduced
depreciation expense in 1997 and more stable operations in 1997 as compared to
1996. These cost improvements were partially offset by higher prices for coke
and zinc. In addition, insurance recoveries aggregating approximately $8.5
million were received in 1997, which positively impacted gross margin.
Depreciation expense was $129.2 million in 1998 as compared to $134.5
million and $144.4 million in 1997 and 1996, respectively. The lower levels of
depreciation in 1998 and 1997 principally resulted from the sale of the Great
Lakes No. 5 coke battery in the second quarter of 1997.
Selling, General and Administrative Expense
Selling, general and administrative expense comparative data for the last
three years is as follows:
Years Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
Selling, general and administrative expense
(dollars in millions)........................... $153.6 $141.3 $136.7
Selling, general and administrative expense, as a
percentage of net sales......................... 5.4% 4.5% 4.6%
Selling, general and administrative expense increased by $12.3 million in
1998 as compared to 1997. Approximately $5.7 million of the increase was
attributable to Year 2000 remediation costs. The remainder of the increase was
primarily due to higher mainframe related costs, costs associated with the
implementation of
24
Audit Committee recommendations relative to internal controls (see "Impact of
Recommendations from Audit Committee Inquiry" below), and other costs
associated with the Securities and Exchange Commission inquiry (see Note 2.
"Audit Committee Inquiry and Securities and Exchange Commission Inquiry").
Expense levels increased in 1997 as compared to 1996 as a result of the
expense associated with converting stock options to stock appreciation rights;
higher information systems costs, which are the result of preliminary systems
evaluations, engineering expenses and Year 2000 remediation costs; and higher
legal and professional fees primarily due to the Audit Committee inquiry.
These higher cost levels are partially offset by lower benefit related
expenses. In addition, 1996 expense levels were lower as a result of the
settlement of a lawsuit in 1996, the proceeds of which were recognized as an
offset to selling, general and administrative expenses.
Equity Income from Affiliates
Equity income from affiliates was $1.2 million in 1998 compared to $1.6
million in 1997 and $9.8 million in 1996. The lower income levels in 1998 and
1997 were primarily the result of the sale of the Company's minority equity
investment in Iron Ore Company of Canada ("IOC") early in the second quarter
of 1997.
Unusual Credit
The unusual credit in 1998 results from the settlement of a lawsuit which
sought a reduction in the assessed value of the Company's real and personal
property at Great Lakes relating to the 1991 through 1997 tax years. The
Company received tax refunds and was granted a lower assessment base that is
expected to result in future tax savings.
Net Financing Costs
Net financing costs for the last three years were as follows:
Years Ended
December 31,
---------------------
1998 1997 1996
------ ------ -----
Dollars in millions
Interest and other financial income............... $(15.8) $(19.2) $(7.1)
Interest and other financial expense.............. 26.7 33.8 43.3
------ ------ -----
Net Financing Costs............................. $ 10.9 $ 14.6 $36.2
====== ====== =====
Net financing costs decreased in 1998 as compared to 1997 as a result of a
decrease in interest and other financial expense partially offset by lower
interest and other financial income. Interest expense decreased by $7.1
million primarily as a result of lower average debt balances during 1998 due
to the 1997 repayment of debt associated with the Great Lakes No. 5 coke
battery. Interest income decreased $3.4 million in 1998 as a result of lower
cash and cash equivalent balances available for investment.
The reduced cost levels in 1997 were the result of higher interest income of
$12.1 million due to higher average cash and cash equivalents, and investment
balances and lower interest costs of $9.5 million due to lower average debt
outstanding. The higher cash and cash equivalents, and investments and lower
debt balances were the result of the disposals of non-core assets, which were
completed in 1997, as well as positive cash flows from operations in 1997.
Net Gain on Disposal of Non-Core Assets and Other Related Activities
In 1998, 1997 and 1996, the Company disposed of, or made provisions for
disposing of, certain non-core assets. The effects of these transactions and
other activities relating to non-core assets are presented as a separate
component in the consolidated statements of income entitled "net gain on
disposal of non-core assets and other related activities." A discussion of
these items follows.
25
During the second quarter of 1998, the Company sold two properties located
at Midwest. The Company received proceeds (net of taxes and expenses) of $3.3
million and recorded a net gain of $2.7 million related to the sales.
On April 1, 1997, the Company completed the sale of its 21.7% minority
equity interest in the IOC to North Limited, an Australian mining and metal
company ("North"). The Company received proceeds (net of taxes and expenses)
of $75.3 million from North in exchange for its interest in IOC and recorded a
$37.0 million gain. The Company continues to purchase iron ore at fair market
value from IOC pursuant to the terms of long-term supply agreements.
On June 12, 1997, the Company completed the sale of the Great Lakes No. 5
coke battery and other related assets, including coal inventories, to a
subsidiary of DTE Energy Company ("DTE"). The Company received proceeds (net
of taxes and expenses) of $234.0 million in connection with the sale and
recorded a $14.3 million loss. The Company utilized a portion of the proceeds
to prepay the remaining $154.3 million of the related party coke battery debt,
which resulted in a net of tax extraordinary loss of $5.4 million in 1997. As
part of the arrangement, the Company has agreed to operate the battery, under
an operation and maintenance agreement executed with DTE, and will purchase
the majority of the coke produced from the battery under a requirements
contract, with the price being adjusted during the term of the contract,
primarily to reflect changes in production costs.
In the second quarter of 1997, the Company also recorded a charge of $3.6
million related to the decision to cease operations of American Steel
Corporation, a wholly-owned subsidiary, which pickled and slit steel.
In 1997, the Company sold four coal properties and recorded a net gain of
$11.8 million. In conjunction with one of the property sales, the purchaser
agreed to assume the potential environmental liabilities and, as a result, the
Company eliminated the related accrual of approximately $8 million.
Additionally, during 1997, the Company received new information related to
closed coal properties' employee benefit liabilities and other expenses, and
reduced the related accrual by $19.8 million. In aggregate, the above coal
properties' transactions resulted in a gain of $39.6 million in 1997.
In September 1996, the Company sold a portion of the land that had been
received in conjunction with the settlement of a lawsuit and recorded a net
gain of $3.7 million.
Income Taxes (Credit)
During 1998, the Company recorded current taxes payable of $23.9 million. In
1997 and 1996, the Company recorded current taxes payable of $37.8 million and
$10.8 million, respectively. The current portion of the income tax represents
taxes which were expected to be due as a result of the filing of the current
period's tax returns and, for federal purposes, such amounts have generally
been determined based on alternative minimum tax payments due.
The current taxes payable represents 27.2% of pre-tax income in 1998.
Current taxes payable in 1997 and 1996 represented 16.1% and 33.6% of pre-tax
income, respectively. The current levels were less than the U.S. Statutory
Rate primarily because of the utilization of net operating loss carryforwards
and alternative minimum tax credits.
The Company recorded a deferred tax benefit of $19.6 million in the year
ended December 31, 1998 and $21.6 million in each of the years ended December
31, 1997 and 1996 due to the expectation of additional future taxable income.
An additional deferred tax benefit is expected to be recognized in 1999 as
continued realization of taxable income increases the likelihood of realizing
these deferred tax assets.
Extraordinary Item
An extraordinary loss of $5.4 million (net of a tax benefit of $1.4 million)
was reflected in 1997 income. This loss relates to early debt repayment costs
related to debt associated with the Company's Great Lakes No. 5 coke battery,
which was sold in the second quarter of 1997.
26
Cumulative Effect of Accounting Change
The Company reflected in its 1996 income statement the cumulative effect of
an accounting change, which resulted from a change in the valuation date used
to measure pension and other postretirement employee benefits ("OPEBs")
obligations. The cumulative effect of this change was $11.1 million. The
valuation date to measure the obligations was changed from December 31 to
September 30 in order to provide more timely information with respect to
pension and OPEB provisions.
Other Operational and Financial Disclosure Matters
Impact of Recommendations From Audit Committee Inquiry
On January 21, 1998, the Board of Directors accepted the report and approved
the recommendation of the legal counsel to the Audit Committee for
improvements in the Company's system of internal controls, a restructuring of
its finance and accounting department, and the expansion of the role of the
internal audit function, as well as corrective measures to be taken related to
the specific causes of accounting errors (see Note 2. "Audit Committee Inquiry
and Securities and Exchange Commission Inquiry" for further discussion). The
Company is in the process of implementing these recommendations with the
involvement of the Audit Committee. In accordance with the recommendations, a
major independent accounting and consulting firm was engaged in early 1998 to
examine and report on the Company's written assertion about the effectiveness
of the internal control over financial reporting. Its report is expected to be
completed in March 1999.
Common Stock Repurchase Program
In the third quarter of 1998, the Board of Directors authorized the
repurchase of up to two million shares of its Class B Common Stock. During
1998, the Company repurchased 1,109,700 shares at a total cost of $8.4
million. The Company purchased an additional 272,500 shares through February
1, 1999 at a cost of $2.6 million.
Change in Assumptions for Pensions and Other Postretirement Employee Benefits
(OPEBs)
Consistent with the decrease in long-term interest rates in the United
States, at September 30, 1998, the Company decreased the discount rate used to
calculate the actuarial present value of its benefit obligations for pensions
and OPEBs by 75 basis points to 6.75% from the rate used at September 30,
1997. The actuarial present value of the Weirton Retirement Plan benefit
obligations continued to be measured at November 30, 1998, due to its
acquisition on November 30, 1997 (see Note 9. "Weirton Liabilities" for
further discussion) utilizing a 7.0% rate, a 50 basis point decrease from the
rate used in 1997.
The decrease in discount rate assumptions along with less than expected
investment returns resulted in increases of $88.3 million in the intangible
pension asset, $138.2 million in the minimum pension liability, and a
corresponding $49.9 million decrease to stockholders' equity. The assumption
changes, the addition of the overfunded Weirton Retirement Plan, and other
factors resulted in a decrease of $18.2 million in pension cost to $39.7
million for the year ended December 31, 1998. OPEB costs also decreased during
1998 by $1.4 million to $74.0 million. The decrease is due to the addition of
new HMOs and a favorable return on assets, partially offset by additional
costs related to the addition of the Weirton plans.
Environmental Liabilities
The Company's operations are subject to numerous laws and regulations
relating to the protection of human health and the environment. The Company
has expended, and can be expected to expend in the future, substantial amounts
for ongoing compliance with these laws and regulations, including, the Clean
Air Act, and the Resource Conservation and Recovery Act of 1976. Additionally,
the Comprehensive Environmental Response, Compensation and Liability Act of
1980 and similar state superfund statutes have imposed joint and several
liability on the Company as one of many potentially responsible parties at a
number of sites requiring
27
remediation. During 1997, in connection with a settlement with Avatex, the
Company released Avatex from its obligation to indemnify the Company for
certain environmental liabilities of its former Weirton Steel Division.
With respect to those claims for which the Company has sufficient
information to reasonably estimate its future expenditures, the Company has
accrued $17.0 million at December 31, 1998. Since environmental laws are
becoming increasingly more stringent, the Company's expenditures and costs for
environmental compliance may increase in the future. As these matters progress
or the Company becomes aware of additional matters, the Company may be
required to accrue charges in excess of those previously accrued.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is required to be adopted
in years beginning after June 15, 1999. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in fair
value of derivatives will either be offset against the change in fair value of
hedged assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not yet determined what
the effect of this Statement will be on earnings and the financial position of
the Company.
The Company, as required, on December 31, 1998 adopted SFAS No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits. The
statement standardized disclosures about pensions and other post retirement
benefits in an effort to make the information more understandable.
Implementation of this disclosure standard did not affect the financial
position or results of operations of the Company. The disclosures for pensions
and OPEBs are now contained within Note 6. "Pension and Other Postretirement
Employee Benefits."
On December 31, 1998, as required, the Company also adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
Statement changes the way public companies are required to report operating
segment information in annual financial statements and in interim financial
reports to stockholders. Operating segments are determined consistent with the
way management organizes and evaluates financial information internally for
making decisions and assessing performance. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The disclosures required by the Statement are contained in Note 4.
"Segment Information."
During the first quarter of 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. Comprehensive income is defined as the change
in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. Consequently, the Company
has reported a portion of its changes in minimum pension liabilities as a
component of comprehensive income in the appropriate financial statements.
Effective January 1, 1998, the Company adopted Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use ("SOP 98-1"). SOP 98-1 provides authoritative guidance on when
internal-use software costs should be capitalized and when these costs should
be expensed as incurred. During 1998, approximately $19.2 million, mainly
relating to the development of a new order fulfillment system and new
accounting software, was capitalized in accordance with this guidance.
Labor Negotiations
In 1993, the Company and the United Steelworkers of America ("USWA")
negotiated a six year labor agreement continuing through July 1999, with a
reopener provision in 1996 for specified payroll items and
28
employee benefits. Pursuant to the terms of the reopener, if the parties could
not reach a settlement, they were to submit final offers to an arbitrator who
would, after a hearing, consider the information and determine an award. On
October 30, 1996, the arbitrator handed down an award regarding the
arbitration of the reopener. The arbitrator's award is comparable to the
industry pattern for payroll and benefit items under collective bargaining
agreements between the USWA and other integrated steel producers. Pursuant to
the award, employees represented by the USWA received an immediate wage
increase of fifty cents per hour retroactive to August 1, 1996, with increases
of twenty-five cents per hour on August 1, 1997 and 1998. In addition, $500
lump sum bonuses were or will be paid to each eligible employee represented by
the USWA on May 1, 1998 and 1999. The Company has a similar labor agreement
with the International Chemical Workers Union Council of the United Food and
Commercial Workers.
The Company estimates that these items, along with certain other provisions
in the agreement, will increase employee related expenses by approximately $11
million for 1999. The Company's 1998 and 1997 labor costs increased by
approximately $16 million and $12 million, respectively, as a result of the
arbitrator's award.
The Company's ability to operate could be impacted by strike or work
stoppage if it is unable to negotiate a new agreement with its represented
employees when the existing agreement expires on July 31, 1999. The USWA's
labor agreements with certain other domestic integrated steel producers also
expire on July 31, 1999. There can be no assurances that work stoppages will
not occur in the future in connection with contract negotiations or otherwise,
or as to the financial impact of such a stoppage. A prolonged general work
stoppage would have a material adverse effect on the Company's results of
operations and financial condition. Also, the Company's profitability could be
adversely affected if increased costs associated with any future contract are
not recoverable through productivity improvements or price increases.
Year 2000 Issues
The "Year 2000" computer software problem is caused by programming practices
that were originally intended to conserve computer memory, thus providing date
fields with only two digits with the computer software logic applying the date
prefix "19." If not corrected, this error could cause computers to fail or
give erroneous results as the computer processes data before or during the
year 2000. This programming practice continued through the mid-1990's and may
affect not only mainframe, business and personal computers, but also any
device that has an embedded microprocessor, such as an elevator or fire alarm
system. All of the Company's locations and operating facilities are impacted.
In 1997, the Company established a Year 2000 Project team to coordinate and
oversee the Year 2000 remediation project. The team is supervised by an
executive steering committee, which meets regularly to monitor progress. In
addition, progress is monitored by the Board of Directors and the Audit
Committee through periodic reports from management. The project's scope
includes mainframe, business and personal computers, business software and
other information technology items, as well as non-information technology
items, such as process control software and embedded software in hardware
devices. The Company is also reviewing with its major vendors and suppliers
their efforts in becoming Year 2000 compliant. Most suppliers and vendors who
have replied thus far to the Company's inquiries have indicated that they
expect to be Year 2000 compliant on a timely basis. The Company continues to
assess and remediate its various systems, electronic commerce and business
associates, and intends to make whatever modifications are necessary to
prevent business interruption.
29
Following is a table which shows the current status and expected substantial
completion dates for the major components of the Company's Year 2000 project:
Estimated
Substantial
Description Completion
----------- ----------------
General:
Development of a Year 2000 Project plan................. Complete
Review and report on Year 2000 Project plan by a major
independent accounting and consulting firm............. Complete
Mainframe:
Transition of data service center to Year 2000 compliant
provider............................................... Complete
Business critical applications--remediated, tested and
implemented............................................ Complete
Non-business critical applications--remediated, tested
and implemented........................................ 2nd quarter 1999
Non mainframe computer equipment:
Inventory and assessment of all non mainframe computer
equipment.............................................. Complete
Business computers at divisions--remediated, tested and
implemented............................................ 2nd quarter 1999
Process control computers and embedded devices--assessed
and remediated......................................... 2nd quarter 1999
Vendors, customers and others:
Vendor readiness evaluations prepared and mailed........ Complete
Review of responses and assessment of risk.............. Ongoing
Contingency plan:
Development and review of contingency plan.............. 2nd quarter 1999
The Company's Year 2000 compliance effort is currently progressing according
to schedule. The remediation of the coding for the mission critical mainframe
based applications has been completed. These programs have been tested to
confirm that the remediation adequately corrected the problems, and they have
been returned to production. All other non-critical mainframe based
applications have been remediated and are currently being tested. When the
testing has been completed, they will be returned to operation. The mainframe
effort, overall, is progressing ahead of schedule. The inventory, assessment
and remediation of all non-mainframe hardware, business computers, process
control computers and embedded devices are proceeding according to schedule.
The Company has discovered some computer equipment that is not Year 2000
compliant and has made arrangements to replace such equipment. An inventory of
all desktop computer equipment, such as personal computers and printers, has
been completed and efforts are underway to remediate or replace the defective
components.
The Company expects to incur total costs of approximately $19.9 million to
address all of its Year 2000 issues. This total consists of: (i) approximately
$10.0 million to remediate mainframe business systems; (ii) approximately $4.7
million to remediate business computers at the divisions and other non-
mainframe desk-top equipment; (iii) approximately $1.9 million to remediate
process control computers and embedded devices; (iv) approximately $1.4
million for accelerated replacement of software which is not Year 2000
compliant; (v) approximately $1.4 million for internal employment cost of
information system employees; and (vi) approximately $0.5 million for other
related administrative costs. Of this total, the Company spent approximately
$7.5 million and $1.8 million during 1998 and 1997, respectively. These cost
estimates do not include any costs that may be incurred by the Company as a
result of the failure of any supplier or customer of the Company, or any other
party with whom the Company does business, to become Year 2000 compliant. Year
2000 costs have been incurred as operating expenses from the Company's
information technology budget. The Company has not deferred any other
information technology projects as a result of its Year 2000 efforts.
30
Thus far, the Company's Year 2000 efforts have focused on (i) the assessment
and remediation of information technology and non-information technology items
and (ii) the evaluation of the Year 2000 compliance status of key suppliers,
customers and other parties with whom the Company does business. The
information obtained by the Company from these activities is being used by the
Company to determine the most reasonably likely worst case scenarios which
could result from a failure by the Company or third parties to become Year
2000 compliant. The Company has also established teams that will produce
contingency plans for handling these worst case scenarios. The Company intends
to make these determinations and create any necessary contingency plans by the
end of the second quarter of 1999.
Based upon the information currently available to it, the Company believes
that the implementation of its Year 2000 Project Plan will adequately resolve
the Company's Year 2000 issues. However, since it is not possible to
anticipate all possible future outcomes, there could be circumstances under
which the Company's business operations are disrupted as a result of Year 2000
problems. These disruptions could be caused by (i) the failure of the
Company's systems or equipment to operate as a result of Year 2000 problems,
(ii) the failure of the Company's suppliers to provide the Company with raw
materials, utilities, supplies or other products or services which are
necessary to sustain the Company's manufacturing processes or other business
operations, or (iii) the failure of the Company's customers to accept delivery
of the Company's products as a result of their Year 2000 problems. Any such
disruption to the Company's business operations could have a material adverse
effect on the financial condition and results of operations of the Company.
Statements contained herein regarding the estimated costs and time to
complete the Company's Year 2000 projects, and the potential effects of Year
2000 problems, are "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. A variety of factors could
cause the actual costs, time for completion and effects to differ from those
which are currently expected. These factors include, but are not limited to,
the following: (i) the failure of the Company to accurately identify all
software and hardware devices which are not Year 2000 compliant; (ii) the
failure of the remediation actions identified by the Company to adequately
correct the Year 2000 problems; (iii) the failure of the Company's customers
or suppliers and other third parties with whom the Company does business to
achieve Year 2000 compliance; (iv) the inability of the Company to find
sufficient outside resources to assist the Company in its Year 2000
remediation activities; and (v) increases in costs and fees charged by third
parties retained by the Company to assist in the Company's Year 2000
remediation activities.
Discussion of Liquidity and Sources of Capital
Overview
The Company's liquidity needs arise primarily from capital investments,
working capital requirements, pension funding requirements, principal and
interest payments on its indebtedness, common stock dividend payments and
stock repurchase programs. The Company has satisfied these liquidity needs
with funds provided by long-term borrowings and cash provided by operations.
Additional sources of liquidity consist of a Receivables Purchase Agreement
(the "Receivables Facility") with commitments of up to $200.0 million which
has an expiration date of September 2002, and a $100.0 million credit facility
and a $50.0 million credit facility, both of which are secured by the
Company's inventories (the "Inventory Facilities") and expire in May 2000 and
July 1999, respectively. All of the lenders under the Company's Inventory
Facilities and a majority of the lenders under the Receivables Facility are
Japanese financial institutions. At December 31, 1998, the Company had total
liquidity, which includes cash balances plus available borrowing capacity
under these facilities, of $395.3 million. In addition, the Company has the
ability to issue additional debt of approximately $290 million under its
Indenture of Mortgage and Deed of Trust securing the First Mortgage Bonds.
The Company is currently in compliance with all covenants of, and
obligations under, the Receivables Facility, the Inventory Facilities and
other debt instruments. On December 31, 1998, there were no cash borrowings
outstanding under the Receivables Facility or the Inventory Facilities, and
31
outstanding letters of credit under the Receivables Facility totaled $79.3
million. For 1998, the maximum availability under the Receivables Facility,
after reduction for letters of credit outstanding, varied from $76.3 million
to $120.7 million and was $107.4 million as of December 31, 1998.
At December 31, 1998, total debt as a percentage of total capitalization
decreased to 27.5% as compared to 29.0% at December 31, 1997. Cash and cash
equivalents, and investments totaled $137.9 million and $337.6 million as of
December 31, 1998 and 1997, respectively. At December 31, 1998, obligations
guaranteed by the Company approximated $19.1 million, compared to $21.7
million at December 31, 1997.
Cash Flows from Operating Activities
For 1998, cash provided from operating activities totaled $31.7 million, a
decrease of $300.5 million compared to 1997. This decrease was primarily
attributable to the $129.7 million decrease in net income as well as a higher
cash usage to fund working capital needs, primarily relating to inventories
and the timing of pension contributions.
For 1997, cash provided from operating activities totaled $332.2 million, an
increase of $173.3 million compared to 1996. This increase was primarily
attributable to the $159.6 million increase in net income as well as a lower
cash usage to fund working capital needs.
Capital Investments
Capital investments for the years ended December 31, 1998 and 1997 amounted
to $171.1 million and $151.8 million, respectively. The 1998 spending was
primarily attributable to the new hot dip galvanizing facility at Great Lakes,
the blast furnace reline at Great Lakes, construction of the new coating line
at Midwest, and new business systems. The 1997 spending was primarily related
to the 72-inch continuous galvanizing line upgrade and construction of the new
coating line, both at Midwest.
Capital investments are expected to approximate $300 million in 1999, of
which approximately $130 million was committed at December 31, 1998. Included
among the budgeted and committed capital investments is the new hot dip
galvanizing facility. Other capital investments include new business systems
and blast furnace relines at both Great Lakes and the Granite City Division.
It is expected that capital investments will be in excess of historical levels
for the next few years.
Cash Proceeds from the Sale of Non-Core Assets
During the second quarter of 1998, the Company sold certain non-core land
and property at Midwest. The Company received proceeds (net of taxes and
expenses) of $3.3 million and recorded a net gain of $2.7 million related to
the sale.
During the second quarter of 1997, the Company sold its Great Lakes No. 5
coke battery, as well as its minority equity investment in the IOC. The sale
of these two assets generated net proceeds of $309.3 million. Additionally, in
1997, certain coal properties were sold generating net proceeds of $11.3
million.
A portion of the proceeds from these sales was used in the fourth quarter of
1997 when the Company redeemed all of the outstanding Redeemable Preferred
Stock--Series B owned by Avatex. Concurrent with the stock repurchase, the
Company and Avatex settled Avatex's obligation relating to certain Weirton
liabilities as to which Avatex had agreed to indemnify the Company in prior
recapitalization programs. Avatex had pre-funded certain of these
indemnification obligations and, at the time of the pre-funding, the Company
and Avatex agreed that a settlement of the liabilities would occur no later
than in the year 2000. The redemption of the preferred stock and the related
settlement resulted in the Company paying Avatex $59.0 million in the fourth
quarter of 1997 and an additional $10.0 million in 1998. Additionally in the
fourth quarter of 1997, the Company
32
recognized insurance proceeds (net of taxes and expenses) aggregating
approximately $13.6 million relating to certain environmental sites, some of
which had been indemnified by Avatex and for which the Company is now solely
responsible.
On December 29, 1997, the Company also redeemed the Preferred Stock--Series
A, which was owned by NKK U.S.A. Corporation. The Company paid NKK U.S.A.
Corporation the face value of the stock ($36.7 million) plus accrued dividends
as of the redemption date of approximately $0.6 million.
Cash Flows Utilized in Financing Activities
During 1998, the Company utilized $40.1 million for financing activities,
which included scheduled repayments of debt, as well as dividend payments on
the Company's common stock. The Company repurchased 1,109,700 shares of its
Class B Common Stock in 1998 at a cost of $8.4 million and plans to repurchase
up to an additional 890,300 shares in 1999. In addition, the Company recorded
borrowings of approximately $14.7 million related to the ProCoil joint
venture.
During 1997, the Company utilized $297.1 million for financing activities.
These included the $154.3 million prepayment of related party debt associated
with the sale of the Great Lakes No. 5 coke battery and $4.5 million of costs
associated with the prepayment of the aforementioned debt. Also included was
the $83.8 million for the redemption of the Preferred Stock--Series A and B
(net of the $13.6 million of insurance proceeds recognized by the Company).
Other areas of cash utilization for financing activities included scheduled
payments of debt, as well as dividend payments on the Company's preferred
stock.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, operations of the Company are exposed to
continuing fluctuations in commodity prices, foreign currency values, and
interest rates that can affect the cost of operating, investing, and
financing. Accordingly, the Company addresses a portion of these risks,
primarily commodity price risk, through a controlled program of risk
management that includes the use of derivative financial instruments. The
Company's objective is to reduce earnings volatility associated with these
fluctuations to allow management to focus on core business issues. The
Company's derivative activities, all of which are for purposes other than
trading, are initiated within the guidelines of a documented corporate risk-
management policy. The Company does not enter into any derivative transactions
for speculative purposes.
Interest Rate Risk
The Company's primary interest rate risk exposure results from changes in
long-term U.S. dollar interest rates. In an effort to manage interest rate
exposures, the Company predominantly enters into fixed rate debt positions. As
such, the fair value of the Company's debt positions is moderately sensitive
to changes in interest rates. A sensitivity analysis has been prepared to
estimate the Company's exposure to market risk of its fixed rate debt
positions. The fair value is calculated by valuing those positions at quoted
market interest rates. Market risk is then estimated at the potential loss in
fair value resulting from a hypothetical 10% adverse change in such rates. The
results of this analysis, which may differ from actual results, are as
follows:
Fair
Value Market Risk
-------- -----------
Dollars in thousands
1998:
Long-term debt position, excluding capitalized lease
obligations (Average interest rate of 8.6%)........ $302,085 $6,631
Commodity Price Risk
In order to reduce the uncertainty of price movements with respect to the
purchase of zinc, the Company enters into derivative financial instruments in
the form of swap contracts and zero cost collars with a major global financial
institution. These contracts typically mature within one year. At expiration,
the derivative contracts are
33
settled at a net amount equal to the difference between the then current price
of zinc and the fixed contract price. While these hedging instruments are
subject to fluctuations in value, such fluctuations are generally offset by
changes in the value of the underlying exposures being hedged.
Based on the Company's overall commodity hedge exposure at December 31,
1998, a hypothetical 10 percent change in market rates applied to the fair
value of the instruments, would have no material impact on the Company's
earnings, cash flows, financial position, or fair values of commodity price
risk sensitive instruments over a one-year period.
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
----
Management's Responsibility for Financial Statements................ 35
Report of Ernst & Young LLP Independent Auditors.................... 36
Consolidated Statements of Income--Years Ended December 31, 1998,
1997 and 1996...................................................... 37
Consolidated Balance Sheets--December 31, 1998 and 1997............. 38
Consolidated Statements of Cash Flows--Years Ended December 31,
1998, 1997 and 1996................................................ 39
Consolidated Statements of Changes in Stockholders' Equity and
Redeemable Preferred Stock--Series B--Years Ended December 31,
1998, 1997 and 1996................................................ 40
Notes to Consolidated Financial Statements.......................... 41
Schedule II--Valuation and Qualifying Accounts...................... 62
34
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation, integrity and fair
presentation of the consolidated financial statements and related notes. The
financial statements, presented on pages 37 to 61, have been prepared in
conformity with generally accepted accounting principles and include amounts
based upon our estimates and judgments, as required. Management also prepared
the other information included in the Form 10-K and is responsible for its
accuracy and consistency with the financial statements. The financial
statements have been audited in accordance with generally accepted auditing
standards and reported upon by our independent auditors, Ernst & Young LLP,
who were given free access to all financial records and related data,
including minutes of the meetings of the Board of Directors and committees of
the Board. We believe the representations made to the independent auditors
during the audit were valid and appropriate. Ernst & Young LLP's audit report
is presented on page 36.
National Steel Corporation maintains a system of internal accounting control
designed to provide reasonable assurance for the safeguarding of assets and
reliability of financial records. The system is subject to review through its
internal audit function, which monitors and reports on the adequacy of and
compliance with the internal control system and appropriate action is taken to
address control deficiencies and other opportunities for improving the system
as they are identified. Although no cost effective internal control system
will preclude all errors and irregularities, management believes that through
the careful selection, training and development of employees, the division of
responsibilities and the application of formal policies and procedures,
National Steel Corporation has an effective and responsive system of internal
accounting control.
The Audit Committee of the Board of Directors, which is composed solely of
non-employee directors, provides oversight to the financial reporting process
through periodic meetings. The Audit Committee is responsible for recommending
to the Board of Directors, subject to approval by the Board and ratification
by stockholders, the independent auditors to perform audit and related work
for the Company, for reviewing with the independent auditors the scope of
their audit of the Company's financial statements, for reviewing with the
Company's internal auditors the scope of the plan of audit, for meeting with
the independent auditors and the Company's internal auditors to review the
results of their audits and the Company's internal accounting control, and for
reviewing other professional services being performed for the Company by the
independent auditors. Both the independent auditors and the Company's internal
auditors have free access to the Audit Committee.
Management believes the system of internal accounting control provides
reasonable assurance that business activities are conducted in a manner
consistent with the Company's high standards of business conduct, and the
Company's financial accounting system contains the integrity and objectivity
necessary to maintain accountability for assets and to prepare National Steel
Corporation's financial statements in accordance with generally accepted
accounting principles.
/s/ Yutaka Tanaka
-------------------------------------
Yutaka Tanaka
Chairman & Chief Executive Officer
/s/ John A. Maczuzak
-------------------------------------
John A. Maczuzak
President & Chief Operating Officer
/s/ Glenn H. Gage
-------------------------------------
Glenn H. Gage
Senior Vice President & Chief
Financial Officer
35
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, 1998 and
1997, and the related consolidated statements of 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, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
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, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998, 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 10 to the consolidated financial statements, in 1996
the Company changed the measurement date that is used in accounting for
pensions and postretirement benefits other than pensions.
/s/ Ernst & Young LLP
Indianapolis, Indiana
January 28, 1999
36
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in Thousands,
Except Per Share Amounts)
Net Sales.................................. $2,848,044 $3,139,659 $2,954,033
Cost of products sold.................... 2,496,786 2,674,444 2,618,151
Selling, general and administrative
expense................................. 153,635 141,252 136,731
Depreciation............................. 129,201 134,546 144,413
Equity income of affiliates.............. (1,240) (1,576) (9,763)
Unusual credit........................... (26,595) -- --
---------- ---------- ----------
Income from Operations..................... 96,257 190,993 64,501
Other (income) expense
Interest and other financial income...... (15,787) (19,198) (7,103)
Interest and other financial expense..... 26,672 33,805 43,352
Net gain on disposal of non-core assets
and other related activities............ (2,685) (58,745) (3,732)
---------- ---------- ----------
Income before Income Taxes, Extraordinary
Item and Cumulative Effect of Accounting
Change.................................... 88,057 235,131 31,984
Income taxes (credit).................... 4,299 16,231 (10,840)
---------- ---------- ----------
Income before Extraordinary Item and
Cumulative Effect of Accounting Change.... 83,758 218,900 42,824
Extraordinary item....................... -- (5,397) --
Cumulative effect of accounting change... -- -- 11,100
---------- ---------- ----------
Net Income................................. 83,758 213,503 53,924
Less preferred stock dividends........... -- 10,252 10,959
---------- ---------- ----------
Net Income Applicable to Common Stock...... $ 83,758 $ 203,251 $ 42,965
========== ========== ==========
Basic Earnings Per Share:
Income before Extraordinary Item and
Cumulative Effect of Accounting Change.. $ 1.94 $ 4.82 $ .74
Extraordinary item....................... -- (.12) --
Cumulative effect of accounting change... -- -- .25
---------- ---------- ----------
Net Income Applicable to Common Stock...... $ 1.94 $ 4.70 $ .99
========== ========== ==========
Diluted Earnings Per Share:
Income before Extraordinary Item and
Cumulative Effect of Accounting Change.. $ 1.94 $ 4.76 $ .74
Extraordinary item....................... -- (.12) --
Cumulative effect of accounting change... -- -- .25
---------- ---------- ----------
Net Income Applicable to Common Stock...... $ 1.94 $ 4.64 $ .99
========== ========== ==========
Weighted average shares outstanding (in
thousands)................................ 43,202 43,288 43,288
Dividends paid per common share............ $ 0.28 $ -- $ --
See notes to consolidated financial statements.
37
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
1998 1997
---------- ----------
(Dollars in
Thousands, Except Per
Share Amounts)
ASSETS
Current assets
Cash and cash equivalents............................ $ 137,895 $ 312,642
Investments.......................................... -- 25,000
Receivables, less allowances (1998--$16,899; 1997--
$17,644)............................................ 245,840 284,306
Inventories.......................................... 472,834 374,202
Deferred tax assets.................................. 23,306 8,597
---------- ----------
Total current assets............................... 879,875 1,004,747
Investments in affiliated companies.................... 19,449 15,709
Property, plant and equipment
Land and land improvements........................... 187,087 190,859
Buildings............................................ 310,141 301,058
Machinery and equipment.............................. 2,978,337 2,886,214
---------- ----------
Total property, plant and equipment................ 3,475,565 3,378,131
Less accumulated depreciation........................ 2,205,025 2,149,107
---------- ----------
Net property, plant and equipment...................... 1,270,540 1,229,024
Deferred tax assets.................................... 179,294 164,503
Intangible pension asset............................... 89,497 1,149
Other assets........................................... 45,320 38,327
---------- ----------
$2,483,975 $2,453,459
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable..................................... $ 242,123 $ 246,085
Salaries and wages................................... 66,368 90,604
Withheld and accrued taxes........................... 62,906 70,608
Pension and other employee benefits.................. 71,234 141,350
Other accrued liabilities............................ 44,369 50,680
Income taxes......................................... 22,580 6,507
Current portion of long-term obligations............. 37,203 31,533
---------- ----------
Total current liabilities.......................... 546,783 637,367
Long-term obligations.................................. 285,767 310,976
Long-term pension liabilities.......................... 269,099 162,234
Postretirement benefits other than pensions............ 398,074 354,604
Other long-term liabilities............................ 133,951 151,300
Commitments and contingencies
Stockholders' equity
Common Stock par value $.01:
Class A--authorized 30,000,000 shares; issued and
outstanding 22,100,000 shares in 1998 and 1997.... 221 221
Class B--authorized 65,000,000 shares; issued
21,188,240 shares in 1998 and 1997................ 212 212
Additional paid-in capital........................... 491,835 491,835
Retained earnings.................................... 417,528 345,876
Treasury stock, at cost; 1,109,700 shares in 1998.... (8,421) --
Accumulated other comprehensive income:
Minimum pension liability.......................... (51,074) (1,166)
---------- ----------
Total stockholders' equity......................... 850,301 836,978
---------- ----------
$2,483,975 $2,453,459
========== ==========
See notes to consolidated financial statements.
38
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
Cash Flows from Operating Activities
Net income..................................... $ 83,758 $213,503 $ 53,924
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................. 129,201 134,546 144,413
Carrying charges related to facility sales
and plant closings.......................... 3,874 19,322 22,385
Net gain on disposal of non-core assets...... (2,685) (58,745) (3,732)
Equity income of affiliates.................. (1,240) (1,576) (9,763)
Dividends from affiliates.................... 1,800 6,808 4,375
Long-term pension liability (net of change in
intangible pension asset)................... (31,692) (79,717) 18,430
Postretirement benefits...................... 26,470 19,028 29,459
Extraordinary item........................... -- 5,397 --
Cumulative effect of accounting change....... -- -- (11,100)
Deferred income taxes........................ (19,628) (21,600) (21,600)
Changes in working capital items:
Investments.................................. 25,000 (25,000) --
Receivables.................................. 38,466 4,757 34,773
Inventories.................................. (98,632) 56,365 (27,192)
Accounts payable............................. (3,962) 942 (20,682)
Accrued liabilities.......................... (102,164) 74,166 (38,209)
Other non-current assets....................... (12,903) 23,602 2,088
Other long-term liabilities.................... (3,923) (39,592) (18,664)
-------- -------- --------
Net Cash Provided by Operating Activities........ 31,740 332,206 158,905
Cash Flows from Investing Activities
Purchases of property, plant and equipment..... (171,071) (151,773) (128,621)
Net proceeds from sale of assets............... 1,372 -- 4,118
Net proceeds from disposal of non-core assets.. 3,278 320,602 3,732
Other.......................................... -- (362) --
-------- -------- --------
Net Cash Provided by (Used in) Investing
Activities...................................... (166,421) 168,467 (120,771)
Cash Flows from Financing Activities
Redemption of Preferred Stock--Series A........ -- (36,650) --
Redemption of Preferred Stock--Series B and
related settlement with Avatex................ -- (47,148) --
Repurchase of Class B common stock............. (8,421) -- --
Prepayment of related party debt............... -- (154,328) --
Cost associated with prepayment of related
party debt.................................... -- (4,500) --
Debt repayments................................ (34,232) (35,041) (35,750)
Borrowings..................................... 14,693 3,959 6,500
Payment of released Weirton benefit
liabilities................................... -- (12,119) (15,360)
Payment of unreleased Weirton liabilities and
their release in lieu of cash dividends on
Redeemable Preferred Stock--Series B -- (7,037) (8,066)
Dividend payments on common stock.............. (12,106) -- --
Dividend payments on Preferred Stock--Series A. -- (3,998) (4,033)
Dividend payments on Redeemable Preferred
Stock--Series B............................... -- (210) --
-------- -------- --------
Net Cash Used in Financing Activities............ (40,066) (297,072) (56,709)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... (174,747) 203,601 (18,575)
Cash and cash equivalents at beginning of the
year............................................ 312,642 109,041 127,616
-------- -------- --------
Cash and cash equivalents at end of the year..... $137,895 $312,642 $109,041
======== ======== ========
Supplemental Cash Payment Information
Interest and other financing costs paid........ $ 27,653 $ 38,882 $ 44,459
Income taxes paid.............................. 17,183 45,177 16,525
See notes to consolidated financial statements.
39
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK--SERIES B
Accumulated Redeemable
Common Common Preferred Additional Other Total Preferred
Stock-- Stock-- Stock-- Paid-In Retained Treasury Comprehensive Stockholders' Stock--
Class A Class B Series A Capital Earnings Stock Income Equity Series B
------- ------- --------- ---------- -------- -------- ------------- ------------- ----------
(Dollars in Thousands)
Balance at January 1,
1996.................. $221 $212 $36,650 $465,359 $ 99,660 $ -- $ (1,767) $600,335 $65,030
Comprehensive income:
Net income............ 53,924 53,924
Other comprehensive
income:
Minimum pension
liability............ 1,262 1,262
--------
Comprehensive income.. 55,186
--------
Amortization of excess
of book value over
redemption value of
Redeemable Preferred
Stock--Series B....... 1,500 1,500 (1,500)
Cumulative dividends on
Preferred Stock--
Series A and B........ (12,459) (12,459)
--------------------------------------------------------------------------------------------
Balance at December 31,
1996.................. 221 212 36,650 465,359 142,625 -- (505) 644,562 63,530
Comprehensive income:
Net income............ 213,503 213,503
Other comprehensive
income:
Minimum pension
liability............ (661) (661)
--------
Comprehensive income.. 212,842
--------
Amortization of excess
of book value over
redemption value of
Redeemable Preferred
Stock--Series B....... 1,354 1,354 (1,354)
Cumulative dividends on
Preferred Stock--
Series A and B........ (11,606) (11,606)
Redemption of Preferred
Stock--Series A....... (36,650) (36,650)
Redemption of
Redeemable Preferred
Stock--Series B and
related settlement
with Avatex........... 26,476 26,476 (62,176)
--------------------------------------------------------------------------------------------
Balance at December 31,
1997.................. 221 212 -- 491,835 345,876 -- (1,166) 836,978 --
Comprehensive income:
Net income............ 83,758 83,758
Other comprehensive
income:
Minimum pension
liability............ (49,908) (49,908)
--------
Comprehensive income.. 33,850
--------
Dividends on common
stock................. (12,106) (12,106)
Purchase of 1,109,700
shares of Class B
common stock.......... (8,421) (8,421)
--------------------------------------------------------------------------------------------
Balance at December 31,
1998.................. $221 $212 $ -- $491,835 $417,528 $(8,421) $(51,074) $850,301 $ --
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
40
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1. Description of the Business and Significant Accounting Policies
National Steel Corporation (together with its majority owned subsidiaries,
the "Company") is a domestic manufacturer engaged in a single line of
business, the production and processing of steel. The Company targets high
value-added applications of flat rolled carbon steel for sale primarily to the
automotive, construction and container markets. The Company also sells hot and
cold rolled steel to a wide variety of other users including the pipe and tube
industry and independent steel service centers. The Company's principal
markets are located throughout the United States.
Since 1986, the Company has had cooperative labor agreements with the United
Steelworkers of America (the "USWA"), the International Chemical Workers Union
Council of the United Food and Commercial Workers and other labor
organizations, which collectively represent approximately 82% of the Company's
employees. The Company entered into a six-year agreement with these labor
organizations in 1993 (the "1993 Settlement Agreement"). Additionally, the
1993 Settlement Agreement contains a no-strike clause also effective through
July 31, 1999. Scheduled negotiations reopened in 1996, and were ultimately
resolved utilizing the arbitration provisions provided for in the 1993
Settlement Agreement without any disruption to operations. The 1993 Settlement
Agreement provided that an individual designated by the International
President of the United Steelworkers of America would be elected to the
Company's Board of Directors. In 1999, the Company will bargain with the USWA
and other labor organizations to replace the agreements expiring between July
31, 1999 and December 31, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of National Steel
Corporation and its majority-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Substantially all revenue is recognized when products are shipped to
customers.
Cash Equivalents
Cash equivalents are short-term liquid investments consisting principally of
time deposits and commercial paper at cost which approximates market.
Generally, these investments have maturities of three months or less at the
time of purchase.
Credit Risk
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.
Investments
Investments consist of a time deposit at cost which had a maturity greater
than three months at the time of purchase.
41
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Risk Management Contracts
In the normal course of business, the Company enters into certain derivative
financial instruments, primarily commodity purchase swap contracts and zero
cost collars, to manage its exposure to fluctuations in commodity prices. The
Company designates the financial instruments as hedges for specific
anticipated transactions. Gains and losses from hedges are classified in the
consolidated statement of income in cost of goods sold when the contracts are
closed. Cash flows from hedges are classified in the consolidated statement of
cash flows under the same category as the cash flows from the related
anticipated transaction. The Company does not enter into any derivative
transactions for speculative purposes. (See Note 14. Risk Management
Contracts.)
Inventories
Inventories are stated at the lower of last-in, first-out ("LIFO") cost or
market.
Based on replacement cost, inventories would have been approximately $178.2
million and $183.9 million higher than reported at December 31, 1998 and 1997,
respectively. In 1998 there were no liquidations of LIFO inventory values.
During 1997 and 1996, certain inventory quantity reductions caused
liquidations of LIFO inventory values. These liquidations did not have a
material effect on net income.
The Company's inventories as of December 31, are as follows:
1998 1997
-------- --------
Dollars in
thousands
Inventories
Finished and semi-finished................................ $421,662 $358,486
Raw materials and supplies................................ 197,192 154,056
-------- --------
618,854 512,542
Less LIFO reserve......................................... 146,020 138,340
-------- --------
$472,834 $374,202
======== ========
Investments in Affiliated Companies
Investments in affiliated companies (corporate joint ventures and 20.0% to
50.0% owned companies) are stated at cost plus equity in undistributed
earnings since acquisition. Undistributed deficit of affiliated companies
included in retained earnings at December 31, 1998 and 1997 amounted to $1.9
million and $1.1 million, respectively. (See Note 10. Non-Operational Income
Statement Activities.)
In May 1997, the Company completed the acquisition of an additional 12% of
the equity in ProCoil Corporation ("ProCoil") for approximately $0.4 million.
This brings the Company's total ownership to 56% as of December 31, 1997.
ProCoil's financial position and results of operations have been included in
the consolidated financial statements from the date of this acquisition.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and include certain
expenditures for leased facilities. Interest costs applicable to facilities
under construction are capitalized. Capitalized interest amounted to $3.8
million in 1998, $5.3 million in 1997 and $4.0 million in 1996. Depreciation
of capitalized interest amounted to $3.6 million in 1998, $4.5 million in 1997
and $5.5 million in 1996.
42
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation
Depreciation of production facilities and capitalized lease obligations are
generally computed by the straight-line method over their estimated useful
life or, if applicable, remaining lease term, if shorter. The following useful
lives are used for financial statement purposes:
Land improvements.............. 10 - 20 years
Buildings...................... 15 - 40 years
Machinery and equipment........ 3 - 15 years
Depreciation of furnace relinings are computed on the basis of tonnage
produced in relation to estimated total production to be obtained from such
facilities.
Research and Development
Research and development costs are expensed when incurred as a component of
cost of products sold. Expenses for 1998, 1997 and 1996 were $11.0 million,
$10.9 million and $11.1 million, respectively.
Financial Instruments
Financial instruments consist of cash and cash equivalents and long-term
obligations (excluding capitalized lease obligations). The fair value of cash
and cash equivalents approximates their carrying amounts at December 31, 1998.
The carrying value of long-term obligations (excluding capitalized lease
obligations) exceeded the fair value by approximately $4.3 million at December
31, 1998. The fair value is estimated using discounted cash flows based on
current interest rates for similar issues.
Earnings per Share (Basic and Diluted)
Basic Earnings per Share ("EPS") is computed by dividing net income
available to common stockholders by the weighted average number of common
stock shares outstanding during the year. Diluted EPS is computed by dividing
net income available to common stockholders by the weighted-average number of
common stock shares outstanding during the year plus potential dilutive
instruments such as stock options. The effect of stock options on diluted EPS
is determined through the application of the treasury stock method, whereby
proceeds received by the Company based on assumed exercises are hypothetically
used to repurchase the Company's common stock at the average market price
during the period.
The calculation of the dilutive effect of stock options on the weighted
average shares is as follows:
1998 1997 1996
------- ------- -------
Shares in thousands
Denominator for basic earnings per share--
weighted-average shares..................... 43,202 43,288 43,288
Effect of stock options...................... 69 485 6
------- ------- -------
Denominator for diluted earnings per share... 43,271 43,773 43,294
======= ======= =======
Options to purchase common stock of 429,967 shares in 1998, 194,000 shares
in 1997 and 1,154,235 shares in 1996 were outstanding, but were excluded from
the computation of diluted earnings per share because the exercise prices were
greater than the average market price of the common shares during those years.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee stock options. Under
43
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
APB 25, because the exercise price of employee stock options equals or exceeds
the market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). (See Note 15. Long-Term Incentive
Plan.)
Use of Estimates
Preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and
expense during the year. Actual results could differ from those estimates.
Reclassifications
Certain amounts in prior years consolidated financial statements have been
reclassified to conform with the current year presentation.
Impact of Recently Issued Accounting Standards
During the first quarter of 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income ("SFAS 130"). Comprehensive income is defined
as the change in equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. Consequently, the Company
has reported its changes in minimum pension liabilities, as required by SFAS
130, as comprehensive income in the appropriate consolidated financial
statements presented herein.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
authoritative guidance on when internal-use software costs should be
capitalized and when these costs should be expensed as incurred. Effective
January 1, 1998, the Company adopted SOP 98-1. During 1998, the Company
capitalized $19.2 million of such costs in accordance with this guidance.
Effective December 31, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131
superseded SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 did not affect
results of operations or financial position, but did affect the disclosure for
segment information. (See Note 4. Segment Information.)
Effective December 31, 1998, the Company adopted the provisions of SFAS No.
132, Employers' Disclosures about Pensions and Other Postretirement Benefits
("SFAS 132"). SFAS 132 supersedes the disclosure requirements in SFAS No. 87,
Employers' Accounting for Pensions, and SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. The overall objective of SFAS
132 is to improve and standardize disclosures about pensions and other
postretirement benefits and to make the required information more
understandable. The adoption of SFAS 132 did not affect results of operations
or financial position, but did affect the disclosures for pensions and other
postretirement benefits. (See Note 6. Pensions and Other Postretirement
Benefits.)
44
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 1999. SFAS
133 will require the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. The Company
has not yet determined what the effect of SFAS 133 will be on earnings and the
financial position of the Company.
Note 2. Audit Committee Inquiry and Securities and Exchange Commission Inquiry
In the third quarter of 1997, the Audit Committee of the Company's Board of
Directors was informed of allegations about managed earnings, including excess
reserves and the accretion of such reserves to income over multiple periods,
as well as allegations about deficiencies in the Company's system of internal
controls. The Audit Committee engaged legal counsel who, with the assistance
of an accounting firm, inquired into these matters. The Company, based upon
the inquiry, restated its financial statements for certain prior periods. On
January 29, 1998, the Company filed a Form 10-K/A for 1996 and Forms 10-Q/A
for the first, second and third quarters of 1997 reflecting the restatements.
See these Forms for information about the restatement, including the effect of
the restatement on items previously presented in Management's Discussion and
Analysis of Results of Operations and Financial Condition.
On December 15, 1997, the Board of Directors approved the termination of the
Company's Vice-President--Finance in connection with the Audit Committee
inquiry. During January 1998, legal counsel to the Audit Committee issued its
report to the Audit Committee, and the Audit Committee approved the report and
concluded its inquiry. On January 21, 1998, the Board of Directors accepted
the report and approved the recommendations, except for the recommendation to
revise the Audit Committee Charter, which was approved on February 9, 1998.
The report found certain misapplications of generally accepted accounting
principles and accounting errors, including excess reserves, which have been
corrected in the amended filings, referred to above. The report found that the
accretion of excess reserves to income during the first, second and third
quarters of 1997, as described in the Forms 10-Q/A for those quarters, may
have had the appearance of management of earnings as the result of errors in
judgement and the misapplication of generally accepted accounting principles.
However, the report concluded that these errors do not appear to have involved
the intentional misstatement of the Company's accounts. The report also found
weaknesses in internal controls and recommended various improvements in the
Company's system of internal controls, including a comprehensive review of
such controls, a restructuring of the Company's finance and accounting
department, and expansion of the role of the internal audit functions, as well
as corrective measures to be taken related to the specific causes of the
accounting errors. The Company is in the process of implementing these
recommendations with the involvement of the Audit Committee. In accordance
with the recommendations, a major independent accounting and consulting firm
was engaged in early 1998 to examine and report on the Company's written
assertion about the effectiveness of the internal control over financial
reporting. Its report is expected to be concluded in March 1999.
The Securities and Exchange Commission (the "Commission") has authorized an
investigation pursuant to a formal order of investigation relating to the
matters described above. The Company has been cooperating with the staff of
the Commission and intends to continue to do so.
Additionally, a complaint has been filed seeking shareholder class action
status and alleging violations of the federal securities laws generally
relating to the matters described above. The Company believes that the lawsuit
is without merit and intends to defend against it vigorously.
45
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Capital Structure
At December 31, 1998, the Company's capital structure was as follows:
Class A Common Stock: At December 31, 1998, the Company had 30,000,000
shares of $.01 par value Class A Common Stock authorized, of which
22,100,000 shares were issued and outstanding and owned by NKK U.S.A.
Corporation. Each share is entitled to two votes. Dividends of $0.28
per share were paid in 1998. No cash dividends were paid on the Class A
Common Stock in 1997 or 1996. As a result of its ownership of the Class
A Common Stock, NKK U.S.A. Corporation controls approximately 68.8% of
the voting power of the Company.
Class B Common Stock: At December 31, 1998, the Company had 65,000,000
shares of $.01 par value Class B Common Stock authorized, 21,188,240
shares issued, and 20,078,540 outstanding net of 1,109,700 shares of
Treasury Stock. Dividends of $0.28 per share were paid in 1998. No cash
dividends were paid on the Class B Common Stock in 1997 or 1996. All of
the issued and outstanding shares of Class B Common Stock are publicly
traded and are entitled to one vote.
On August 26, 1998, the Board of Directors authorized the repurchase of up
to two million shares of the Class B Common Stock. As of December 31, 1998,
the Company had repurchased 1,109,700 shares of the Class B Common Stock at a
cost of $8.4 million.
In prior years, the Company had two series of preferred stock outstanding.
Both of these series of stock were redeemed in the fourth quarter of 1997.
Prior to redemption, which occurred on December 29, 1997, there were 5,000
shares of $1.00 par value Series A Preferred Stock issued and outstanding. All
of this stock was owned by NKK U.S.A Corporation. Annual dividends of $806.30
per share were cumulative and payable quarterly. Dividend payments of
approximately $4 million were paid in 1997 and 1996. This stock was redeemed
at its book value of approximately $36.7 million plus accrued dividends
through the redemption date. This stock had not been subject to mandatory
redemption provisions.
The Company also had 10,000 shares of Redeemable Preferred Stock--Series B
issued and outstanding prior to the redemption of these shares on November 24,
1997. This stock had been owned by Avatex Corporation ("Avatex"--formerly
known as FoxMeyer Health Corporation). Annual dividends of $806.30 per share
were cumulative and payable quarterly. This stock was subject to mandatory
redemption on August 5, 2000. Concurrent with the stock repurchase in 1997,
the Company and Avatex settled Avatex's obligations relating to certain
Weirton liabilities for which Avatex agreed to indemnify the Company in prior
recapitalization programs. In 1997, dividends were accrued and paid on this
stock through November 4, 1997.
The mandatory redemption price of the Redeemable Preferred Stock--Series B
was $58.3 million. The difference between this price and the book value of the
stock was being amortized to retained earnings at a rate of $1.5 million per
year.
Note 4. Segment Information
The Company has one reportable segment: Steel. The Steel segment consists of
two operating segments, the Regional Division and the Granite City Division,
that produce and sell hot and cold rolled steel to automotive, construction,
container, and pipe and tube customers as well as independent steel service
centers. The Company's operating segments are primarily organized and managed
by geographic location. A third operating segment has been combined with "All
Other" as it does not meet the quantitative thresholds for determining
reportable segments. "All Other" revenues from external customers are
attributable primarily to steel processing, warehousing and transportation
services.
46
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company evaluates performance and allocates resources based on operating
profit or loss before income taxes. The accounting policies of the Steel
segment are the same as described in Note 1 to the financial statements.
Intersegment sales and transfers are accounted for at market prices and are
eliminated in consolidation.
1998 1997
--------------------------------- --------------------------------
Steel All Other Total Steel All Other Total
---------- ---------- ---------- ---------- ---------- ----------
Dollars in thousands
Revenues from external
customers.............. $2,829,122 $ 18,922 $2,848,044 $3,121,447 $ 18,212 $3,139,659
Intersegment revenues... 612,443 3,130,971 3,743,414 656,197 3,414,572 4,070,769
Depreciation expense.... 99,446 29,755 129,201 111,972 22,574 134,546
Segment income (loss)
from operations........ 128,856 (32,599) 96,257 141,292 49,701 190,993
Segment assets.......... 1,524,285 959,690 2,483,975 1,400,221 1,053,238 2,453,459
Expenditures for long-
lived assets........... 128,573 42,498 171,071 127,600 24,173 151,773
Included in "All Other" intersegment revenues in 1998 and 1997,
respectively, is $2,886,938 and $3,155,874 of qualified trade receivables sold
to National Steel Funding Corporation, a wholly-owned subsidiary.
The following table sets forth the percentage of the Company's revenues from
various markets for 1998, 1997 and 1996:
1998 1997 1996
----- ----- -----
Automotive........................................... 29.5% 27.0% 27.6%
Construction......................................... 26.6 24.8 21.6
Containers........................................... 11.3 11.0 10.6
Pipe and Tube........................................ 5.6 7.3 6.5
Service Centers...................................... 19.5 21.3 20.2
All Other............................................ 7.5 8.6 13.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
No single customer accounted for more than 10.0% of net sales in 1998, 1997
or 1996. Export sales accounted for approximately 2.1% of revenues in 1998,
2.0% in 1997 and 0.8% in 1996. The Company has no long-lived assets that are
maintained outside of the United States.
47
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Long-Term Obligations
Long-term obligations were as follows:
December 31,
-----------------
1998 1997
-------- --------
Dollars in
thousands
First Mortgage Bonds, 8.375% Series due August 1, 2006,
with general first liens on principal plants, properties
and certain subsidiaries................................. $ 75,000 $ 75,000
Vacuum Degassing Facility Loan, 10.336% fixed rate due in
semi-annual installments through 2000, with a first
mortgage in favor of the lenders......................... 12,431 19,753
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......................... 101,204 107,873
Pickle Line Loan, 7.726% fixed rate due in equal semi-
annual installments through 2007, with a first mortgage
in favor of the lender................................... 73,689 78,788
ProCoil, various rates and due dates...................... 24,143 18,959
Capitalized lease obligation.............................. 16,619 21,026
Other..................................................... 19,884 21,110
-------- --------
Total long-term obligations............................... 322,970 342,509
Less long-term obligations due within one year............ 37,203 31,533
-------- --------
Long-term obligations..................................... $285,767 $310,976
======== ========
Future minimum payments for all long-term obligations and leases as of
December 31, 1998 are as follows:
Other Long-
Capitalized Operating Term
Lease Leases Obligations
----------- --------- -----------
Dollars in thousands
1999..................................... $ 6,712 $ 62,703 $ 32,272
2000..................................... 6,712 54,392 25,008
2001..................................... 6,712 42,969 24,826
2002..................................... -- 39,616 34,300
2003..................................... -- 44,639 25,712
Thereafter............................... -- 71,224 164,233
-------- -------- --------
Total payments........................... $ 20,136 $315,543 $306,351
======== ========
Less amount representing interest ....... 3,517
Less current portion of obligation under
capitalized lease....................... 4,931
--------
Long-term obligation under capitalized
lease .................................. $ 11,688
========
Asset under capitalized lease:
Machinery and equipment.................. $ 37,000
Less accumulated depreciation............ (29,463)
--------
$ 7,537
========
Operating leases include a coke battery facility which services Granite City
and expires in 2004, a continuous caster and the related ladle metallurgy
facility which services Great Lakes and expires in 2008, and an electrolytic
galvanizing facility which services Great Lakes and expires in 2001. Upon
expiration, the
48
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $73.1 million in 1998, $75.3 million in 1997, and $72.2 million in
1996.
Credit Arrangements
The Company's credit arrangements consist of a Receivables Purchase
Agreement (the "Receivables Purchase Agreement") with commitments of up to
$200.0 million and an expiration date of September 2002 and a $100.0 million
and a $50.0 million credit facility, both of which are secured by the
Company's inventories (the "Inventory Facilities") and expire in May 2000 and
July 1999, respectively.
The Company is currently in compliance with all covenants of, and
obligations under, the Receivables Purchase Agreement, the Inventory
Facilities and other debt instruments. On December 31, 1998, there were no
cash borrowings outstanding under the Receivables Purchase Agreement or the
Inventory Facilities, and outstanding letters of credit under the Receivables
Purchase Agreement totaled $79.3 million. During 1998, the maximum
availability under the Receivables Purchase Agreement, after reduction for
letters of credit outstanding, varied from $76.3 million to $120.7 million and
was $107.4 million as of December 31, 1998.
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 $454.6
million was free of such limitations at December 31, 1998. In addition, any
dividend payments must be matched by a like contribution into a Voluntary
Employees' Beneficiary Association Trust ("VEBA Trust"), the amount of which
is calculated under the terms of the 1993 Settlement Agreement between the
Company and the USWA, until the asset value of the VEBA Trust exceeds $100.0
million. The asset value of the VEBA Trust at December 31, 1998 was
approximately $112.6 million. No matching dividend contribution to the VEBA
Trust was required for the year ended December 31, 1998.
49
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Pension and Other Postretirement Employee Benefits
The Company has various qualified and nonqualified pension plans and other
postretirement employee benefit ("OPEB") plans for its employees. The
following tables provide a reconciliation of the changes in the plans' benefit
obligations and fair value of assets over the periods ended September 30, 1998
and 1997, and the plans funded status at September 30 reconciled to the
amounts recognized on the balance sheet on December 31, 1998 and 1997:
Other Postretirement
Pension Benefits Benefits
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Dollars in thousands
Reconciliation of benefit
obligation
Benefit obligation,
October 1 prior year..... $2,077,236 $1,465,446 $ 710,780 $ 615,539
Service cost.............. 27,260 24,080 11,207 11,256
Interest cost............. 151,911 115,070 52,341 48,623
Participant contributions. -- -- 4,879 4,868
Other contributions....... 7,257 -- -- --
Plan amendments........... -- (1,576) -- --
Actuarial loss (gain)..... 113,066 92,102 67,558 (26,047)
Assumption of Weirton..... -- 488,961 -- 101,900
Benefits paid............. (163,523) (106,847) (51,864) (45,359)
---------- ---------- ---------- ----------
Benefit obligation,
September 30............. $2,213,207 $2,077,236 $ 794,901 $ 710,780
---------- ---------- ---------- ----------
Reconciliation of fair value
of plan assets
Fair value of plan assets,
October 1 prior year..... $1,846,486 $1,181,708 $ 82,668 $ 48,287
Actual return on plan
assets................... 17,142 216,665 9,610 18,380
Company contributions..... 122,776 79,941 51,985 56,492
Participant contributions. -- -- 4,879 4,868
Other contributions....... 7,257 -- -- --
Assumption of Weirton..... -- 475,019 -- --
Benefits paid............. (163,523) (106,847) (51,864) (45,360)
---------- ---------- ---------- ----------
Fair value of plan assets,
September 30............. $1,830,138 $1,846,486 $ 97,278 $ 82,667
---------- ---------- ---------- ----------
Funded Status
Funded status, September
30....................... $ (383,069) $ (230,750) $ (697,623) $ (628,113)
Unrecognized actuarial
(gain) loss.............. 124,714 (130,288) (95,085) (169,871)
Unamortized prior service
cost..................... 75,382 86,206 -- --
Unrecognized net
transition obligation.... 26,575 35,347 373,230 400,515
Fourth quarter
contributions............ 13,036 9,649 11,404 15,865
---------- ---------- ---------- ----------
Net amount recognized,
December 31.............. $ (143,362) $ (229,836) $ (408,074) $ (381,604)
========== ========== ========== ==========
In connection with the 1993 Settlement Agreement between the Company and the
United Steelworkers of America ("USWA"), the Company began prefunding the OPEB
obligation with respect to USWA represented employees beginning in 1994.
Pursuant to the terms of the 1993 Settlement Agreement, a VEBA Trust was
established. Under the terms of the agreement, the Company agreed to
contribute a minimum of $10.0 million annually and, under certain
circumstances, additional amounts calculated as set forth in the 1993
Settlement Agreement. In 1998, there was no contribution made to the VEBA
Trust due to a special agreement with the USWA. In 1997, the Company
contributed $16.0 million to the VEBA Trust.
50
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other contributions reflect reimbursements from the Weirton Steel
Corporation ("Weirton"), the Company's former Weirton Steel Division, for
retired Weirton employees whose pension benefits are paid by the Company but
are partially the responsibility of Weirton. An offsetting amount is reflected
in the benefits paid.
The following table provides the amounts recognized in the consolidated
balance sheet as of December 31 of both years:
Other
Postretirement
Pension Benefits Benefits
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Dollars in thousands
Prepaid benefit cost............ $ 20,561 $ 8,961 $ N/A $ N/A
Accrued benefit liability....... (163,923) (238,797) (408,074) (381,604)
Additional minimum liability.... (140,571) (2,315) N/A N/A
Intangible asset................ 89,497 1,149 N/A N/A
Accumulated other comprehensive
income......................... 51,074 1,166 N/A N/A
--------- --------- --------- ---------
Recognized amount............... $(143,362) $(229,836) $(408,074) $(381,604)
========= ========= ========= =========
The projected benefit obligation, accumulated benefit obligation ("ABO"),
and fair value of plan assets for pension plans with an ABO in excess of plan
assets were $1,747.0 million, $1,613.8 million and $1,331.6 million,
respectively, as of December 31, 1998 and $1,490.2 million, $1,372.7 million
and $1,253.8 million, respectively, as of December 31, 1997.
The following table provides the components of net periodic benefit cost for
the plans for fiscal years 1998, 1997 and 1996.
Other Postretirement
Pension Benefits Benefits
------------------------------ -------------------------
1998 1997 1996 1998 1997 1996
--------- --------- -------- ------- ------- -------
Dollars in thousands
Service cost............ $ 27,260 $ 24,081 $ 26,010 $11,207 $11,256 $12,546
Interest cost........... 151,911 115,071 111,454 52,341 48,623 47,812
Expected return on
assets................. (159,323) (101,146) (96,247) (8,295) (5,114) (3,422)
Prior service cost
amortization........... 10,824 11,196 11,196 -- -- --
Actuarial (gain)/loss
amortization........... 246 (34) 286 (8,544) (6,631) (1,465)
Transition amount
amortization........... 8,772 8,769 9,474 27,285 27,285 27,759
--------- --------- -------- ------- ------- -------
Net periodic benefit
cost................... $ 39,690 $ 57,937 $ 62,173 $73,994 $75,419 $83,230
========= ========= ======== ======= ======= =======
The assumptions used in the measuring of the Company's benefit obligations
and costs are shown in the following table:
1998 1997 1996
----- ----- -----
Weighted-average assumptions, September 30
Discount rate......................................... 6.75% 7.50% 8.00%
Expected return on plan assets--Pension............... 9.75% 9.75% 9.25%
Expected return on plan assets--Retiree Welfare....... 9.75% 9.25% 9.25%
Rate of compensation increase......................... 4.20% 4.70% 4.70%
51
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company generally uses a September 30 measurement date. As discussed in
Note 9. Weirton Liabilities, the Company assumed the pension and
postretirement benefit plans of Weirton on November 30, 1997. As a result, the
plan assets, benefit obligation and cost for the Weirton plans included in the
1998 disclosures are based on a November 30 measurement date. The discount
rate used to measure the benefit obligation for the Weirton plans at November
30, 1998 is 7.0%. All other assumptions are the same as those disclosed above.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects on 1998
service and interest cost and the accumulated postretirement benefit
obligation at September 30, 1998:
1% 1%
Increase Decrease
---------- ----------
Dollars in thousands
Effect on total of service and interest cost
components of net periodic postretirement health
care benefit cost................................ $ 7,475 $ (6,669)
Effect on the health care component of the
accumulated postretirement benefit obligation.... 73,864 (68,916)
The Company has assumed a 6% health-care cost trend rate at September 30,
1998, reducing 0.3% for 3 years, reaching an ultimate trend rate of 5.0% in
2002.
Note 7. Other Long-Term Liabilities
Other long-term liabilities at December 31 consisted of the following:
1998 1997
-------- --------
Dollars in
thousands
Deferred gain on sale leasebacks .................. $ 14,268 $ 18,618
Insurance and employee benefits (excluding pensions
and OPEBs)........................................ 84,474 94,861
Plant closing...................................... 15,314 13,720
Other.............................................. 19,895 24,101
-------- --------
Total Other Long-Term Liabilities.................. $133,951 $151,300
======== ========
52
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8. Income Taxes
Deferred income taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities at December 31 are as follows:
1998 1997
--------- --------
Dollars in
thousands
Deferred tax assets
Accrued liabilities ............................... $ 82,600 $127,300
Employee benefits ................................. 222,100 176,300
Net operating loss ("NOL") carryforwards........... 600 17,400
Leases ............................................ 7,100 10,000
Federal tax credits................................ 85,100 66,200
Other.............................................. 32,900 33,400
--------- --------
Total deferred tax assets............................ 430,400 430,600
Valuation allowance................................ (32,900) (52,500)
--------- --------
Deferred tax assets net of valuation allowance..... 397,500 378,100
Deferred tax liabilities
Book basis of property in excess of tax basis...... (168,200) (174,300)
Excess tax LIFO over book.......................... (14,800) (21,800)
Other.............................................. (11,900) (8,900)
--------- --------
Total deferred tax liabilities....................... (194,900) (205,000)
--------- --------
Net deferred tax assets after valuation allowance.... $ 202,600 $173,100
========= ========
In 1998 and 1997, the Company determined that it was more likely than not
that approximately $525 million and $450 million, respectively, of future
taxable income would be generated to justify the net deferred tax assets after
the valuation allowance. Accordingly, the Company recognized additional
deferred tax assets of $29.5 million in 1998 and $21.6 million in both of 1997
and 1996.
Significant components of income taxes (credit) are as follows:
1998 1997 1996
-------- -------- --------
Dollars in thousands
Current taxes payable:
Federal tax............................... $ 21,653 $ 35,536 $ 10,426
State and foreign......................... 2,274 2,295 334
Deferred tax credit......................... (19,628) (21,600) (21,600)
-------- -------- --------
Income taxes (credit)....................... $ 4,299 $ 16,231 $(10,840)
======== ======== ========
53
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of income tax computed at the federal statutory tax rates
to the recorded income taxes (credit) is as follows:
1998 1997 1996
-------- -------- --------
Dollars in thousands
Tax at federal statutory rates............. $ 30,800 $ 82,300 $ 11,200
Benefit of operating loss carryforward..... (28,600) (41,400) (9,900)
Temporary differences for which benefit was
recognized (net).......................... (6,400) (39,300) (27,300)
Depletion.................................. (2,100) (5,200) (1,900)
Dividend exclusion......................... (600) (2,000) (1,200)
Alternative minimum tax.................... 21,653 35,536 10,426
Other...................................... (10,454) (13,705) 7,834
-------- -------- --------
Income taxes (credit)...................... $ 4,299 $ 16,231 $(10,840)
======== ======== ========
At December 31, 1998, the Company has utilized all federal NOL
carryforwards, but has unused alternative minimum tax credit and other tax
credit carryforwards of approximately $85.1 million which may be applied to
offset its future regular federal income tax liabilities. These tax credits
may be carried forward indefinitely.
Note 9. Weirton Liabilities
In 1984, NKK purchased a 50% equity interest in the Company from Avatex. As
a part of these transactions, Avatex agreed to indemnify the Company, based on
agreed-upon assumptions, for certain ongoing employee benefit liabilities
related to the Company's former Weirton Steel Division ("Weirton"), which had
been divested through an Employee Stock Ownership Plan arrangement in 1984. In
1990, NKK purchased an additional 20% equity interest in the Company from
Avatex. As a part of the 1990 transaction, Avatex contributed $146.6 million
to the Company for employee benefit related liabilities and agreed that
dividends from the Redeemable Preferred Stock--Series B would be primarily
used to fund pension obligations of Weirton. Under this arrangement, it was
agreed that the Company would release Avatex from its indemnification
obligation at the time of the scheduled redemption of the Redeemable Preferred
Stock--Series B or at an earlier date if agreed to by the parties. The
Redeemable Preferred Stock--Series B was scheduled to be redeemed in the year
2000. Avatex also agreed in 1984 to indemnify the Company against certain
environmental liabilities related to Weirton and the Company's subsidiary, The
Hanna Furnace Corporation ("Environmental Liabilities"). In 1994, Avatex
prepaid $10.0 million to the Company with respect to these Environmental
Liabilities. In 1995, the Company redeemed one half of the outstanding
Redeemable Preferred Stock--Series B for approximately $67 million, with the
proceeds going to partially fund the Weirton pension obligations.
During the fourth quarter of 1997, the Company redeemed all remaining
Redeemable Preferred Stock --Series B held by Avatex, which had a book value
including accrued dividends of $62.6 million. In addition, the Company
finalized a settlement with Avatex regarding certain employee benefit
liabilities associated with Weirton, as well as the Environmental Liabilities.
As a result of the redemption and settlement, in 1997, the Company made a
payment of $59.0 million to Avatex and paid an additional $10.0 million,
without interest, in 1998. In connection with the settlement, Avatex released
any claims to amounts received, or to be received, with respect to settlements
reached in a lawsuit brought by the Company and Avatex against certain former
insurers of the Company, wherein recovery was sought for past and future
environmental claims, which included the Environmental Liabilities. During the
fourth quarter of 1997, the Company recognized insurance proceeds (net of
taxes and expenses) aggregating approximately $13.6 million related to the
settlement of such lawsuit. The Company also retained the $9.2 million
remaining balance of the Environmental Liabilities prepayment made by Avatex
in 1994.
54
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under its settlement with Avatex, the Company has recorded liabilities for
the Weirton pension obligation, certain other Weirton employee benefit
liabilities and the Environmental Liabilities, and has relieved Avatex from
any future indemnity obligation with regard to all such liabilities.
Also, as a result of the redemption of the Company's Redeemable Preferred
Stock--Series B, NKK U.S.A. Corporation, a subsidiary of NKK Corporation, no
longer has any obligation to Avatex relating to a "put" agreement entered into
in 1990 at the time this preferred stock was issued.
The redemption of Redeemable Preferred Stock--Series B and the related
transactions described above, which are the resolution of the 1990
recapitalization plan, were reflected as a capital transaction resulting in an
increase in additional paid-in capital of approximately $26.5 million in 1997.
Note 10. Non-Operational Income Statement Activities
A number of non-operational activities are reflected in the consolidated
statement of income in each of the three years ended December 31, 1998. A
discussion of these items follows.
Unusual Credit
During the third quarter of 1998, the Company recorded an unusual credit of
$26.6 million resulting from the settlement of a lawsuit seeking a reduction
in the assessed value of the Company's real and personal property at Great
Lakes relating to the 1991 through 1997 tax years. The Company received tax
refunds and was granted a lower assessment base that is expected to result in
future tax savings.
Net Gain on the Disposal of Non-Core Assets and Other Related Activities
In 1998, 1997 and 1996, the Company disposed, or made provisions for
disposing of, certain non-core assets. The effects of these transactions and
other activities relating to non-core assets are presented as a separate
component in the consolidated statements of income. A discussion of these
items follows.
During the second quarter of 1998, the Company sold two properties located
at Midwest. The Company received proceeds (net of taxes and expenses) of $3.3
million and recorded a net gain of $2.7 million related to the sales.
On April 1, 1997, the Company completed the sale of its 21.7% minority
equity interest in the Iron Ore Company of Canada ("IOC") to North Limited, an
Australian mining and metal company ("North"). The Company received proceeds
(net of taxes and expenses) of $75.3 million from North in exchange for its
interest in IOC and recorded a $37.0 million gain. The Company will continue
to purchase iron ore at fair market value from IOC pursuant to the terms of
long-term supply agreements.
On June 12, 1997, the Company completed the sale of the Great Lakes No. 5
coke battery and other related assets, including coal inventories, to a
subsidiary of DTE Energy Company ("DTE"). The Company received proceeds (net
of taxes and expenses) of $234.0 million in connection with the sale and
recorded a total loss on the transaction of $14.3 million. The Company
utilized a portion of the proceeds to prepay the remaining $154.3 million of
the related party coke battery debt, resulting in an extraordinary loss of
$5.4 million (net of a tax benefit of $1.4 million). As part of the
arrangement, the Company has agreed to operate the battery under an operation
and maintenance agreement executed with DTE, and will purchase the majority of
the coke produced from the battery under a requirements contract, with the
price being adjusted during the term of the contract, primarily to reflect
changes in production costs.
55
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the second quarter of 1997, the Company also recorded a charge of $3.6
million for exit costs related to the decision to cease operations of American
Steel Corporation, a wholly-owned subsidiary which pickled and slit steel.
In 1997, the Company sold four non-core coal properties and recorded a net
gain of $11.8 million. In conjunction with one of the property sales, the
purchaser agreed to assume the potential environmental liabilities and as a
result, the Company eliminated the related accrual of approximately $8.0
million. Additionally, during 1997, the Company received new information
related to closed coal properties employee benefit liabilities and other
expenses and reduced the related accrual by $19.8 million. In aggregate the
above coal properties' transactions resulted in a gain of $39.6 million in
1997.
In September 1996, the Company sold a portion of land that had previously
been received in conjunction with the settlement of a lawsuit and recorded a
net gain of $3.7 million.
Extraordinary Item
An extraordinary loss of $5.4 million (net of a tax benefit of $1.4 million)
was reflected in 1997 income. This loss relates to early debt repayment costs
related to debt associated with the Great Lakes No. 5 coke battery, which was
sold in the second quarter of 1997.
Cumulative Effect of Accounting Change
The Company reflected in its 1996 consolidated statement of income the
cumulative effect of an accounting change, which resulted from a change in the
valuation date used to measure pension and OPEB liabilities. The cumulative
effect of this change was $11.1 million. The valuation date to measure the
liabilities was changed from December 31 to September 30 and was made in order
to provide more timely information with respect to pension and OPEB
provisions.
Note 11. Related Party Transactions
Summarized below are transactions between the Company and NKK (the Company's
principal stockholder), and other affiliates accounted for using the equity
method.
NKK Transactions
On October 23, 1998, the Company entered into a Turnkey Engineering and
Construction Contract with NKK Steel Engineering, Inc. ("NKK SE"), a
subsidiary of NKK. The Agreement was unanimously approved by all directors of
the Company who were not then, and never have been, employees of NKK. Pursuant
to this agreement, NKK SE will design, engineer, construct and install a
continuous galvanizing facility at Great Lakes. The purchase price payable by
the Company to NKK SE for the facility is approximately $139.7 million. During
1998, $15.2 million was paid to NKK SE relating to the above mentioned
contract and $6.6 million is included in accounts payable, net of a $1.6
million retention, at December 31, 1998.
Effective May 1, 1995, the Company entered into an Agreement for the
Transfer of Employees ("Agreement") which supercedes a prior arrangement with
NKK. The Agreement was unanimously approved by all directors of the Company
who were not then, and never have been, employees of NKK. Pursuant to the
terms of this Agreement, technical and business advice is provided through NKK
employees who are transferred to the employ of the Company. The Agreement
further provides that the term can be extended from year to year after
expiration of the initial term, if approved by NKK and a majority of the
directors of the Company who were not then, and never have been, employees of
NKK. The Agreement has been extended through calendar
56
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
year 1999 in accordance with this provision. Pursuant to the terms of the
Agreement, the Company is obligated to reimburse NKK for the costs and
expenses incurred by NKK in connection with the transfer of these employees,
subject to an agreed upon cap. The cap was $11.7 million during the initial
term and $7 million during each of 1999, 1998 and 1997. The Company incurred
expenditures of approximately $6.0 million, $6.6 million and $6.4 million
under this Agreement during 1998, 1997 and 1996, respectively. In addition,
the Company utilized various other engineering services provided by NKK and
incurred expenditures of approximately $0.9 million, $1.3 million and $0.3
million for these services during 1998, 1997 and 1996, respectively.
In 1998, cash dividends of $0.28 per share, or approximately $6.2 million,
were paid on 22,100,000 shares of Class A Common Stock owned by NKK. In 1997
and 1996, cash dividends of approximately $4.0 million were paid on the
Preferred Stock--Series A. On December 29, 1997, all shares of Preferred
Stock--Series A were redeemed. (See Note 3. Capital Structure.)
The Company prepaid related party debt of $154.3 million in June of 1997.
(See Note 10. Non-Operational Income Statement Activity.)
During 1997, the Company purchased approximately $4.3 million of finished
coated steel produced by NKK, with such purchase made from trading companies
in arms length transactions.
Affiliate Transactions
The Company is contractually required to purchase its proportionate share of
raw material production or services from certain affiliated companies. Such
purchases of raw materials and services aggregated $34.3 million in 1998,
$38.3 million in 1997 and $11.4 million in 1996. Additional expenses were
incurred in connection with the operation of a joint venture agreement. (See
Note 13. Other Commitments and Contingencies.) Accounts payable at December
31, 1998 and 1997 included amounts with affiliated companies accounted for by
the equity method of $3.8 million and $5.3 million, respectively. Accounts
receivable at December 31, 1998 and 1997 included amounts with affiliated
companies of $5.5 million and $1.2 million, respectively.
The Company sold various prime and non-prime steel products to an affiliated
company, under a supply agreement that approximates market price. Sales
totaled approximately $12.6 million in 1998 and $13.1 million in 1997.
Note 12. Environmental Liabilities
The Company's operations are subject to numerous laws and regulations
relating to the protection of human health and the environment. Because these
environmental laws and regulations are quite stringent and are generally
becoming more stringent, the Company has expended, and can be expected to
expend in the future, substantial amounts for compliance with these laws and
regulations. Due to the possibility of future changes in circumstances or
regulatory requirements, the amount and timing of future environmental
expenditures could vary substantially from those currently anticipated.
It is the Company's policy to expense or capitalize, as appropriate,
environmental expenditures that relate to current operating sites.
Environmental expenditures that relate to past operations and which do not
contribute to future or current revenue generation are expensed. With respect
to costs for environmental assessments or remediation activities, or penalties
or fines that may be imposed for noncompliance with such laws and regulations,
such costs are accrued when it is probable that liability for such costs will
be incurred and the amount of such costs can be reasonably estimated. The
Company has accrued an aggregate liability for such costs of approximately
$3.8 million and $4.4 million as of December 31, 1998 and 1997, respectively.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state statutes generally impose joint
and several liability on present and former
57
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 CERCLA and other environmental cleanup proceedings. At some of these
sites, the Company does not have sufficient information regarding the nature
and extent of the contamination, the wastes contributed by other PRPs, or the
required remediation activity to estimate its potential liability. With
respect to those sites for which the Company has sufficient information to
estimate its potential liability, the Company has accrued an aggregate
liability of approximately $11.2 million and $12.3 million as of December 31,
1998 and 1997, respectively.
The Company has also recorded reclamation and other costs to restore its
shutdown coal locations to their original and natural state, as required by
various federal and state mining statutes. The Company has recorded an
aggregate liability of approximately $2.0 million at both December 31, 1998
and 1997 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. Although the outcome of any of the matters described, to
the extent they exceed any applicable accruals or insurance coverages, could
have a material adverse effect on the Company's results of operations and
liquidity for the applicable period, the Company has no reason to believe that
such outcomes, whether considered individually or in the aggregate, will have
a material adverse effect on the Company's financial condition.
Note 13. Other Commitments and Contingencies
In September 1990, the Company entered into a joint venture agreement to
build a 400,000 ton per year continuous galvanizing line to serve North
American automakers. This joint venture, DNN Galvanizing Limited Partnership,
which was completed in 1993, coats steel products for the Company and an
unrelated third party. The Company is a 10% equity owner of the facility, an
unrelated third party is a 50% owner, and a subsidiary of NKK owns the
remaining 40%. The Company is committed to utilize and pay a tolling fee in
connection with 50% of the available line-time of the facility. The agreement
extends for 20 years after the start of production, which commenced in January
1993.
The Company has a 50% interest in a joint venture with an unrelated third
party, which commenced production in May 1994. The joint venture, Double G
Coatings Company, L.P. ("Double G"), constructed a 270,000 ton per year
coating facility near Jackson, Mississippi which produces galvanized and
Galvalume(R) steel sheet for the construction market. The Company is committed
to utilize and pay a tolling fee in connection with 50% of the available line-
time at the facility through May 10, 2004. Double G provided a first mortgage
on its property, plant and equipment and the Company has separately guaranteed
$19.1 million of Double G's debt as of December 31, 1998.
The Company has agreed to purchase its proportionate share of the limestone
production from an affiliated company, which will approximate $2 million per
year. These agreements contain pricing provisions that are expected to
approximate market price at the time of purchase.
The Company has entered into certain commitments with suppliers which are of
a customary nature within the steel industry. Commitments have been entered
into relating to future expected requirements for such
58
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
commodities as coal, coke, iron ore pellets, natural and industrial gas,
electricity and certain transportation and other services. Commitments have
also been made relating to the supply of pulverized coal and coke briquettes.
Certain commitments contain provisions which require that the Company "take or
pay" for specified quantities without regard to actual usage for periods of up
to 13 years. In 1999 and 2000 the Company has commitments with "take or pay"
or other similar commitment provisions for approximately $264.5 million and
$259.4 million, respectively. The Company believes that production
requirements will be such that consumption of the products or services
purchased under these commitments will occur in the normal production process.
The Company also believes that pricing mechanisms in the contracts are such
that the products or services will approximate the market price at the time of
purchase.
The Company is involved in various routine legal proceedings which are
incidental to the conduct of its business. Management believes that the
Company is not party to any pending legal proceeding which, if decided
adversely to the Company, would individually or in the aggregate, have a
material adverse effect on the Company.
Note 14. Risk Management Contracts
In the normal course of business, operations of the Company are exposed to
continuing fluctuations in commodity prices, foreign currency values, and
interest rates that can affect the cost of operating, investing, and
financing. Accordingly, the Company addresses a portion of these risks,
primarily commodity price risk, through a controlled program of risk
management that includes the use of derivative financial instruments. The
Company's objective is to reduce earnings volatility associated with these
fluctuations to allow management to focus on core business issues. The
Company's derivative activities, all of which are for purposes other than
trading, are executed within the guidelines of a documented corporate risk
management policy. The Company does not enter into any derivative transactions
for speculative purposes.
The amounts of derivatives summarized in the following paragraphs indicate
the extent of the Company's involvement in such agreements but do not
represent its exposure to market risk through the use of derivatives.
Commodity Risk Management
In order to reduce the uncertainty of price movements with respect to the
purchase of zinc, the Company enters into derivative financial instruments in
the form of swap contracts and zero cost collars with a major global financial
institution. These contracts typically mature within one year. While these
hedging instruments are subject to fluctuations in value, such fluctuations
are generally offset by changes in the value of the underlying exposures being
hedged. The Company had contracts to hedge future zinc requirements (up to 50%
of annual requirements) in the amounts of $18.5 million and $40.3 million at
December 31, 1998 and 1997, respectively. The fair value of these contracts
approximated their contract value at December 31, 1998. The fair value at
December 31, 1997 was $35.0 million.
The estimated fair value of derivative financial instruments used to hedge
the Company's risks will fluctuate over time. The fair value of commodity
purchase swap contracts and zero cost collars are calculated using pricing
models used widely in financial markets.
Note 15. Long-Term Incentive Plan
The Long-Term Incentive Plan, established in 1993, has authorized the
granting of options for up to 3,400,000 shares of Class B Common Stock to
certain executive officers and other key employees of the Company. The Non-
Employee Directors Stock Option Plan, also established in 1993, has authorized
the grant of options for up to 100,000 shares of Class B Common Stock to
certain non-employee directors. The exercise price
59
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the options equals the fair market value of the Common Stock on the date of
the grant. All options granted have ten year terms. During 1998, the stock
option plans were amended to reflect a change in the vesting schedule of all
outstanding and future stock option grants. Pursuant to this change, options
generally vest and become fully exercisable ratably over three years of
continued employment. Prior to the amendment, options generally vested and
became fully exercisable at the end of three years of continued employment.
However, in the event that termination of employment 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. There were 2,737,226
and 2,794,360 options available for granting under the stock option plans as
of December 31, 1998 and 1997, respectively.
The Company cancelled 563,167 and 653,265 options during 1998 and 1997,
respectively, and replaced them with Stock Appreciation Rights ("SARs"). In
accordance with APB 25, the Company recorded $1.9 million and $1.5 million of
compensation expense in 1998 and 1997, respectively. In addition, during
October of 1998 the Company cancelled 241,968 SARs and converted them back to
options.
As permitted by SFAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value at the date of grant consistent with
the provisions of APB 25. Accordingly, no compensation expense has been
recognized for the stock option plans. Had compensation cost for the option
plans been determined based on the fair value at the grant date for awards in
1998, 1997, and 1996 consistent with the provisions of SFAS 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1998 1997 1996
-------- -------- -------
Dollars in thousands,
except per share amounts
Net income--pro forma.......................... $ 83,594 $213,503 $52,659
Basic earnings per share--pro forma............ 1.93 4.70 .96
Diluted earnings per share--pro forma.......... 1.93 4.64 .96
As a result of the aforementioned replacement of stock options with SARs, a
recovery of prior years' pro forma expense for those options would be required
in 1998. The recovery would offset compensation costs to be recorded in 1998.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998: dividend yield of 2.7% expected
volatility 48.9%; risk-free interest rate of 4.7%; and expected term of 6.8
years.
A reconciliation of the Company's stock option activity and related
information follows:
Number Of Exercise Price
Options (Weighted Average)
--------- ------------------
Balance outstanding at January 1, 1996...... 967,916 $14.38
Granted..................................... 314,000 12.96
Forfeited................................... (122,181) 13.75
--------- ------
Balance outstanding at December 31, 1996.... 1,159,735 14.03
Granted..................................... 304,500 9.37
Forfeited................................... (132,470) 12.99
Cancelled and replaced with SARs............ (653,265) 14.14
--------- ------
Balance outstanding at December 31, 1997.... 678,500 12.10
Granted..................................... 429,500 12.88
Forfeited................................... (51,167) 11.83
Cancelled and replaced with SARs............ (563,167) 12.61
SARs cancelled and converted to options..... 241,968 12.51
--------- ------
Balance outstanding at December 31, 1998.... 735,634 $12.31
========= ======
60
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1998:
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Life Average Exercisable at Average
Exercise Prices 12/31/98 (in years) Exercise Price 12/31/98 Exercise Price
--------------- -------------- -------------- -------------- -------------- --------------
$6 1/2 to $10........... 305,167 8.8 $ 9.11 32,000 $ 9.37
$10 to $15.............. 326,467 8.2 14.02 86,134 13.51
$15 to $19.............. 104,000 7.7 16.38 52,500 15.25
------- --- ------ ------- ------
Total................. 735,634 8.4 $12.31 170,634 $13.27
======= === ====== ======= ======
There were no exercisable stock options as of December 31, 1997, and 457,401
exercisable stock options with a weighted average exercise price of $14.00 as
of December 31, 1996.
Note 16. Quarterly Results of Operations (Unaudited)
Following are the unaudited quarterly results of operations for the years
1998 and 1997.
1998
-------------------------------------------
March 31 June 30 September 30 December 31
Three Months Ended -------- -------- ------------ -----------
Dollars in thousands, except per share
amounts
Net sales....................... $708,429 $747,846 $706,361 $685,408
Gross margin.................... 39,922 59,982 58,778 63,375
Unusual credit.................. -- -- (26,621) --
Net income...................... 5,948 26,459 32,503 18,848
Basic and diluted earnings per
share:
Net Income applicable to
common stock................. $ 0.14 $ 0.61 $ 0.75 $ 0.44
1997
-------------------------------------------
March 31 June 30 September 30 December 31
Three Months Ended -------- -------- ------------ -----------
Dollars in thousands, except per share
amounts
Net sales....................... $757,618 $824,869 $788,663 $768,509
Gross margin.................... 69,263 87,834 103,747 69,825
Net gain on disposal of non-core
assets and other related
activities..................... -- (25,385) (28,804) (4,556)
Income before extraordinary
item........................... 26,665 64,925 78,561 48,749
Extraordinary item.............. -- (5,397) -- --
Net income...................... 26,665 59,528 78,561 48,749
Basic earnings per share:
Income before extraordinary
item......................... $ 0.55 $ 1.43 $ 1.76 $ 1.08
Extraordinary item............ -- (.12) -- --
-------- -------- -------- --------
Net income applicable to
common stock............... $ 0.55 $ 1.31 $ 1.76 $ 1.08
======== ======== ======== ========
Diluted earnings per share:
Income before extraordinary
item......................... $ 0.55 $ 1.42 $ 1.72 $ 1.06
Extraordinary item............ -- (.12) -- --
-------- -------- -------- --------
Net income applicable to
common stock............... $ 0.55 $ 1.30 $ 1.72 $ 1.06
======== ======== ======== ========
61
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ---------------------------- ------------ --------------------------------- ------------ --------------
Additions
---------------------------------
Balance at Charged to Other
Beginning of Charged to Costs Accounts-- Deductions-- Balance at End
Description Period and Expense Describe Describe of Period
- ---------------------------- ------------ ---------------- ---------------- ------------ --------------
(Thousands of Dollars)
Year Ended December 31, 1998
Reserves Deducted From
Assets
Allowances and discounts
on trade notes and
accounts receivable...... $17,644 $13,913(1) $ -- $14,658(2) $16,899
Year Ended December 31, 1997
Reserves Deducted From
Assets
Allowances and discounts
on trade notes and
accounts receivable...... $19,320 $29,363(1) $ -- $31,039(2) $17,644
Year Ended December 31, 1996
Reserves Deducted From
Assets
Allowances and discounts
on trade notes and
accounts receivable...... $19,986 $21,560(1) $ -- $22,226(2) $19,320
- --------
NOTE 1--Provision for doubtful accounts of $1,274, $963 and $748 for 1998,
1997 and 1996, respectively and other charges consisting primarily of
claims for pricing adjustments and discounts allowed.
NOTE 2--Doubtful accounts charged off, net of recoveries, claims and discounts
allowed and reclassification to other assets.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference from the
section captioned "Executive Officers" in Part I of this report and from the
sections captioned "Information Concerning Nominees for Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement for the 1999 Annual Meeting of Stockholders. With the
exception of the information specifically incorporated by reference, the
Company's Proxy Statement is not to be deemed filed as part of this report for
purposes of this Item.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the
sections captioned "Executive Compensation", "Summary Compensation Table",
"Stock Option/SAR Tables", "Option/SAR Grants in 1998", "Aggregated Option/SAR
Exercises in 1998 and December 31, 1998 Option/SAR Values", "Pension Plans",
"Pension Plan Table", "Employment Contracts" and "Compensation of Directors"
in the Company's Proxy Statement for the 1999 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.
62
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 1999 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 1999 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.
PART IV
Items 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Documents filed as part of this Report:
The following is a list of the financial statements, schedule and exhibits
included in this Report or incorporated herein by reference.
(1) Financial Statements
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity and Redeemable
Preferred Stock--Series B for the years ended December 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements (Including Quarterly
Financial Data)
(2) Consolidated Financial Statement Schedule
The following consolidated financial statement schedule of National
Steel Corporation and Subsidiaries is filed as a part of this Report:
Schedule II--Valuation and Qualifying Accounts and Reserves, years
ended December 31, 1998, 1997 and 1996
Schedules not included have been omitted because they are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
Separate financial statements of subsidiaries not consolidated and 50
percent or less owned persons accounted for by the equity method have
been omitted because considered in the aggregate as a single subsidiary
they do not constitute a significant subsidiary.
(3) Exhibits
See the attached Exhibit Index. Items 10-T through 10-HH are management
contracts or compensatory plans or arrangements.
63
(b) Reports on Form 8-K:
During the quarter ended December 31, 1998, the Company filed the following
reports on Form 8-K:
(i) The Company filed a Form 8-K dated October 15, 1998, reporting on Item
5, Other Events and Item 7, Financial Statements and Exhibits.
(ii) The Company filed a Form 8-K dated October 22, 1998, reporting on Item
5, Other Events and Item 7, Financial Statements and Exhibits.
(iii) The Company filed a Form 8-K dated October 27, 1998, reporting on
Item 5, Other Events and Item 7, Financial Statements and Exhibits.
(iv) The Company filed a Form 8-K dated December 17, 1998, reporting on
Item 5, Other Events and Item 7, Financial Statements and Exhibits.
(v) The Company filed a Form 8-K dated December 29, 1998, reporting on Item
5, Other Events and Item 7, Financial Statements and Exhibits.
64
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 February 16, 1999.
National Steel Corporation
/s/ John A. Maczuzak
By: _________________________________
John A. Maczuzak
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated on February 16, 1999.
Name Title
---- -----
/s/ Yutaka Tanaka Director; Chairman of the Board and Chief
___________________________________________ Executive Officer
Yutaka Tanaka
/s/ Charles A. Bowsher Director
___________________________________________
Charles A. Bowsher
/s/ Edsel D. Dunford Director
___________________________________________
Edsel D. Dunford
/s/ Mitsuoki Hino Director
___________________________________________
Mitsuoki Hino
/s/ Frank J. Lucchino Director
___________________________________________
Frank J. Lucchino
/s/ Bruce K. MacLaury Director
___________________________________________
Bruce K. MacLaury
/s/ Mineo Shimura Director
___________________________________________
Mineo Shimura
/s/ Hisashi Tanaka Director
___________________________________________
Hisashi Tanaka
/s/ Sotaro Wakabayashi Director
___________________________________________
Sotaro Wakabayashi
/s/ Glenn H. Gage Senior Vice President and Chief Financial
___________________________________________ Officer
Glenn H. Gage
/s/ Kirk A. Sobecki Corporate Controller
___________________________________________
Kirk A. Sobecki
65
EXHIBIT INDEX
Except for those exhibits which are incorporated by reference, as indicated
below, all exhibits are being filed along with this Form 10-K.
Exhibit
Number Exhibit Description
------- -------------------
2-A Assets Purchase Agreement between Weirton Steel Corporation
and the Company, dated as of April 29, 1983, together with
collateral agreements incident to such Assets Purchase
Agreement, filed as Exhibit 2-A to the annual report of the
Company on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
2-B Stock Purchase Agreement by and among NKK Corporation,
National Intergroup, Inc. and the Company, dated August 22,
1984, together with certain collateral agreements incident to
such Stock Purchase Agreement and certain schedules to such
agreements, filed as Exhibit 2-B to the annual report of the
Company on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
2-C Stock Purchase and Recapitalization Agreement by and among
National Intergroup, Inc., NII Capital Corporation, NKK
Corporation, NKK U.S.A. Corporation and the Company, dated as
of June 26, 1990, filed as Exhibit 2-C to the annual report of
the Company on Form 10-K for the year ended December 31, 1995,
is incorporated herein by reference.
2-D Amendment to Stock Purchase and Recapitalization Agreement by
and among, National Intergroup, Inc., NII Capital Corporation,
NKK Corporation, NKK U.S.A. Corporation and the Company, dated
July 31, 1991 filed as Exhibit 2-D to the annual report of the
Company on Form 10-K for the year ended December 31, 1997 is
incorporated herein by reference.
2-E Stock Purchase Agreement dated as of January 31, 1997 among
the Company, North Limited, NS Holdings Corporation, Bethlehem
Steel Corporation and Bethlehem Steel International
Corporation filed as Exhibit 2-A to the quarterly report of
the Company on Form 10-Q for the quarter ended June 30, 1997,
is incorporated herein by reference.
2-F Asset Purchase Agreement dated as of June 6, 1997 between EES
Coke Battery Company, Inc. and the Company, filed as Exhibit
2.1 to the Report on Form 8-K of the Company dated June 12,
1997, is incorporated herein by reference.
2-G Coal Inventory Purchase Agreement dated as of June 6, 1997
between DTE Coal Services, Inc. and the Company, filed as
Exhibit 2.2 to the Report on Form 8-K of the Company dated
June 12, 1997, is incorporated herein by reference.
3-A The Sixth Restated Certificate of Incorporation of the
Company, filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-57952, is
incorporated herein by reference.
3-B Form of Amended and Restated By-laws of the Company filed as
Exhibit 3-B to the annual report of the Company on Form 10-K
for the year ended December 31, 1996, is incorporated herein
by reference.
4-A NSC Stock Transfer Agreement between National Intergroup,
Inc., the Company, NKK Corporation and NII Capital Corporation
dated December 24, 1985, filed as Exhibit 4-A to the annual
report of the Company on Form 10-K for the year ended December
31, 1995, is incorporated herein by reference.
4-B The Company is a party to certain long-term debt agreements
where the amount involved does not exceed 10% of the Company's
total assets. The Company agrees to furnish a copy of any such
agreement to the Commission upon request.
66
Exhibit
Number Exhibit Description
------- -------------------
10-A Amended and Restated Lease Agreement between the Company and
Wilmington Trust Company, dated as of December 20, 1985,
relating to the Electrolytic Galvanizing Line, filed as
Exhibit 10-A to the annual report of the Company on Form 10-K
for the year ended December 31, 1995, is incorporated herein
by reference.
10-B Lease Agreement between The Connecticut National Bank as Owner
Trustee and Lessor and National Acquisition Corporation as
Lessee dated as of September 1, 1987 for the Ladle Metallurgy
and Caster Facility located at Ecorse, Michigan, filed as
Exhibit 10-B to the annual report of the Company on Form 10-K
for the year ended December 31, 1995, is incorporated herein
by reference.
10-C Lease Supplement No. 1 dated as of September 1, 1987 between
The Connecticut National Bank as Owner Trustee and National
Acquisition Corporation as the Lessee for the Ladle Metallurgy
and Caster Facility located at Ecorse, Michigan, filed as
Exhibit 10-C to the annual report of the Company on Form 10-K
for the year ended December 31, 1995, is incorporated herein
by reference.
10-D Lease Supplement No. 2 dated as of November 18, 1987 between
The Connecticut National Bank as Owner Trustee and National
Acquisition Corporation as Lessee for the Ladle Metallurgy and
Caster Facility located at Ecorse, Michigan, filed as Exhibit
10-D to the annual report of the Company on Form 10-K for the
year ended December 31, 1995, is incorporated herein by
reference.
10-E Purchase Agreement dated as of March 25, 1988 relating to the
Stinson Motor Vessel among Skar-Ore Steamship Corporation,
Wilmington Trust Company, General Foods Credit Investors No. 1
Corporation, Stinson, Inc. and the Company, and Time Charter
between Stinson, Inc. and the Company, filed as Exhibit 10-E
to the annual report of the Company on Form 10-K for the year
ended December 31, 1995, is incorporated herein by reference.
10-F Purchase and Sale Agreement, dated as of May 16, 1994 between
the Company and National Steel Funding Corporation, filed as
Exhibit 10-A to Amendment No. 1 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-G Form of Indemnification Agreement filed as Exhibit 10-R to the
Annual Report of the Company on Form 10-K for the year ended
December 31, 1996 is incorporated herein by reference.
10-H Shareholders' Agreement, dated as of September 18, 1990, among
DNN Galvanizing Corporation, 904153 Ontario Inc., National
Ontario Corporation and Galvatek America Corporation, filed as
Exhibit 10.27 to the Company's Registration Statement on Form
S-1, Registration No. 33-57952, is incorporated herein by
reference.
10-I Partnership Agreement, dated as of September 18, 1990, among
Dofasco, Inc., National Ontario II, Limited, Galvatek Ontario
Corporation and DNN Galvanizing Corporation, filed as Exhibit
10.28 to the Company's Registration Statement on Form S-1,
Registration No. 33-57952, is incorporated herein by
reference.
10-J Amendment No. 1 to the Partnership Agreement, dated as of
September 18, 1990, among Dofasco, Inc., National Ontario II,
Limited, Galvatek Ontario Corporation and DNN Galvanizing
Corporation, filed as Exhibit 10.29 to the Company's
Registration Statement on Form S-1, Registration No.
33-57952, is incorporated herein by reference.
10-K Agreement, dated as of May 19, 1993, among the Company and NKK
Capital of America, Inc., filed as Exhibit 10-FF to the annual
report of the Company on Form 10-K for the year ended December
31, 1993, is incorporated herein by reference.
10-L Receivables Purchase Agreement, dated as of May 16, 1994,
among the Company, National Steel Funding Corporation and
certain financial institutions named therein, filed as Exhibit
10-A to Amendment No. 2 to the quarterly report of the Company
on Form 10-Q/A for the quarter ended June 30, 1994, is
incorporated herein by reference.
67
Exhibit
Number Exhibit Description
------- -------------------
10-M Amendment Number One to the Receivables Purchase Agreement,
dated as of May 31, 1995, among the Company, National Steel
Funding Corporation and certain financial institutions named
therein, filed as Exhibit 10-A to the quarterly report of the
Company on Form 10-Q for the quarter ended June 30, 1995, is
incorporated herein by reference.
10-N Amendment No. 2 and Consent to the Receivables Purchase
Agreement, dated as of July 18, 1996, among the Company,
National Steel Funding Corporation and certain financial
institutions named therein, filed as Exhibit 10-A to the
quarterly report of the Company on Form 10-Q for the quarter
ended September 30, 1996, is incorporated herein by reference.
10-O Agreement for the Transfer of Employees by and between NKK
Corporation and the Company, dated as of May 1, 1995, filed as
Exhibit 10-CC to the annual report of the Company on Form 10-K
for the year ended December 31, 1995, is incorporated herein
by reference.
10-P Amendment No. 1 to Agreement for the Transfer of Employees by
and between the Company and NKK Corporation filed as Exhibit
10-NN to the annual report of the Company on Form 10-K for the
year ended December 31, 1996, is incorporated herein by
reference.
10-Q Amendment No. 2 to Agreement for the Transfer of Employees by
and between the Company and NKK Corporation filed as Exhibit
10-Q to the annual report on Form 10-K for the year ended
December 31, 1997 is incorporated herein by reference.
10-R Amendment No. 3 to Agreement for the Transfer of Employees by
and between the Company and NKK Corporation.
10-S Agreement dated as of November 25, 1997 among the Company,
Avatex Corporation, NKK Corporation and NKK U.S.A. Corporation
filed as Exhibit 10-R to the Annual Report of the Company on
Form 10-K for the year ended December 31, 1997 is incorporated
herein by reference.
10-T 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-U 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-V Amendment Number One to the 1993 National Steel Corporation
Non-Employee Directors' Stock Option Plan, filed as Exhibit
10-A to the quarterly report of the Company on Form 10-Q for
the quarter ended June 30, 1997, is incorporated herein by
reference.
10-W Amendment Number Two to the 1993 National Steel Corporation
Non-Employee Directors' Stock Option Plan filed as Exhibit 10-
V to the Annual Report of the Company on Form 10-K for the
year ended December 31, 1997 is incorporated herein by
reference.
10-X 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-Y Employment contract dated April 30, 1996 between the Company
and David L. Peterson, filed as Exhibit 10-D to the quarterly
report of the Company on Form 10-Q for the quarter ended June
30, 1996, is incorporated herein by reference.
10-Z Supplement to Employment contract dated July 30, 1996 between
the Company and David L. Peterson, filed as Exhibit 10-C to
the quarterly report of the Company on Form 10-Q for the
quarter ended September 30, 1996, is incorporated herein by
reference.
68
Exhibit
Number Exhibit Description
------- -------------------
10-AA Amendment dated August 1, 1998 to Employment Contract between
the Company and David L. Peterson, filed as Exhibit 10-D to
the quarterly report of the Company for the quarter ended
September 30, 1998 is incorporated herein by reference.
10-BB Amended and Restated Employment Agreement dated as of February
1, 1998 between the Company and Robert G. Pheanis filed as
Exhibit 10-CC to the Annual Report of the Company on Form 10-K
for the year ended December 31, 1997 is incorporated herein by
reference.
10-CC Employment contract dated May 1, 1996 between the Company and
John A. Maczuzak, filed as Exhibit 10-G to the quarterly
report of the Company on Form 10-Q for the quarter ended June
30, 1996, is incorporated herein by reference.
10-DD Employment Contract dated as of August 1, 1998 between the
Company and Glenn H. Gage, filed as Exhibit 10-A to the
quarterly report of the Company on Form 10-Q for the quarter
ended September 30, 1998 is incorporated herein by reference.
10-EE Employment Contract dated as of August 1, 1998 between the
Company and John F. Kaloski, filed as Exhibit 10-B to the
quarterly report of the Company on Form 10-Q for the quarter
ended September 30, 1998 is incorporated herein by reference.
10-FF Agreement dated January 28, 1999 between the Company and John
F. Kaloski.
10-GG Employment Contract dated as of September 1, 1998 between the
Company and Yutaka Tanaka, filed as Exhibit 10-C to the
quarterly report of the Company on Form 10-Q for the quarter
ended September 30, 1998 is incorporated herein by reference.
10-HH Employment contract dated December 11, 1996 between the
Company and Osamu Sawaragi filed as Exhibit 10-MM to the
annual report of the Company on Form 10-K for the year ended
December 31, 1996, is incorporated herein by reference.
10-II No. 1 Continuous Galvanizing Line Turnkey Engineering and
Construction Contract dated October 23, 1998 between the
Company and NKK Steel Engineering, Inc.
21 List of Subsidiaries of the Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
69