-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BsQVYMS2U9NY1Cq/6m/etPw2a2ZhDTXexVkNBfgnG6lPMXTVB1b+UIEC/7PO55vk UQVHjDkK+6xMLyFRNRBYUg== 0000011860-97-000004.txt : 19970327 0000011860-97-000004.hdr.sgml : 19970327 ACCESSION NUMBER: 0000011860-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: CBOE SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BETHLEHEM STEEL CORP /DE/ CENTRAL INDEX KEY: 0000011860 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 240526133 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01941 FILM NUMBER: 97563795 BUSINESS ADDRESS: STREET 1: 1170 EIGHTH AVE CITY: BETHLEHEM STATE: PA ZIP: 18016-7699 BUSINESS PHONE: 6106843745 MAIL ADDRESS: STREET 1: 1170 EIGHTH AVE CITY: BETHLEHEM STATE: PA ZIP: 18016-7699 10-K 1 FORM 10-K, BETHLEHEM STEEL CORPORATION 1 1996 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 F O R M 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-1941 B E T H L E H E M S T E E L C O R P O R A T I O N (Exact name of registrant as specified in its charter) DELAWARE 24-0526133 (State of Incorporation) (I.R.S. Employer Identification No.) 1170 EIGHTH AVENUE BETHLEHEM, PENNSYLVANIA 18016-7699 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 694-2424 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock--$1 par value per share New York Stock Exchange Chicago Stock Exchange Preference Stock Purchase Rights New York Stock Exchange Chicago Stock Exchange Preferred Stock -- $1 par value per share $5.00 Cumulative Convertible New York Stock Exchange (stated value $50.00 per share) $2.50 Cumulative Convertible New York Stock Exchange (stated value $25.00 per share) 6-7/8% Debentures. Due March 1, 1999 New York Stock Exchange 8-3/8% Debentures. Due March 1, 2001 New York Stock Exchange 8.45% Debentures. Due March 1, 2005 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Aggregate Market Value of Voting Stock held by Non-Affiliates: 919,398,299 The amount shown is based on the closing price of Bethlehem Common Stock on the New York Stock Exchange Composite Tape on March 21, 1996. Voting stock held by directors and executive officers of Bethlehem is not included in the computation. However, Bethlehem has made no determination that such individuals are "affiliates" within the meaning of Rule 405 under the Securities Act of 1933. Number of Shares of Common Stock outstanding as of March 21, 1997: 112,061,570 DOCUMENTS INCORPORATED BY REFERENCE: Selected portions of the 1996 Annual Report to Stockholders of Bethlehem Steel Corporation are incorporated by reference into Part II of this Report on Form 10-K. Selected portions of the 1997 Proxy Statement of Bethlehem Steel Corporation are incorporated by reference into Part III of this Report on Form 10-K. 2 PART I ITEM 1. BUSINESS. Bethlehem(1) is the second largest steel producer in the United States and primarily manufactures and sells a wide variety of steel mill products. Bethlehem also produces and sells coke, coal and iron ore. For financial reporting purposes, Bethlehem reports the results of its operations and other financial information in two segments, Basic Steel Operations and Steel Related Operations. Note B to the Consolidated Financial Statements contains financial information relating to Bethlehem's industry segments for 1996, 1995 and 1994. The table below shows the percentage contribution to Bethlehem's net sales of each segment and of major classes of products for each of the years 1994 through 1996: 1996 1995 1994 ---- ---- ---- BASIC STEEL OPERATIONS Steel mill products: Hot rolled sheets . . . . . . . . . . 14.7% 15.9% 16.6% Cold rolled sheets. . . . . . . . . . 16.0 14.4 17.0 Coated sheets . . . . . . . . . . . . 32.0 29.7 25.9 Tin mill products . . . . . . . . . . 7.0 6.1 6.6 Plates. . . . . . . . . . . . . . . . 15.3 15.1 14.0 Structural shapes and piling. . . . . 3.8 6.7 6.7 Rail products . . . . . . . . . . . . 3.5 3.2 2.8 Other steel mill products . . . . . . 1.6 2.7 2.5 Other products and services (including raw materials). 3.6 4.2 5.5 ------ ------ ------ 97.5 98.0 97.6 STEEL RELATED OPERATIONS . . . . . . . . 2.5 2.0 2.4 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ====== BASIC STEEL OPERATIONS OPERATIONS Bethlehem's Basic Steel Operations produces a wide variety of steel mill products, including hot rolled, cold rolled and coated sheets and strip, plates, tin mill products, specialty blooms, carbon and alloy bars, rail and large-diameter pipe. Basic Steel Operations includes the following Business Units: the Burns Harbor Division, the Sparrows Point Division and Pennsylvania Steel Technologies, Inc. Basic Steel Operations also includes Bethlehem Structural Products Corporation which produced structural shapes and special sections. See "ITEM 1. BUSINESS--Restructuring Activities" of this Report for a discussion of Bethlehem Structural Products Corporation. Also included in Basic Steel Operations are iron ore and coal operations (which provide raw materials to Bethlehem's steelmaking facilities or sell such materials to trade customers), railroad and trucking operations (which primarily transport raw materials and semifinished steel products within various Bethlehem operations) and lake shipping operations (which primarily transport raw materials to the Burns Harbor Division). See "ITEM 2. PROPERTIES" of this Report for a description of the facilities of these business units and operations. As reported by the American Iron and Steel Institute ("AISI"), the domestic steel industry's raw steel production capability for 1996 was 116 million tons, and the preliminary average rate of industry utilization of that capability was 90 percent, compared with 112 million tons and 93 percent for 1995 and 108 million tons and 93 percent for 1994. Bethlehem's raw steel production capability was 10.5 million tons for 1996 compared with 11.5 million tons for 1995 and 1994. Its average rate of utilization of that capability was 90 percent for 1996, 91 percent for 1995 and 85 percent for 1994. - ---------- (1) "Bethlehem" when used in this Report means Bethlehem Steel Corporation, a Delaware corporation, and where applicable includes its consolidated subsidiaries. Bethlehem was incorporated in Delaware in 1919. - 1 - 3 The following table shows, for each of the years indicated, the raw steel production of Bethlehem and of the entire domestic steel industry: Raw Steel Production ------------------------------------------ Domestic Bethlehem as a Steel % of Domestic Bethlehem Industry* Steel Industry --------- --------- -------------- (millions of net tons) 1996. . . . . . . . . . . . . 9.4 104.4** 9.1** 1995. . . . . . . . . . . . . 10.4 104.9 10.0 1994. . . . . . . . . . . . . 9.8 100.6 9.7 - ----------------- * The figures are as reported by the AISI. ** Based on preliminary AISI figures. Of Bethlehem's 1996 raw steel production, 92 percent was produced by basic oxygen furnaces and 8 percent by electric furnaces. Bethlehem's three continuous slab casters for light flat rolled products and plates produced about 81 percent of the slabs needed for these products in 1996 compared with 84 percent in 1995 and 78 percent in 1994. Bethlehem's operations are subject to planned and unplanned outages due to required maintenance, equipment malfunctions, work stoppages, various hazards (including explosions, fires and severe weather conditions) and the availability of raw materials, supplies, utilities and other items needed for the production of steel. These outages could result in reduced production and increased costs. MARKETS The following table shows, for each of the years indicated, the percentage of the total net tons of steel mill products shipped by Bethlehem's Basic Steel Operations to each of its principal markets, including shipments to its own manufacturing operations: 1996 1995 1994 ---- ---- ---- Service Centers, Distributors, Processors and Converters (including semifinished 45.2% 41.0% 45.9% customers) Transportation (including automotive) . 26.0 24.8 24.2 Construction. . . . . . . . . . . . . . 12.6 14.2 14.7 Containers. . . . . . . . . . . . . . . 5.2 5.2 5.7 Machinery . . . . . . . . . . . . . . . 5.1 5.2 4.9 Other . . . . . . . . . . . . . . . . . 5.9 9.6 4.6 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ====== Many of the markets Bethlehem supplies, such as automotive, machinery and construction, are highly cyclical and subject to downturns in the U.S. economy. Also, many of Bethlehem's customers and suppliers are subject to collective bargaining agreements and their ability to operate could be impacted by a strike or work stoppage. Bethlehem distributes steel products principally through its own sales organization, which has sales offices at various locations in the United States and Mexico, and through foreign sales agents. In addition to selling to customers who consume steel products directly, Bethlehem sells steel products to steel service centers, distributors, processors and converters. Export sales for this segment were 3 percent of total sales in 1996, 5 percent in 1995 and 2 percent in 1994. Trade orders on hand for Basic Steel Operations at December 31, 1996 and 1995 were about $1.2 billion and $1.3 billion, respectively. Substantially all of the orders on hand at December 31, 1996, are expected to be filled in 1997. - 2 - 4 STEEL PRICE SENSITIVITY Bethlehem's results are significantly affected by relatively small (on a percentage basis) variations in the realized prices for its products. Bethlehem shipped 8.8 million net tons of steel products and recorded sales of $4.7 billion during 1996, implying an average realized price per ton of about $530. A one percent increase or decrease in this implied average realized price during 1996 could, on a pro forma basis, have resulted in an increase or decrease in net sales and pre-tax income of about $47 million. Competitive pressures in the steel industry are severe. These pressures could limit Bethlehem's ability to obtain price increases or could lead to a decline in prices, which could have a material adverse effect upon Bethlehem. CYCLICALITY The domestic steel industry is highly cyclical in nature. Domestic integrated producers suffered substantial losses in the first half of the 1980s. During the second half of the 1980s, domestic steel producers benefited from improved industry conditions and in 1988 domestic industry earnings reached record levels. Steel demand and pricing declined between 1989 and 1992 and the domestic industry reported substantial losses. Since 1993, there has been a recovery in steel markets and domestic steel producers have reported improved results. Although Bethlehem believes that domestic steel markets will be relatively good in 1997, there can be no assurance as to the extent of any future improvement in domestic industry earnings. COMPETITION The domestic steel industry is highly competitive. This competition affects the prices that Bethlehem can charge for its products, the utilization of its production facilities, its ability to sell higher value products and ultimately the profitability of Bethlehem. CAPICITY. There is excess world capacity for many of the products produced by Basic Steel Operations. Many foreign steel producers are owned, controlled or subsidized by their governments. Decisions by these foreign producers to continue marginal facilities may be influenced to a greater degree by political and economic policy considerations than by prevailing market conditions. Overcapacity has also been perpetuated by the continued operation, modernization and upgrading of marginal domestic facilities through bankruptcy reorganization proceedings and by the sale by integrated producers of marginal domestic facilities to new owners, which operate such facilities with a lower cost structure. Over the next several years, construction of additional flat rolled production facilities could result in increased domestic capability of up to 10 million tons over 1996 levels. MINI-MILLS. Domestic integrated producers, such as Bethlehem, have lost market share in recent years to domestic mini-mills. Mini-mills provide significant competition in certain product lines, including hot rolled sheet products. Mini-mills, which are less expensive to build than integrated facilities, are relatively efficient, low-cost producers that produce steel from scrap in electric furnaces, have low employment and environmental costs and target regional markets. Through the use of iron substitutes and thin slab casting technology, mini-mill competitors are increasingly able to compete directly with producers of higher value products, including cold rolled and coated sheets. Most of the previously mentioned new flat rolled facilities that will be constructed over the next several years will be mini-mills. IMPORTS. Domestic steel producers also face significant competition from foreign producers and have been adversely affected by unfairly traded imports. In many cases, foreign producers are pricing their products below their production costs. Imports of finished steel products accounted for about 18 percent of the domestic market in 1996 and 1995 and 20 percent in 1994. - 3 - 5 The following table, which is based on data reported by the AISI, shows the percentage of the domestic apparent consumption of steel mill products supplied by imports for various classes of products. 1996* 1995 1994 ----- ---- ---- Structural shapes and piling. . . . . . 16% 11% 13% Bars, rods, tool steel and semifinished . . 36 31 35 Plates . . . . . . . . . . . . . 26 22 23 Sheets, strip and tin mill products . . . 16 16 19 Rail. . . . . . . . . . . . . . 26 28 30 All products** . . . . . . . . . . 23 21 25 - ---------- * Preliminary ** Excludes steel imported in the form of manufactured goods, such as automobiles, but includes semifinished steel. Excluding semifinished steel, imports of steel mill products were about 21.6 million tons in 1996, 19.2 million tons in 1995 and 22.1 million tons in 1994. Antidumping and countervailing duty orders covering imports of corrosion resistant sheet from 6 countries, cold rolled sheet from 3 countries and plates from 11 countries, which resulted from unfair trade cases filed by Bethlehem and 11 other companies in 1992, remain in place. Imports of flat rolled steel from countries not subject to orders, including particularly the Commonwealth of Independent States (formerly the USSR), eastern European countries and the People's Republic of China, have increased significantly. New antidumping investigations are currently pending with respect to imports of cut-to-length plate from the People's Republic of China, Russia, the Ukraine and South Africa. The major restructuring of the domestic steel industry, which began in the late 1970s and early 1980s, has removed the steelmaking capacity that once existed to meet market demand during peak periods. During the last few years, domestic producers have met a portion of the demand that exceeded steelmaking capacity by importing semifinished slabs for rolling into finished products in their own mills. Increased imports of finished products met the remaining demand, which could not be met by domestic rolling mills. SUBSTITUTE MATERIALS. For many steel products, there is substantial competition from manufacturers of products other than steel, including plastics, aluminum, ceramics, glass, wood and concrete. Changes to the relative competitiveness of these substitute materials and the emergence of additional substitute materials could adversely affect future prices and demand for Bethlehem's products. STEEL RELATED OPERATIONS Bethlehem's Steel Related Operations includes BethForge, Inc. and CENTEC Roll Corporation. BethForge manufactures and fabricates forged products, including forged rolls for the metalworking industry. CENTEC produces centrifugally cast rolls for the metalworking industry. The operations of BethForge and CENTEC are located in Bethlehem, Pennsylvania. Steel Related Operations also includes BethShip, Inc., which repairs and services ships and fabricates industrial products. The facilities of BethShip consist of a ship repair yard at Sparrows Point, Maryland. Trade orders on hand for Bethlehem's Steel Related Operations at December 31, 1996 and 1995, were about $59 million and $43 million, respectively. Substantially all the orders on hand at December 31, 1996, are expected to be filled in 1997. See "ITEM 1. BUSINESS--Restructuring Activities" of this Report for a discussion of the status of Bethlehem's Steel Related Operations. - 4 - 6 GENERAL CAPITAL EXPENDITURES Capital expenditures were $259 million in 1996 compared with $267 million in 1995 and $445 million in 1994. Capital expenditures for 1997 are currently estimated to be about $280 million. Major projects during 1996 included the upgrade of the 160-inch plate mill and the modernization of the hot strip mill at the Burns Harbor Division. About $280 million of additional capital expenditures were authorized in 1996. At December 31, 1996, the estimated cost of completing authorized capital expenditures was about $386 million compared with $400 million at December 31, 1995. Such authorized capital expenditures are expected to be completed during the 1997-1999 period. The domestic integrated steel industry is very capital intensive. As discussed under "ITEM 2. PROPERTIES--General" of this Report, Bethlehem's principal operations and facilities are of varying ages, technologies and operating efficiencies. Bethlehem will need to continue to make significant capital expenditures in the future to improve and maintain the competitiveness of its operations and facilities. ENVIRONMENTAL CONTROL AND REMEDIATION EXPENDITURES Bethlehem is subject to various federal, state and local environmental laws and regulations concerning, among other things, air emissions, waste water discharges and solid and hazardous waste disposal. During the five years ended December 31, 1996, Bethlehem spent about $160 million for environmental control equipment. Expenditures for new environmental control equipment totaled about $29 million in 1996, $36 million in 1995 and $44 million in 1994. The costs incurred in 1996 to operate and maintain existing environmental control equipment were about $115 million (excluding interest costs but including depreciation charges of $19 million) compared with $120 million in 1995 and $115 million in 1994. In addition, Bethlehem has been required to pay various fines and penalties relating to violations or alleged violations of laws and regulations in the environmental control area. Bethlehem paid about $160,000 in 1996, $5.9 million in 1995 and $3.9 million in 1994 for such fines and penalties. Under the Clean Air Act, as amended, coke-making facilities will have to meet progressively more stringent standards over the next 25 years. Bethlehem currently operates coke-making facilities in Bethlehem, Pennsylvania; Burns Harbor, Indiana; and Lackawanna, New York. While Bethlehem continues to evaluate the impact future emission control regulations will have on these operations, it believes that these operations will be able to comply. Negotiations between Bethlehem and federal and state regulatory agencies are being conducted to resolve differences in interpretation of certain environmental control requirements. In some instances, those negotiations are being held in connection with the resolution of pending environmental proceedings. Bethlehem believes there will not be any significant curtailment or interruptions of any of its important operations as a result of these proceedings and negotiations. Bethlehem cannot predict future specific environmental control requirements. Based on existing and anticipated regulations promulgated under presently enacted legislation, Bethlehem estimates that capital expenditures for new environmental control equipment will average about $30 million per year over the next two years. However, estimates of future capital expenditures and operating costs required for environmental compliance are subject to numerous uncertainties, including the evolving nature of regulations, possible imposition of more stringent requirements, availability of new technologies and the timing of expenditures. Under the Resource Conservation and Recovery Act, as amended ("RCRA"), the owners of certain facilities that managed hazardous waste after 1980 are required to investigate and, if appropriate, remediate - 5 - 7 certain historic environmental contamination found at the facility. All of Bethlehem's major facilities may be subject to this "Corrective Action Program", and Bethlehem has implemented or is currently implementing the program at its facilities located in Steelton, Pennsylvania; Lackawanna, New York; Burns Harbor, Indiana; and Sparrows Point, Maryland. At Steelton, Bethlehem has completed a RCRA Facility Investigation ("RFI"), a Corrective Measures Study ("CMS") and a remediation program, which program received formal approval of the United States Environmental Protection Agency (the "EPA") and was completed in 1994. At Lackawanna, Bethlehem is conducting an RFI which is expected to be completed later this year. At Burns Harbor, Bethlehem has recently received EPA approval of its proposed scope of work for an RFI which will require several years to complete. At Sparrows Point, Bethlehem, the EPA and the Maryland Department of the Environment have agreed to a phased RFI as part of a comprehensive multimedia pollution prevention agreement which was lodged in the U. S. District Court for Maryland as a proposed consent decree on February 25, 1997. The potential costs for possible remediation activities, if any, at Lackawanna, Burns Harbor and Sparrows Point and the timeframe for implementation of these activities cannot be reasonably estimated until the RFIs, and possibly the CMSs, have been completed and approved. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA", also known as "Superfund"), the EPA has authority to impose liability for site remediation on generators and transporters of waste, as well as past and present owners and operators of the sites where the waste was disposed of regardless of, fault or the legality of the disposal activities. Bethlehem is actively involved at a total of 25 sites where it has been advised that it may be considered a potentially responsible party under CERCLA or the corresponding State Superfund legislation. Based on its experience regarding site remediation and its knowledge of and extent of involvement in such sites, Bethlehem expects that its share of the costs for remediation of these sites will not be material. Although it is possible that Bethlehem's future quarterly or annual results of operations could be materially affected by the future costs of environmental compliance, Bethlehem believes that the future costs of environmental compliance will not have a material adverse effect on its consolidated financial position or on its competitive position with respect to other integrated domestic steelmakers that are subject to the same environmental requirements. To the extent that competitors are not required to undertake equivalent costs, Bethlehem's competitive position could be adversely affected. Since 1946, Bethlehem has had a formal program of environmental control. Bethlehem was one of the first industrial companies in the United States to recognize its obligation to its communities, the citizens of its communities and the environment. Bethlehem continues to expand its commitment to the environment through the development and implementation of progressive environmental programs consistent with the goals identified in its Corporate Environmental Policy and the CERES Principles which Bethlehem first endorsed last year. During 1996, Bethlehem published its first environmental progress report and CERES report based upon its environmental accomplishments and activities for the preceding year. PURCHASED MATERIALS AND SERVICES Bethlehem purchases about $3 billion per year of raw materials, energy, equipment, goods and services from commercial sources. Difficulties in obtaining these items and the prices paid by Bethlehem could affect Bethlehem's profitability. Bethlehem has made significant progress in 1996 through its Strategic Sourcing initiatives and expects further progress in 1997. The objectives of Strategic Sourcing are to forge a strong, competitive base of supply partners who share Bethlehem's commitment to deliver superior value to customers; to realize significant, immediate and sustainable improvements in the total cost, quality and value of purchased goods and services; and to establish mutual commitments to continuous improvement. See "ITEM 2. PROPERTIES--Properties Relating to the Basic Steel Operations Segment--Raw Material Properties and Interests" of this Report for a further description of the sources of iron ore, coal, limestone and other raw materials essential to Bethlehem's steelmaking business. - 6 - 8 RESEARCH AND DEVELOPMENT Bethlehem engages in its own research activities for the improvement of existing products and the development of new products and more efficient operating processes. During 1996, 1995 and 1994, Bethlehem spent about $25 million, $25 million and $24 million, respectively, in its research and development activities. Bethlehem owns a number of United States and corresponding foreign patents that relate to a wide variety of products and processes, has pending various patent applications and is licensed under a number of patents. Bethlehem also licenses its patents to others, producing royalties. During 1996, six United States patents covering a variety of new developments were awarded to Bethlehem. However, Bethlehem believes that no single patent or license, which expires from time to time, or any group of patents or licenses relating to a particular product or process is of material importance in its overall business. Bethlehem also owns registered trademarks for certain of its products and service marks for certain of its services which, unlike patents and licenses, are renewable so long as they are continued in use and properly protected. In 1994, Bethlehem and U. S. Steel Group, a unit of USX Corporation, entered into a Cooperative Research and Development Agreement. During 1996, Bethlehem and U. S. Steel Group continued to conduct joint research and development activities under the Agreement in the field of basic ironmaking and steelmaking technologies and processes, such as primary iron and steel process development, finishing process development and process instrumentation development. Bethlehem believes that the joint research and development activities are helping to meet the Agreement's goals, including expediting technological developments and improvements, enhancing Bethlehem's domestic and worldwide competitiveness and reducing research and development costs and time periods. Bethlehem, therefore, intends to continue the joint research and development activities in 1997. Notices in connection with the Agreement have been filed in accordance with the National Cooperative Research and Development Act of 1993. EMPLOYEES AND EMPLOYMENT COSTS At the end of 1996, Bethlehem had about 17,500 employees compared with about 18,300 employees at the end of 1995 and 19,900 employees at the end of 1994. About 13,000 Bethlehem employees are covered by collective bargaining agreements with the United Steelworkers of America ("USWA"). The agreement applicable to a majority of Bethlehem's USWA represented employees includes a guarantee of minimum hours of work which limits Bethlehem's ability to reduce costs during economic downturns. Under the terms of Bethlehem's 1993 labor agreements with the USWA, most employees at its steel operations received a bonus in 1996 of $.50 per hour worked (maximum payment of $1,000) based on Bethlehem having achieved the required level of 1995 adjusted consolidated pre-tax income. Also, profit sharing of 8 percent of adjusted consolidated annual income before taxes, unusual items and expenses applicable to the plan plus 2 percent of adjusted profits of certain operations is paid to USWA represented employees in the following year. Profit sharing is also paid to non-represented employees based on specific Corporate and Business Unit plans and performance. Bethlehem paid about $75 million in 1996 and expects to pay about $45 million for income related bonus, profit-sharing and shortfall amounts in early 1997. The 1993 labor agreements provided for Reopener Negotiations in March 1996 for certain wage and benefit provisions (excluding pensions and health care benefits) with changes effective August 1, 1996, and continuing through the expiration of the labor agreement on August 1, 1999. Bethlehem did not reach a settlement with the USWA and the parties submitted unresolved issues to arbitration. The Arbitrator selected Bethlehem's final offer which included three wage increases totaling $1.00 per hour, lump sums totaling up to $2,000 per employee (one-half depends on achieving certain levels of profits in 1997 and 1998) and continuing one floating holiday each year for the next three years. As a result of the Arbitrator's decision, most employees at steel operations received a $.50 per hour wage increase on August 1, 1996, and will receive a $.25 per hour wage increase on August 1, 1997 and 1998. The Arbitrator's decision will not have a material adverse effect on Bethlehem's future profitability. - 7 - 9 Under other provisions of the labor agreements, Bethlehem is required to pay "shortfall amounts" each year up to 10 percent of the first $100 million and 20 percent in excess of $100 million of consolidated income before taxes, unusual items and expenses applicable to the shortfall plan. Shortfall amounts arise when employees terminate employment and ESOP Preference Stock, held in trust for employees in reimbursement for wage and benefit reductions in prior years, is converted into Common Stock and sold for amounts less than the stated value of the Preference Stock ($32 for Series A and $40 for Series B). Bethlehem issued about 61,000 shares of Series B Preference Stock in 1996 and about 40,800 shares in 1995 to a trustee for the benefit of employees for 1995 and 1994, respectively, and expects to issue about 35,000 shares in early 1997 for the 1996 plan year. Bethlehem's ability to operate could be impacted by a strike or work stoppage if it is unable to negotiate a new agreement with its represented employees when the existing agreement expires in 1999. Also, Bethlehem's profitability could be adversely affected if increased costs associated with any future contract are not recoverable through productivity improvements or price increases. For further information with regard to Bethlehem's employment costs, see "Employment Cost Summary--All Employees" under "Financial Review and Operating Analysis" in Bethlehem's 1996 Annual Report to Stockholders. As set forth on page 16 of this Report, such discussion is incorporated herein by reference. EMPLOYEE POSTRETIREMENT OBLIGATIONS Bethlehem has substantial financial obligations related to its employee postretirement plans for pensions and health care. Also, due to the excess of projected benefit obligations over pension fund assets, Bethlehem's annual pension expense is substantially higher on a per ton basis than that of most other domestic steel producers. This pension expense, combined with postretirement health care expense, puts Bethlehem at a competitive disadvantage with respect to such costs compared to most other domestic steel producers. As of December 31, 1996, Bethlehem's consolidated balance sheet reflects liabilities of $870 million and $1,595 million for the actuarial present value of unfunded accumulated benefit obligations ("ABO") for pensions and postretirement benefits other than pensions, respectively. The calculation of the actuarial present value of the ABOs for active employees assumes continued employment with projections for retirements, deaths, resignations and discharges. If the actual retirement of active employees is significantly earlier than projected (for plant closings or other reasons), the ABOs would increase substantially. The charges for employees terminated as a result of plant shutdowns or restructurings vary depending upon the demographics of the work force, but could be $100,000 per employee. The recording of these charges could result in a material adverse impact on Bethlehem's financial condition because of the increase in recorded liabilities, decrease in stockholders' equity and increases in required contributions to the pension fund and retiree health care payments. During 1996, long-term interest rates increased. As a result, Bethlehem increased the discount rate used to calculate the actuarial present value of its ABO for pensions from the 7.25 percent used at December 31, 1995, to 7.75 percent at November 30, 1996. This increase in the discount rate reduced Bethlehem's ABO for pensions and restored $67 million to additional paid-in capital as required by generally accepted accounting principles. For each 25 basis point change in the future discount rate, Bethlehem's ABO for pensions changes by about $100 million. A decrease in interest rates at November 30, 1997, from November 30, 1996, would require Bethlehem to increase the actuarial present value of its ABO for pensions and might again require Bethlehem to reduce additional paid-in capital depending on the market value of Bethlehem's pension trust fund assets (which at November 30, 1996, was $4.2 billion). For postretirement benefits other than pensions, principally health care and life insurance, the same increase in the discount rate as of November 30, 1996, and potential future changes also apply to the actuarial present value of Bethlehem's ABO. However, because different accounting principles apply, there is no immediate change in the recorded liability or potential charge to equity. Bethlehem has contributed amounts to its pension fund substantially in excess of amounts required under current law and regulations. As a result, Bethlehem currently has a funding standard credit balance which would allow it under current law and regulations to defer all pension funding for about two years, although it presently has no plans to do so. - 8 - 10 RESTRUCTURING ACTIVITIES As part of Bethlehem's efforts to make its business and operations more competitive, Bethlehem has implemented, and will continue to consider, a wide range of restructuring alternatives. JOINT VENTURES, PARTNERSHIPS, FACILITY SHARING ARRANGEMENTS AND MERGERS. Bethlehem has considered, and discussed with others, various opportunities for joint ventures, partnerships, facility sharing arrangements and mergers of all or part of Bethlehem. Bethlehem will continue to explore such opportunities. See "ITEM 2. PROPERTIES." of this Report for a description of joint ventures in which Bethlehem participates. FACILITY SHUTDOWNS AND RESTRUCTURINGS. During the last five years, Bethlehem has shut down or restructured facilities and operations and has reduced its annual steelmaking capability from 16.0 million tons in 1992 to 10.5 million tons in 1996. Bethlehem has recorded charges of $815 million in connection with these actions, including a $465 million restructuring charge ($382 million after-tax) in 1996. See Note C to the Consolidated Financial Statements. On October 30, 1996, Bethlehem announced a restructuring plan to improve its financial performance and stockholder value. Planned actions include the sale or shutdown of Bethlehem Structural Products Corporation, BethForge, CENTEC and BethShip. It also included the write-off of the assets of its Coke Division located in Bethlehem, Pennsylvania, as an impaired asset in accordance with generally accepted accounting principles, although Bethlehem will continue to operate this facility. Bethlehem is currently negotiating with qualified buyers for the sale of BethForge, CENTEC and BethShip. Efforts to sell Bethlehem Structural as an ongoing business have been unsuccessful and operations ceased during the first quarter of 1997. Although Bethlehem has no current plans to do so, if it becomes necessary for Bethlehem to shut down or restructure additional businesses and operations in the future, it could incur substantial additional charges in the process. The recording of these charges could have a material adverse impact on Bethlehem's financial condition because of the increase in recorded liabilities and decrease in stockholders' equity. ASSET SALES. Since early 1986, Bethlehem has implemented an extensive program of asset sales. About 35 businesses have been sold since the program began. Upon the completion of Bethlehem's most recent restructuring plan discussed above, Bethlehem believes that its remaining core steel businesses (Burns Harbor, Sparrows Point and PST) will provide a solid base on which to build the company and add value for its stockholders. Bethlehem does not anticipate raising substantial cash in the future from asset sales. CAPITAL STRUCTURE As of December 31, 1996, Bethlehem's capital structure was highly leveraged reflecting its significant recorded liability for pensions and other post-retirement obligations. Although Bethlehem believes it has sufficient access to funds for the operation of its business, its existing obligations and below investment grade credit rating may limit its ability to raise capital in the future. FORWARD-LOOKING STATEMENTS Bethlehem and its representatives may from time to time make forward-looking statements in reports filed with the Securities and Exchange Commission, reports to stockholders, press releases, other written documents and oral presentations. These forward-looking statements may include, among others, statements concerning projected levels of sales, shipments and income, pricing trends, cost-reduction strategies, product mix, anticipated capital expenditures and other future plans and strategies. As permitted by the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Bethlehem is identifying in this Report important factors that could cause Bethlehem's actual results to differ materially from those projected in these forward-looking statements. These factors include, but are not necessarily limited to: (bullet) the effect of planned and unplanned outages on Bethlehem's operations; - 9 - 11 (bullet) the highly cyclical nature of the domestic steel industry and many of the markets supplied by Bethlehem and the effect of that cyclicality on prices and volume; (bullet) the potential impact of strikes or work stoppages at facilities of Bethlehem's customers and suppliers; (bullet) the sensitivity of Bethlehem's results to relatively small changes in the prices obtained by Bethlehem for its products; (bullet) intense competition due to world steel overcapacity, new domestic capacity over the next several years, low-cost mini-mills, imports and substitute materials; (bullet) the high capital requirements associated with integrated steel facilities; (bullet) the significant costs associated with environmental controls and remediation expenditures and the uncertainty of future environmental control requirements; (bullet) availability and prices associated with raw materials, supplies, utilities and other services and items required by Bethlehem's operations; (bullet) employment matters, including costs and uncertainties associated with Bethlehem's collective bargaining agreements, and employee post-retirement obligations, including the impact of changes in the interest rate assumptions applicable in determining employee postretirement obligations and health care costs for retirees and their families; (bullet) the effect of possible future restructuring activities; (bullet) Bethlehem's highly leveraged capital structure; and (bullet) the effect of existing and possible future lawsuits filed against Bethlehem. The discussion of these factors is contained elsewhere in "ITEM 1. BUSINESS" and in "ITEM 3. LEGAL PROCEEDINGS" of this Report and are incorporated by reference into this section. Bethlehem does not undertake to update any forward-looking statements that may be made from time to time by Bethlehem or its representatives. ITEM 2. PROPERTIES. PROPERTIES RELATING TO THE BASIC STEEL OPERATIONS SEGMENT BURNS HARBOR DIVISION The principal operations of the Burns Harbor Division are located in Indiana on Lake Michigan, about 50 miles southeast of Chicago, Illinois. Burns Harbor produces hot rolled sheet, cold rolled sheet, corrosion-resistant coated sheet and plates. It is a major supplier of sheet and plate products to the automotive, service center, construction, machinery and appliance markets. Principal facilities include a sintering plant, two coke oven batteries, two blast furnaces, including new coal injection facilities, three basic oxygen furnaces with a combined annual raw steel production capability of about 5.6 million tons, a vacuum degassing facility, two continuous slab casters with a combined annual production capability of about 4.0 million tons, a 50 x 90-inch slabbing mill, two sheared plate mills (110-inch and 160-inch), an 80-inch hot-strip mill, two continuous pickling lines, an 80-inch five-stand cold reducing mill, sheet finishing mills, a continuous heat treating line, batch annealing facilities, a 48-inch continuous electrogalvanizing line and a 72-inch hot-dip galvanizing line. Burns Harbor operates a cold reducing mill, a continuous pickling line, a galvanizing line and two coke oven batteries in Lackawanna, New York. About 80 percent of the steel produced at Burns Harbor is continuously cast; the remaining 20 percent is ingot cast. Ingot cast slabs are used primarily to make steel plates. Burns Harbor's utilization of raw steel production capability was 92 percent during 1996. - 10 - 12 SPARROWS POINT DIVISION The operations of the Sparrows Point Division are located on the Chesapeake Bay near Baltimore, Maryland. Sparrows Point produces hot rolled sheet, cold rolled sheet, corrosion resistant coated sheet (e.g., galvanized sheet, Galvalume sheet), tin mill products and steel plate. Its principal markets include construction, containers and service centers. Principal facilities include a sintering plant, a large blast furnace, two basic oxygen furnaces with an annual raw steel production capability of about 3.6 million tons, a two-strand continuous slab caster with an annual production capability of about 3.6 million tons, a 160-inch sheared plate mill, a 68-inch hot- strip mill, three continuous pickling lines, three cold reducing mills (66-inch, 56-inch and 48- inch), continuous and batch annealing facilities, two galvanizing lines, a Galvalume line, a 48- inch hot-dip galvanizing/Galvalume line and tin mill facilities that include tin and chrome plating lines. Sparrows Point continuously casts essentially 100 percent of its total production volume. Sparrows Point's utilization of raw steel production capability was 98 percent during 1996. PENNSYLVANIA STEEL TECHNOLOGIES, INC. ("PST") Located in Steelton, Pennsylvania, south of Harrisburg, Pennsylvania, PST uses electric furnace steelmaking and a continuous caster in the production of railroad rails, specialty blooms and flat bars. It is one of only two rail producers in the United States. PST also produces large- diameter pipe for the oil and gas industries. Principal facilities include a DC electric arc furnace with an annual raw steel production capability of about 1.3 million tons, a ladle furnace, a vacuum degassing facility, a continuous bloom caster, a 44-inch blooming mill, a 28-inch rail mill, in-line rail head-hardening facilities, finishing and shipping facilities for long-length (80-foot) rails, a 20-inch bar mill and an electric fusion welded pipe mill. PST's utilization of raw steel production capability was 59 percent during 1996. JOINT VENTURES Bethlehem participates in a joint venture, known as Double G Coatings Company, L.P., which operates a 270,000 ton per year sheet coating line near Jackson, Mississippi. The line produces galvanized and Galvalume coated sheets primarily for the construction market. The Sparrows Point Division provides cold rolled coils for about half of Double G's annual capacity and is responsible for marketing its share of the finished product. Bethlehem also participates in a joint venture which owns and operates a 400,000 ton per year electrogalvanizing line at Walbridge, Ohio. This facility produces corrosion-resistant sheet steel primarily for the automobile industry and other consumer durables markets. The Burns Harbor Division provides cold rolled coils for 75 percent of Walbridge's annual capacity and is responsible for marketing its share of the finished product. Bethlehem also participates in two joint ventures with facilities located adjacent to the Burns Harbor operations: Indiana Pickling and Processing Company that operates a pickling line and Chicago Cold Rolling, L.L.C. that operates a reversing cold mill complex. Bethlehem also has indirect equity interests in various iron ore properties. See "Raw Material Properties and Interests" below. RAW MATERIAL PROPERTIES AND INTERESTS IRON ORE. Bethlehem has indirect equity interests in various iron ore operating properties, which (excluding tonnages applicable to interests owned by others) it estimates contained recoverable reserves at December 31, 1996, sufficient to produce at least 9 million tons of direct shipping iron ore from properties located in Brazil and 475 million tons of iron ore concentrates and pellets, of which 206 million tons are from properties located in Minnesota and 269 million tons are from properties located in Canada. As previously announced, Bethlehem has signed an agreement for the sale of its equity interest in the Iron Ore Company of - 11 - 13 Canada ("IOC"). Upon completion of the sale, which is subject to governmental approvals and IOC shareholder consent, Bethlehem will continue its relationship as a customer of IOC and will purchase iron ore at market prices. In addition to the estimated reserves at operating properties, Bethlehem also has indirect equity interests in undeveloped or nonoperating iron ore properties, which (excluding tonnages applicable to interests owned by others) it estimates contained recoverable reserves at December 31, 1996, sufficient to produce at least 16 million tons of direct shipping iron ore from properties located in Brazil and 126 million tons of iron ore pellets from properties located in Minnesota. The iron ore operating properties in which Bethlehem has interests have mining and processing facilities capable of supplying the major portion of Bethlehem's current annual iron ore requirements. However, because of the location of Bethlehem's steel operations and the iron ore products best suited to these facilities, Bethlehem engages in iron ore sales and exchanges with other consumers and purchases a portion of its iron ore requirements. These purchases have been from various sources, including sources in which it has ownership interests, under a variety of contractual arrangements extending over varying periods of time. Bethlehem's share of the annual iron ore production by enterprises in which it has ownership interests, for Bethlehem's use or sale to trade customers, was 13.9 million tons in 1996 and 14.7 million tons in 1995. In addition to these sources, Bethlehem purchased 1.7 million tons of iron ore in each of 1996 and 1995 from sources in which it had no ownership interests. In 1996, Bethlehem obtained about 86 percent of its iron ore requirements from operations in which it had ownership interests compared with 85 percent in 1995. Bethlehem had trade sales of iron ore in 1996 and 1995 of 1.2 million tons and .6 million tons, respectively. Additional iron ore trade sales commitments through December 31, 1997, presently aggregate .3 million tons. No iron ore trade sales commitments exist beyond 1997. The interests in foreign iron ore properties described above are subject to the risks associated with investments in foreign countries, including the risk of nationalization. COAL AND COKE. Bethlehem owns and leases coal operating properties in West Virginia, which it estimates contained recoverable reserves at December 31, 1996, sufficient to produce at least 23 million tons of steam coal. In addition to the estimated reserves at operating properties, Bethlehem also owns and leases undeveloped or nonoperating coal properties in Pennsylvania and West Virginia, which it estimates contained recoverable reserves at December 31, 1996, sufficient to produce at least 167 million tons of coal, of which about 89 percent and 11 percent, respectively, are metallurgical and steam coal. Bethlehem's coal operations produced 1.9 million tons of coal in 1996 and 3.3 million tons in 1995. Trade shipments of coal were 1.2 million tons in 1996 compared with 2.2 million tons in 1995. During 1996, Bethlehem sold and leased its Eagle Nest coal operations and sold other coal reserves located in Boone County, West Virginia. In 1996, Bethlehem obtained about 13 percent of its coal requirements from its own mines, compared with 19 percent in 1995. The balance of Bethlehem's requirements was purchased from commercial sources. Through December 31, 2005, Bethlehem is committed to satisfy certain of its coal requirements from a single supplier. Bethlehem continues to operate coke-making facilities at Bethlehem, Pennsylvania; Burns Harbor, Indiana; and Lackawanna, New York. OTHER RAW MATERIALS. Bethlehem purchases its other raw material requirements from commercial sources. - 12 - 14 TRANSPORTATION Bethlehem owns five subsidiary shortline railroads which transport raw materials and semifinished steel products within various Bethlehem operations and serve other customers on their lines. Bethlehem manages an owner-operated interstate trucking company serving Bethlehem's operations and other facilities. The Burns Harbor Division operates two 1,000 foot ore vessels (one owned and one under long-term charter), which are used for the transportation of iron ore on the Great Lakes. PROPERTIES RELATING TO THE STEEL RELATED OPERATIONS SEGMENT As discussed under "ITEM 1. BUSINESS--Facility Shutdowns and Restructurings", all of the properties of the Steel Related Operations Segment will either be sold or shut down. GENERAL While Bethlehem's principal operations and facilities are adequately maintained, they are of varying ages, technologies and operating efficiencies. Bethlehem believes that most of its operations and facilities currently are competitive with the operations and facilities of its principal competitors. Bethlehem will continue to make capital expenditures to improve and maintain the competitiveness of its operations and facilities. See "ITEM 1. BUSINESS--General--Capital Expenditures" of this Report for a discussion of Bethlehem's capital expenditures. All principal operations and facilities are owned in fee by Bethlehem except for two continuous casters at the Sparrows Point Division and the Burns Harbor Division which are being leased. Bethlehem capitalized the expenditures related to the leases for two continuous casters and financed the construction of two new hot-dip galvanizing lines at its Burns Harbor and Sparrows Point Divisions. These two facilities are pledged as collateral for the borrowings. ITEM 3. LEGAL PROCEEDINGS. Bethlehem is a party to numerous legal proceedings incurred in the ordinary course of its business, including the matters specifically discussed below. On October 4, 1990, the State of Maryland Department of Environment (the "MDE") filed a civil action against Bethlehem in the Circuit Court of Baltimore County, Maryland seeking civil penalties for alleged violations of the Maryland air pollution regulations arising out of exceedances of the visible emissions standards established for various sources at the Sparrows Point Division by an October 1987 Consent Order, as amended in June 1989. On April 30, 1991, the MDE filed a complaint in intervention in a civil action filed on April 25, 1991, by the Justice Department on behalf of the United States Environmental Protection Agency (the "EPA") against Bethlehem, alleging violations of the Clean Air Act resulting from alleged violations of Maryland air pollution regulations at the Sparrows Point Division. The complaint in intervention, which was approved by the Court on June 14, 1991, incorporated all of the violations alleged in the MDE complaint. On May 1, 1992, a settlement between the parties to the EPA action was memorialized in a Consent Decree, which was entered by the Court on July 1, 1992. The Consent Decree resolved all of the issues in both the federal and state actions except for a single count in the MDE action dealing with alleged violations from the basic oxygen furnace. The parties have agreed to resolve that count with a civil penalty payment of $350,000 as part of a comprehensive multimedia pollution prevention agreement which was lodged in the U. S. District Court for Maryland as a proposed consent decree on February 25, 1997. On June 9, 1994, the EPA issued an administrative Complaint and Notice of Opportunity for Hearing alleging several violations of the polychlorinated biphenyl (PCB) regulations under the Toxic Substance Control Act by Bethlehem at the Sparrows Point Division. The Complaint sets forth a proposed civil penalty of $145,500. On June 30, 1994, Bethlehem filed its Answer and Request for Hearing. Settlement discussions have been - 13 - 15 initiated between Bethlehem and the EPA. If such discussions do not succeed, Bethlehem believes it has meritorious defenses and will vigorously defend the action. On December 6, 1995, the Pennsylvania Department of Environmental Protection (the "DEP") issued a notice alleging violations by Bethlehem of the Pennsylvania Air Pollution Control Act based on sulfur dioxide emissions exceeding plan approval limits for new steelmaking facilities at Pennsylvania Steel Technologies, Inc. The parties have negotiated a consent order which required Bethlehem to pay a civil penalty of $95,000 by October 31, 1996, to install additional control equipment by March 31, 1998, and to make additional civil penalty payments of $5,400 for each month from July 1996 until the earlier of March 1998 or the start-up of a proposed sulfur dioxide scrubber. Bethlehem is in full compliance with the consent order. On March 29, 1996, the U. S. Department of Justice, on behalf of the EPA, brought a civil action against Bethlehem in the U. S. District Court for the Northern District of Indiana for alleged violations of the Clean Water Act and the Safe Drinking Water Act at the Burns Harbor Division. The Complaint alleges that, from November 1992 to April 1994, the Division discharged pollutants from its dock wall without a permit as required by the Clean Water Act and failed to meet certain requirements of an underground injection well permit. Settlement negotiations were initiated prior to the filing of the Complaint and the government has suggested settlement for total civil penalties of $441,300 and appropriate injunctive relief. If settlement negotiations are unsuccessful, Bethlehem believes it has meritorious defenses and will vigorously defend the action. On July 31, 1996, the EPA issued an Administrative Complaint alleging that Bethlehem violated the Comprehensive Environmental Response, Compensation and Liability Act by failing to report until January 31, 1995, releases in excess of the reportable quantity of sodium nitrite at the Burns Harbor Division on each of 20 days in January 1995. The Complaint sets forth a proposed civil penalty of $148,500. Bethlehem filed an answer and request for hearing on August 19, 1996, and has requested a settlement conference. If settlement discussions are unsuccessful, Bethlehem believes it has meritorious defenses and will vigorously defend the action. On February 14, 1997, the EPA issued a notice alleging violations by Bethlehem Structural Products Corporation (BSPC) of the Clean Air Act, based on emissions from Coke Oven Battery A at BSPC on various days in 1996 exceeding those allowed under the Pennsylvania State Implementation Plan (the "SIP"). Settlement negotiations have been initiated among BSPC, the EPA and the DEP to resolve Battery A compliance issues under the National Emissions Standards for coke oven emissions as well as under the SIP. The EPA has initially proposed a civil penalty of $322,500 as part of the consent decree. If settlement discussions do not succeed, Bethlehem believes it has meritorious defenses and will vigorously defend the action. See "ITEM 1. BUSINESS--General--Environmental Control and Remediation Expenditures" of this Report for a discussion of Bethlehem's potential responsibilities for environmental cleanup at certain sites under RCRA and CERCLA. Bethlehem cannot predict with any certainty the outcome of any legal proceedings to which it is a party. However, in the opinion of Bethlehem's management, adequate reserves have been recorded for losses which are likely to result from these proceedings. To the extent that such reserves prove to be inadequate, Bethlehem would incur a charge to earnings which could be material to its future results of operations in particular quarterly or annual periods. The outcome of these proceedings, however, is not currently expected to have a material adverse effect on Bethlehem's consolidated financial position. 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 1996. - 14 - 16 Executive Officers of the Registrant. The executive officers of Bethlehem as of March 21, 1997, are as follows: Name Age Position ---- --- -------- Curtis H. Barnette 62 Chairman (Chief Executive Officer) Roger P. Penny 60 President (Chief Operating Officer) Gary L. Millenbruch 59 Executive Vice President (Chief Financial Officer) and Treasurer John A. Jordan, Jr. 61 Senior Vice President (Administration) David P. Post 63 Senior Vice President (Commercial) Lonnie A. Arnett 51 Vice President (Accounting) and Controller Dr. Walter N. Bargeron 54 President, Burns Harbor Division Stephen G. Donches 51 Vice President (Public Affairs) Duane R. Dunham 55 President, Sparrows Point Division Andrew R. Futchko 54 President, Pennsylvania Steel Technologies, Inc. William H. Graham 51 Vice President (Law), General Counsel and Secretary John L. Kluttz 54 Vice President (Union Relations) Dr. Carl F. Meitzner 57 Vice President (Planning) Dr. Augustine E. Moffitt, Jr. 51 Vice President (Safety, Health and Environment) Gregory F. Paolini 64 President, Bethlehem Structural Products Corporation, BethForge, Inc., and CENTEC Roll Corporation Dr. Malcolm J. Roberts 54 Vice President (Technology) and Chief Technology Officer Robert A. Rudzki 43 Vice President (Purchasing and Transportation) and Chief Procurement Officer Dorothy L. Stephenson 47 Vice President (Human Resources) All of the executive officers have held responsible management or professional positions with Bethlehem or its subsidiaries for more than the past five years. The By-laws of Bethlehem provide that the officers shall be chosen annually by the Board of Directors and that each officer shall hold office until his successor shall have been elected and shall qualify or until his earlier death or his earlier resignation or removal in the manner provided in the By-laws. - 15 - 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. As of March 21, 1997, there were 112,061,570 shares of Bethlehem Common Stock outstanding held by about 36,600 stockholders of record. The principal market for Bethlehem Common Stock is the New York Stock Exchange. Bethlehem Common Stock is also listed on the Chicago Stock Exchange. Dividends on Bethlehem Common Stock are paid quarterly when declared by Bethlehem's Board of Directors. Under the provisions of Bethlehem's 10-3/8% Senior Notes due 2003, Bethlehem's ability to pay dividends on its Common Stock is restricted. See Note K to the Consolidated Financial Statements. At December 31, 1996, about $450 million was available for the payment of Common Stock dividends under these provisions. Bethlehem has not paid a dividend on its Common Stock since the fourth quarter of 1991. In accordance with Bethlehem's policy, future dividends will be determined by the Board of Directors (subject to any applicable restrictions) on the basis of attained results and the business outlook. The following table sets forth, for the periods indicated, the high and low sales prices of Bethlehem Common Stock as reported in the consolidated transaction reporting system. The closing sale price of Bethlehem Common Stock on March 21, 1997, as reported in the consolidated transaction reporting system, was $8.250. 1996 1995 ---- ---- Sales Prices Sales Prices ------------ ------------ Period High Low High Low ------ ---- --- ---- --- First Quarter $15.875 $13.125 $19.125 $14.125 Second Quarter 14.500 11.500 16.375 13.625 Third Quarter 12.000 9.250 18.250 13.750 Fourth Quarter 10.313 7.625 14.750 12.625 ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is incorporated by reference from page 26 of Bethlehem's 1996 Annual Report to Stockholders. With the exception of the information specifically incorporated by reference, the 1996 Annual Report to Stockholders is not to be deemed filed as part of this Report for purposes of this Item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item is incorporated by reference from pages 1 to 5 and 8 to 11, inclusive, of Bethlehem's 1996 Annual Report to Stockholders. With the exception of the information specifically incorporated by reference, the 1996 Annual Report to Stockholders is not to be deemed filed as part of this Report for purposes of this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item is incorporated by reference from pages 12 to 23, inclusive, of Bethlehem's 1996 Annual Report to Stockholders. With the exception of the information specifically incorporated by reference, the 1996 Annual Report to Stockholders is not to be deemed filed as part of this Report for purposes of this Item. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. - 16 - 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. In addition to the information set forth under the caption "Executive Officers of the Registrant" in Part I of this Report, the information required by this Item is incorporated by reference from pages 2 to 6, inclusive, of Bethlehem's Proxy Statement for the 1997 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, Bethlehem'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 pages 9 to 14, inclusive, of Bethlehem's Proxy Statement for the 1997 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, Bethlehem's Proxy Statement is not to be deemed filed as part of this Report for purposes of this Item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference from pages 7 and 15 of Bethlehem's Proxy Statement for the 1997 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, Bethlehem'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 material appearing under the heading "Certain Business Relationships" appearing on page 8 and the heading "Indemnification Assurance Agreements" appearing on page 15 of Bethlehem's Proxy Statement for the 1997 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, Bethlehem's Proxy Statement is not to be deemed filed as part of this Report for purposes of this Item. - 17 - 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) DOCUMENTS FILED AS PART OF THIS REPORT: The following is an index of the financial statements, schedules and exhibits included in this Report or incorporated herein by reference. (1) Financial Statements. BETHLEHEM STEEL CORPORATION AND CONSOLIDATED SUBSIDIARIES Page ---- Consolidated Statements of Income for the years 1996, 1995 and 1994. * Consolidated Balance Sheets as of December 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . * Consolidated Statements of Cash Flows for the years 1996 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . * Notes to Consolidated Financial Statements (Including Quarterly Financial Data). . . . . . . . . . . . . . * (2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. Report of Independent Auditors On Consolidated Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . F-1 Schedules: II -- Valuation and Qualifying Accounts and Reserves, years ended December 31, 1996, 1995 and 1994. . . . . . . . F-3 - --------------- * Incorporated in this Report by reference from pages 12 to 23, inclusive, of Bethlehem's 1996 Annual Report to Stockholders referred to below. The Consolidated Financial Statements, together with the report thereon of Price Waterhouse LLP dated January 29, 1997, appearing on pages 12 to 24, inclusive, of the 1996 Annual Report to Stockholders are incorporated by reference in this Form 10-K Annual Report. With the exception of those pages, the 1996 Annual Report to Stockholders is not to be deemed filed as part of this Report for purposes of this Item. The Schedules listed above should be read in conjunction with the consolidated financial statements in such 1996 Annual Report to Stockholders. Schedules not included have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. Separate financial statements of subsidiaries not consolidated and 50 percent or less owned persons accounted for by the equity method have been omitted because considered in the aggregate as a single subsidiary they do not constitute a significant subsidiary. (3) EXHIBITS. The following is an index of the exhibits included in this Report or incorporated herein by reference. (3)(a) Second Restated Certificate of Incorporation (Incorporated by reference from Exhibit 3 to Bethlehem's quarterly report on Form 10-Q for the quarter ended March 31, 1994). (b) Amendment to Second Restated Certificate of Incorporation (Incorporated by reference from Exhibit 3(i) to Bethlehem's quarterly report on Form 10-Q for the quarter ended June 30, 1995). (c) By-laws of Bethlehem Steel Corporation, as amended October 1, 1988 (Incorporated by reference from Exhibit (3)(b) to Bethlehem's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). (4)(a) Rights Agreement, dated as of September 28, 1988, between Bethlehem Steel Corporation and Morgan Shareholder Services Trust Company (Incorporated by reference from Exhibit (4)(a) to Bethlehem's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). - 18 - 20 (b) Amendment to Rights Agreement, dated as of November 1, 1995, between Bethlehem Steel Corporation and First Chicago Trust Company of New York (formerly Morgan Shareholder Services Trust Company) (Incorporated by reference from Exhibit 4(a) to Bethlehem's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). (c) Bethlehem is a party to certain long-term debt agreements where the amount involved does not exceed 10% of Bethlehem's total consolidated assets. Bethlehem agrees to furnish a copy of any such agreement to the Commission upon request. *(10)(a) Excess Benefit Plan of Bethlehem Steel Corporation and Subsidiary Companies, as amended July 29, 1992 (Incorporated by reference from Exhibit 10(a) to Bethlehem's quarterly report on Form 10-Q for the quarter ended June 30, 1992). *(b) 1988 Stock Incentive Plan of Bethlehem Steel Corporation (Incorporated by reference from Exhibit 10(b) to Bethlehem's Annual Report on Form 10-K for the fiscal year ended December 31, 1992). *(c) 1994 Stock Incentive Plan of Bethlehem Steel Corporation (Incorporated by reference from Exhibit 1 to Bethlehem's Proxy Statement in connection with its Annual Meeting of Shareholders held on April 26, 1994). *(d) 1994 Non-Employee Directors Stock Plan of Bethlehem Steel Corporation (Incorporated by reference from Exhibit 2 to Bethlehem's Proxy Statement in connection with its Annual Meeting of Shareholders held on April 26, 1994). *(e) Special Incentive Compensation Plan of Bethlehem Steel Corporation, which is contained in Article Seven of the Second Restated Certificate of Incorporation referred to in Exhibit 3(a) to this Report. *(f) Supplemental Benefits Plan of Bethlehem Steel Corporation and Subsidiary Companies, as amended July 29, 1992 (Incorporated by reference from Exhibit 10(b) to Bethlehem's quarterly report on Form 10-Q for the quarter ended June 30, 1992). *(g) Post-Retirement Retainer Plan for Non-Officer Directors (Incorporated by reference from Exhibit (10)(o) to Bethlehem's Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (h) Form of Indemnification Assurance Agreement between Bethlehem Steel Corporation and each of its directors and executive officers listed on Schedule A thereto. (11) Statement regarding computation of earnings per share. (13) Those portions of the 1996 Annual Report to Stockholders of Bethlehem Steel Corporation which are incorporated by reference into this Form 10-K Annual Report. (23) Consent of Independent Auditors (included on page F-2 of this Report). (27) Financial Data Schedule. - ------------------ * Compensatory plans in which Bethlehem's directors and executive officers participate. (b) REPORTS ON FORM 8-K. During the quarter ended December 31, 1996, no reports on Form 8-K were filed by Bethlehem. - 19 - 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Bethlehem Steel Corporation has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of March, 1997. BETHLEHEM STEEL CORPORATION, by /s/ Lonnie A. Arnett -------------------------- Lonnie A. Arnett Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of Bethlehem Steel Corporation and in the capacities indicated on the 26th day of March, 1997.
/s/ Curtis H. Barnette /s/ Thomas L. Holton ------------------------------ ------------------------------ Curtis H. Barnette Thomas L. Holton Chairman and Director Director (principal executive officer) /s/ Gary L. Millenbruch /s/ Lewis B. Kaden ------------------------------ ------------------------------ Gary L. Millenbruch Lewis B. Kaden Executive Vice President, Treasurer Director and Director (principal financial officer) /s/ Lonnie A. Arnett /s/ Harry P. Kamen ------------------------------ ------------------------------ Lonnie A. Arnett Harry P. Kamen Vice President and Controller Director (principal accounting officer) /s/ Benjamin R. Civiletti /s/ Winthrop Knowlton ------------------------------ ------------------------------ Benjamin R. Civiletti Winthrop Knowlton Director Director /s/ Worley H. Clark /s/ Robert McClements, Jr. ------------------------------ ------------------------------ Worley H. Clark Robert McClements, Jr. Director Director /s/ John B. Curcio /s/ Roger P. Penny ------------------------------ ------------------------------ John B. Curcio Roger P. Penny Director Director /s/ Shirley D. Peterson /s/ William A. Pogue ------------------------------ ------------------------------ Shirley D. Peterson William A. Pogue Director Director /s/ Dean P. Phypers /s/ John F. Ruffle ------------------------------ ------------------------------ Dean P. Phypers John F. Ruffle Director Director
- 20 - 22 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Bethlehem Steel Corporation Our audits of the consolidated financial statements referred to in our report dated January 29, 1997 appearing on page 24 of the 1996 Annual Report to Stockholders of Bethlehem Steel Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the informtion set forth therein when read in conjunction with the related consolidated financial statements. /s/ Price Waterhouse LLP 1177 Avenue of the Americas New York, NY 10036 January 29, 1997 F-1 23 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 2-90795, No. 2-71699, No. 2-53880, No. 2-90796, No. 2-67314, No. 33-23516, No. 33-23688, No. 33-52267, No. 33-58019, No. 33-58021 and No. 33-60507) of Bethlehem Steel Corporation of our report dated January 29, 1997 appearing on page 24 of the 1996 Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page F-1 of this Form 10-K. /s/ Price Waterhouse LLP 1177 Avenue of the Americas New York, NY 10036 March 26, 1997 F-2 24 BETHLEHEM STEEL CORPORATION 10-K SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES ($ in Millions)
CHARGED BALANCE AT (CREDITED) BALANCE AT 12/31/95 TO INCOME DEDUCTIONS OTHER 12/31/96 ---------- ---------- ---------- -------- ---------- CLASSIFICATION Doubtful Receivables & Returns $19.5 $0.1 $1.2 (a) - $20.8 Long-term Receivables 4.5 (0.1) - - 4.4 Deferred Income Tax Asset 360.2 67.0 - (17.2)(b) 410.0 CHARGED BALANCE AT (CREDITED) BALANCE AT 12/31/94 TO INCOME DEDUCTIONS OTHER 12/31/95 ---------- ---------- ---------- -------- ---------- CLASSIFICATION Doubtful Receivables & Returns $18.6 $1.2 ($0.3)(a) - $19.5 Long-term Receivables 4.5 - - - 4.5 Deferred Income Tax Asset 383.2 (37.0) - 14.0 (c) 360.2 CHARGED BALANCE AT (CREDITED) BALANCE AT 12/31/93 TO INCOME DEDUCTIONS OTHER 12/31/94 ---------- ---------- ---------- -------- ---------- CLASSIFICATION Doubtful Receivables & Returns $16.3 $2.4 ($0.1)(a) - $18.6 Long-term Receivables 4.5 - - - 4.5 Deferred Income Tax Asset 406.7 (13.0) - (10.5)(d) 383.2
(a) Amounts written-off less collections and reinstatements. (b) Represents eliminating the valuation allowance recorded for a $82 million ($67 million after-tax) adjustment to equity at December 31, 1995 required to recognize the minimum pension liability. See Notes G and K to the Consolidated Financial Statements. (c) Represents the valuation allowance for a $82 million ($67 million after-tax) charge to equity required to recognize the minimum pension liability. See Notes G and K to the Consolidated Financial Statements. (d) Represents eliminating the valuation allowance recorded for a $60 million ($50 million after-tax) adjustment to equity at December 31, 1993 required to recognize the minimum pension liability. See Notes G and K to the Consolidated Financial Statements. F-3 25 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION (3)(a) Second Restated Certificate of Incorporation (Incorporated by reference from Exhibit 3 to Bethlehem's quarterly report on Form 10-Q for the quarter ended March 31, 1994). (b) Amendment to Second Restated Certificate of Incorporation (Incorporated by reference from Exhibit 3(i) to Bethlehem's quarterly report on Form 10-Q for the quarter ended June 30, 1995). (c) By-laws of Bethlehem Steel Corporation, as amended October 1, 1988 (Incorporated by reference from Exhibit (3)(b) to Bethlehem's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). (4)(a) Rights Agreement, dated as of September 28, 1988, between Bethlehem Steel Corporation and Morgan Shareholder Services Trust Company (Incorporated by reference from Exhibit (4)(a) to Bethlehem's Annual Report on Form 10-K for the fiscal year ended December 31, 1993). (b) Amendment to Rights Agreement, dated as of November 1, 1995, between Bethlehem Steel Corporation and First Chicago Trust Company of New York (formerly Morgan Shareholder Services Trust Company). (Incorporated by reference from Exhibit 4(a) to Bethlehem's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). (c) Bethlehem is a party to certain long-term debt agreements where the amount involved does not exceed 10% of Bethlehem's total consolidated assets. Bethlehem agrees to furnish a copy of any such agreement to the Commission upon request. *(10)(a) Excess Benefit Plan of Bethlehem Steel Corporation and Subsidiary Companies, as amended July 29, 1992 (Incorporated by reference from Exhibit 10(a) to Bethlehem's quarterly report on Form 10-Q for the quarter ended June 30, 1992). *(b) 1988 Stock Incentive Plan of Bethlehem Steel Corporation (Incorporated by reference from Exhibit 10(b) to Bethlehem's Annual Report on Form 10-K for the fiscal year ended December 31, 1992). - ------------ * Compensatory plans in which Bethlehem's directors and executive officers participate. 26 *(c) 1994 Stock Incentive Plan of Bethlehem Steel Corporation (Incorporated by reference from Exhibit 1 to Bethlehem's Proxy Statement in connection with its Annual Meeting of Shareholders held on April 26, 1994). *(d) 1994 Non-Employee Directors Stock Plan of Bethlehem Steel Corporation (Incorporated by reference from Exhibit 2 to Bethlehem's Proxy Statement in connection with its Annual Meeting of Shareholders held on April 26, 1994). *(e) Special Incentive Compensation Plan of Bethlehem Steel Corporation, which is contained in Article Seven of the Second Restated Certificate of Incorporation referred to in Exhibit 3(a) to this Report. *(f) Supplemental Benefits Plan of Bethlehem Steel Corporation and Subsidiary Companies, as amended July 29, 1992 (Incorporated by reference from Exhibit 10(b) to Bethlehem's quarterly report on Form 10- Q for the quarter ended June 30, 1992). *(g) Post-Retirement Retainer Plan for Non-Officer Directors (Incorporated by reference from Exhibit (10)(o) to Bethlehem's Annual Report on Form 10-K for the fiscal year ended December 31, 1992). (h) Form of Indemnification Assurance Agreement between Bethlehem Steel Corporation and each of its directors and executive officers listed on Schedule A thereto. (11) Statement regarding computation of per share earnings. (13) Those portions of the 1996 Annual Report to Stockholders of Bethlehem Steel Corporation which are incorporated by reference into this Form 10- K Annual Report. (23) Consent of Independent Auditors (included on page F-2 of this Report). (27) Financial Data Schedule. - --------------- * Compensatory plans in which Bethlehem's directors and executive officers participate. 27 Exhibit 10(h) FORM OF INDEMNIFICATION ASSURANCE AGREEMENT [Bethlehem Steel Corporation] [Name and Address of Director or Officer] Dear : This letter will confirm the agreement and understanding between Bethlehem Steel Corporation (the "Company") and you regarding your service as a [Director/Officer] of the Company. It is and has been the policy of the Company to indemnify its officers and directors against any costs, expenses and other liabilities to which they may become subject by reason of their service to the Company, and to insure its directors and officers against such liabilities, as and to the extent permitted by applicable law and in accordance with the principles of good corporate governance. In this regard, the Company's By-laws (Article IX) require that the Company indemnify and advance costs and expenses to (collectively, "indemnify") its directors and officers as permitted by Delaware law. A copy of the relevant provisions of the Company's By-laws, as amended, is attached hereto. In consideration of your service as a [Director/Officer] of the Company, the Company shall indemnify you, and hereby confirms its agreement to indemnify you, to the full extent provided by applicable law and the By-laws of the Company as currently in effect. In particular, as provided by the By-laws, the Company shall make any necessary determination as to your entitlement to indemnification in respect of any liability within 60 days of receiving a written request from you for indemnification against such liability. You have agreed to provide the Company with such information or documentation as the Company may reasonably request to evidence the liabilities against which indemnification is sought or as may be necessary to permit the Company to submit a claim in respect thereof under any applicable directors and officers liability insurance or other liability insurance policy. You have further agreed to cooperate with the Company in the making of any determination regarding your entitlement to indemnification. If the Company does not make a determination within the required 60- day period, a favorable determination will be deemed to be made, and you shall be entitled to payment, subject only to your written agreement to refund such payment if a contrary determination is later made and the delay was by reason of the inability of the Company to make such determination within the 60-day period. In the event the 28 Company shall determine that you are not entitled to indemnification, the Company shall give you written notice thereof specifying the reason therefor, including any determinations of fact or conclusions of law relied upon in reaching such determination. Notwithstanding any determination made by the Company that you are not entitled to indemnification, you shall be entitled to seek a de novo judicial determination of your right to indemnification under the By-laws and this agreement by commencing an appropriate action therefor within 180 days after the Company shall notify you of its determination. The Company shall not oppose any such action by reason of any prior determination made by it as to your right to indemnification or, except in good faith, raise any objection not specifically relating to the merits of your indemnification claim or not considered by the Company in making its own determination. In any such proceeding, the Company shall bear the burden of proof in showing that your conduct did not meet the applicable standard of conduct required by the By-laws or applicable law for indemnification. It is understood that, as provided in Section 4 of Article IX of the By- laws, any expenses incurred by you in any investigation or proceeding by the Company or before any court commenced for the purpose of making any such determination shall be reimbursed by the Company. No future amendment of the By-laws shall diminish your rights under this agreement, unless you shall have consented to such amendment. Your right to indemnification as aforesaid shall be in addition to any right to remuneration to which you may from time to time be entitled as a [Director/Officer]. It is understood and agreed that your right to indemnification shall not entitle you to continue in your present position with the Company or any future position to which you may be appointed or elected and that you shall be entitled to indemnification under the By-laws only in respect to liabilities arising out of acts or omissions or alleged acts or omissions by you as a [Director/Officer] or as otherwise provided by the By-laws, but you shall be entitled to such indemnification with respect to any such liability, whether incurred or arising during or after your service as a [Director/Officer] and whether before or after the date of this letter, in respect of any claim, cause, action, proceeding or investigation, whether commenced, accruing or arising during or after your service as a [Director/Officer] and whether before or after the date of this letter. In further consideration of your service as a [Director/Officer] of the Company, the Company in connection with its indemnification policy has arranged for the issuance of, and you shall be entitled to the benefits of, an "Irrevocable Straight Standby Letter of Credit" issued by Morgan Guaranty Trust Company of New York. Said letter of credit has been arranged for the purpose of assuring payment to you, certain other current and former directors and officers of the Company and future directors, officers and employees of the Company and its affiliates designated by the Board of Directors of the Company ("Indemnitees") of any amounts to which you and they may become entitled as - 2 - 29 indemnification pursuant to the By-laws in the event that, for any reason, the Company shall fail promptly to pay to you, upon written request therefor, any such indemnification, said assurance for all Indemnitees being limited at any time to $5,000,000 in aggregate amount. The Company understands that there has been established an irrevocable trust, the Bethlehem Indemnification Trust, for which First Valley Bank, Bethlehem, Pennsylvania, acts as trustee, for the purpose, among other things, of administering the respective interests of the Indemnitees in said letter of credit, and the Company has consented to the issuance and delivery of said letter of credit to the Bethlehem Indemnification Trust. Unless renewed or replaced by a comparable letter of credit in the amount of $5,000,000, the full undrawn amount of said letter of credit may be drawn upon prior to the expiration thereof. Drawings on said letter of credit may be arranged through the Bethlehem Indemnification Trust, as provided by the trust agreement therefor, by contacting the First Valley Bank, One Bethlehem Plaza, Bethlehem, Pennsylvania 18018. You have agreed to repay to the Bethlehem Indemnification Trust any amount paid to you by such trust (i) if it shall ultimately be determined (by the Company and upon expiration of the 180-day period for commencement of a judicial proceeding for a de novo determination or by a final judicial determination) that you are not entitled under this agreement or otherwise to indemnification from Bethlehem in respect of the liability for which you shall have received payment or (ii) if you shall subsequently receive payment in respect of such liability from any liability insurer or from Bethlehem or any successor thereto. It is agreed that, in addition to the rights of any other person to do so, the Company shall have the right to compel any repayment to the Bethlehem Indemnification Trust so required. This agreement shall terminate upon the later of (i) the tenth anniversary of the date on which you shall cease to be a director or officer of the Company or (ii) the final termination or resolution of all actions, suits, proceedings or investigations commenced within such ten-year period and relating to the Company or any of its affiliates or your services thereto to which you may be or become a party and of all claims for indemnification by you under this agreement or against the Bethlehem Indemnification Trust asserted within such ten-year period. This agreement supersedes any and all prior agreements between the Company and you relating to the subject matter hereof. It is understood and agreed that this agreement is binding upon the Company and its successors and shall inure to your benefit and that of your heirs, distributees and legal representatives. This agreement, and the interpretation and enforcement hereof, shall be governed by the laws of the State of Delaware. In confirmation of the provisions of the Company's By-laws, the Company hereby agrees to pay, and you shall be held harmless from and indemnified against, any costs and expenses (including attorneys' fees) which you may reasonably incur in connection with any challenge to the validity of, or the performance and enforcement of, - 3 - 30 this agreement, in the same manner as provided by the Company's By-laws. If the foregoing is in accordance with your understanding of our agreement, kindly countersign the enclosed copies of this letter, whereupon this letter shall become a binding agreement in accordance with the laws of the State of Delaware. Very truly yours, BETHLEHEM STEEL CORPORATION By: ----------------------------- - ------------------------------- [Signature of Director/Officer] - 4 - 31 Schedule A 1. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Curtis H. Barnette. 2. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Silas S. Cathcart. 3. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and George P. Jenkins. 4. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Reginald H. Jones. 5. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Winthrop Knowlton. 6. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Russell E. Palmer. 7. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Ellmore C. Patterson. 8. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Dean P. Phypers. 9. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and William W. Scranton. 10. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Donald H. Trautlein. 11. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Walter F. Williams. 12. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Lonnie A. Arnett. 13. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and D. Sheldon Arnot. 14. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Robert W. Cooney. 32 15. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Frank S. Dickerson, III. 16. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and George T. Fugere. 17. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and John A. Jordan, Jr. 18. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and James F. Kegg. 19. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and David H. Klinges. 20. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Edward H. Kottcamp, Jr. 21. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and James H. Leonard. 22. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Gary L. Millenbruch. 23. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and C. Adams Moore. 24. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Reynold Nebel. 25. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and James C. Van Vliet. 26. Indemnification Assurance Agreement dated August 22, 1986 between Bethlehem Steel Corporation and Robert C. Wilkins. 27. Indemnification Assurance Agreement dated December 29, 1986 between Bethlehem Steel Corporation and Larry L. Adams. 28. Indemnification Assurance Agreement dated December 29, 1986 between Bethlehem Steel Corporation and Benjamin C. Boylston. - 2 - 33 29. Indemnification Assurance Agreement dated January 28, 1987 between Bethlehem Steel Corporation and Herman E. Collier. 30. Indemnification Assurance Agreement dated January 28, 1987 between Bethlehem Steel Corporation and Edwin A. Gee. 31. Indemnification Assurance Agreement dated January 28, 1987 between Bethlehem Steel Corporation and Thomas L. Holton. 32. Indemnification Assurance Agreement dated March 1, 1987 between Bethlehem Steel Corporation and Roger P. Penny. 33. Indemnification Assurance Agreement dated May 27, 1987 between Bethlehem Steel Corporation and Andrew M. Weller. 34. Indemnification Assurance Agreement dated January 27, 1988 between Bethlehem Steel Corporation and John B. Curcio. 35. Indemnification Assurance Agreement dated January 27, 1988 between Bethlehem Steel Corporation and William C. Hittinger. 36. Indemnification Assurance Agreement dated January 27, 1988 between Bethlehem Steel Corporation and William A. Pogue. 37. Indemnification Assurance Agreement dated September 27, 1989 between Bethlehem Steel Corporation and Robert McClements, Jr. 38. Indemnification Assurance Agreement dated September 27, 1989 between Bethlehem Steel Corporation and John L. Kluttz. 39. Indemnification Assurance Agreement dated June 27, 1990 between Bethlehem Steel Corporation and Duane R. Dunham. 40. Indemnification Assurance Agreement dated September 26, 1990 between Bethlehem Steel Corporation and John F. Ruffle. 41. Indemnification Assurance Agreement dated May 1, 1991 between Bethlehem Steel Corporation and Carl F. Meitzner. 42. Indemnification Assurance Agreement dated July 1, 1991 between Bethlehem Steel Corporation and Walter N. Bargeron. - 3 - 34 43. Indemnification Assurance Agreement dated March 1, 1992 between Bethlehem Steel Corporation and David P. Post. 44. Indemnification Assurance Agreement dated November 1, 1992 between Bethlehem Steel Corporation and Stephen G. Donches. 45. Indemnification Assurance Agreement dated November 1, 1992 between Bethlehem Steel Corporation and William H. Graham. 46. Indemnification Assurance Agreement dated November 1, 1992 between Bethlehem Steel Corporation and G. Penn Holsenbeck. 47. Indemnification Assurance Agreement dated March 1, 1993 between Bethlehem Steel Corporation and Benjamin R. Civiletti. 48. Indemnification Assurance Agreement dated March 1, 1993 between Bethlehem Steel Corporation and Worley H. Clark. 49. Indemnification Assurance Agreement dated March 1, 1993 between Bethlehem Steel Corporation and Harry P. Kamen. 50. Indemnification Assurance Agreement dated April 28, 1993 between Bethlehem Steel Corporation and Joseph F. Emig. 51. Indemnification Assurance Agreement dated April 28, 1993 between Bethlehem Steel Corporation and Andrew R. Futchko. 52. Indemnification Assurance Agreement dated April 28, 1993 between Bethlehem Steel Corporation and Timothy Lewis. 53. Indemnification Assurance Agreement dated April 28, 1993 between Bethlehem Steel Corporation and William E. Wickert, Jr. 54. Indemnification Assurance Agreement dated March 1, 1994 between Bethlehem Steel Corporation and Augustine E. Moffitt, Jr. 55. Indemnification Assurance Agreement dated March 16, 1994 between Bethlehem Steel Corporation and Lewis B. Kaden. 56. Indemnification Assurance Agreement dated January 31, 1996 between Bethlehem Steel Corporation and Shirley D. Peterson. - 4 - 35 57. Indemnification Assurance Agreement dated May 1, 1996 between Bethlehem Steel Corporation and Gregory F. Paolini. 58. Indemnification Assurance Agreement dated May 1, 1996 between Bethlehem Steel Corporation and Malcolm J. Roberts. 59. Indemnification Assurance Agreement dated May 1, 1996 between Bethlehem Steel Corporation and Robert A. Rudzki. 60. Indemnification Assurance Agreement dated May 1, 1996 between Bethlehem Steel Corporation and Dorothy L. Stephenson. - 5 - 36 EXHIBIT (11) BETHLEHEM STEEL CORPORATION STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (dollars in millions and shares in thousands, except per share data)
YEAR ENDED DECEMBER 31 ------------------------------ PRIMARY EARNINGS PER SHARE 1996 1995 1994 -------------------------------------------------- -------- -------- -------- NET INCOME (LOSS) ($308.8) $179.6 $80.5 LESS DIVIDEND REQUIREMENTS: $2.50 Preferred Dividend-Cash (10.0) (10.0) (10.0) $5.00 Preferred Dividend-Cash (12.5) (12.5) (12.5) $3.50 Preferred Dividend-Cash (17.9) (17.9) (17.9) 5% Preference Dividend-Stock (1.5) (2.0) (2.7) -------- -------- -------- TOTAL PREFERRED AND PREFERENCE DIVIDENDS (41.9) (42.4) (43.1) -------- -------- -------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK ($350.7) $137.2 $37.4 ======== ======== ======== AVERAGE SHARES OF COMMON STOCK AND EQUIVALENTS OUTSTANDING: Common Stock 111,286 110,311 105,826 Stock Options 2 13 227 -------- -------- -------- TOTAL 111,288 110,324 106,053 ======== ======== ======== PRIMARY EARNINGS PER SHARE ($3.15) $1.24 $0.35 ======== ======== ======== FULLY DILUTED EARNINGS PER SHARE NET INCOME (LOSS) ($308.8) $179.6 $80.5 LESS DIVIDEND REQUIREMENTS: $2.50 Preferred Dividend (10.0) (10.0) (10.0) $5.00 Preferred Dividend (12.5) (12.5) (12.5) $3.50 Preferred Dividend (17.9) (17.9) (17.9) 5% Preference Dividend (1.5) - (2.7) -------- -------- -------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK ($350.7) $139.2 $37.4 ======== ======== ======== AVERAGE SHARES OF COMMON STOCK AND EQUIVALENTS AND OTHER POTENTIALLY DILUTIVE SECURITIES OUTSTANDING: Common Stock 111,286 110,311 105,826 Stock Options 2 13 227 $2.50 Preferred Stock * * * $5.00 Preferred Stock * * * $3.50 Preferred Stock * * * 5% Preference Stock * 2,588 * -------- -------- -------- TOTAL 111,288 112,912 106,053 ======== ======== ======== FULLY DILUTED EARNINGS PER SHARE ($3.15) $1.23 $0.35 ======== ======== ========
* Antidilutive EX-13 2 PORTIONS OF THE BETHLEHEM STEEL 1996 ANNUAL REPORT 1 CHAIRMAN'S LETTER Bethlehem Steel TO OUR STOCKHOLDERS 1996 was a very difficult year for Bethlehem Steel, and yet it was a year in which significant actions were taken that will position Bethlehem for improved profitability and the achievement of our Vision to be the Premier Steel Company. Three actions were particularly important: we enhanced the competitiveness of our three core steel Divisions, announced and began implementing a Restructuring Plan, and made steady progress in dealing with our pension and health care legacy costs. As a result of the Restructuring Plan, we had a net loss for the year of $309 million, including $382 million in after-tax restructuring charges. Excluding these charges, we had net income of $73 million, down from $180 million in 1995. 1996 was clearly a very difficult and, in some respects, a disappointing year. We recognize that our financial results were not satisfactory, and we will take the necessary and appropriate actions in 1997 and in the years ahead to improve them. RESTRUCTURING TO IMPROVE FUTURE PROFITABILITY AND STOCKHOLDER VALUE In 1996, we announced a Restructuring Plan that will result in exiting five businesses, which will contribute significantly to improving our performance in the future. During the second half of 1996, we decided that the long-term outlook for these unprofitable business units was such that we could no longer keep them as part of Bethlehem. We decided to exit our BethEnergy Eagle Nest coal business, Bethlehem Structural, BethForge, CENTEC roll business, and BethShip Sparrows Point Shipyard. We also decided to write down our Bethlehem Coke operation as an impaired asset, but we will continue to operate that business as long as it has a satisfactory performance. In total, these decisions resulted in recording $465 million of pre-tax restructuring charges in 1996. These decisions are consistent with our basic requirement that all of our business units must earn a competitive rate of return on the investment we have in them. As to the current status of these restructured businesses, we have already sold and leased our Eagle Nest coal assets. Also, we have concluded that we will not be able to sell Bethlehem Structural as an ongoing business and, therefore, we will close it by the end of the first quarter of this year. We are continuing to negotiate with qualified buyers for the sale of our BethForge, CENTEC, and Sparrows Point Shipyard businesses. We hope to be able to conclude satisfactory sales transactions for them during the first half of this year. If not, we will close them and their assets will be sold. Implementing the Restructuring Plan will eliminate the significant operating losses caused by these businesses, will result in a stronger company better positioned for the future, and will allow us to focus even greater attention on our three core steel businesses. - 1 - 2 CONCENTRATING ON OUR CORE STEEL BUSINESSES Bethlehem's core steel businesses are the Burns Harbor Division, the Sparrows Point Division, and Pennsylvania Steel Technologies. We believe they provide a solid base on which we can build our company and add value for our stockholders. We will grow our company by intensifying our concentration on these businesses and by continuously improving their competitive positions in their markets. BURNS HARBOR The Burns Harbor Division accounts for about one-half of our total revenues and ships about 5 million tons of high quality steel products per year, primarily to the automotive and machinery markets. Burns Harbor has competitive costs and has won many quality awards from its customers. During 1996, we further enhanced Burns Harbor by making relatively modest capital expenditures to increase steelmaking capability, by modernizing the plate mill and hot strip mill, and by investing in Chicago Cold Rolling, L.L.C. This investment will make it possible for Burns Harbor to process more hot rolled sheet into higher value cold rolled sheet. We will continue to enhance Burns Harbor's competitiveness, and we believe a competitive rate of return will be earned on the investment we have in this Division. SPARROWS POINT The Sparrows Point Division accounts for about one-third of our total revenues and ships about 3 million tons per year of high quality sheet, plate and tin mill products, primarily to the construction and container markets. Sparrows Point has also won many quality awards and other forms of recognition from its customers. This past year, the Division established "reliability to customers" as a primary objective and, taking full advantage of its coating lines, further increased its percentage of higher value sheet product shipments. While Sparrows Point is currently profitable, one of our greatest challenges and highest priorities is to develop plans and implement actions for Sparrows Point to earn a competitive rate of return on the capital invested. We must continue to improve productivity and reduce costs, and we may also consider some future modernization. With facilities at Burns Harbor and Sparrows Point, Bethlehem continues to be the nation's largest producer of plate, most of it in the higher value grades required for the more demanding industrial uses. Also, higher value cold rolled sheet, coated sheet and tin mill products accounted for more than 70 percent of sheet products shipped from these Divisions in 1996, up from 65 percent in 1995. PENNSYLVANIA STEEL TECHNOLOGIES Pennsylvania Steel Technologies is a leading supplier of railroad rails to the rail transportation market, high quality specialty blooms to the forging industry, and large-diameter pipe to the energy market. PST has a recently modernized electric steelmaking facility, a continuous caster, and state-of-the-art rail making technology. PST's operations were impaired by a severe flood in January 1996. Extraordinary actions by our employees returned the Division to operation quickly, and the utilization of its facilities has continued to improve throughout the year. PST is now well positioned to serve the growing market for premium railroad rail, specialty blooms, flat bars and large diameter pipe. With continuing cost and productivity improvements, we believe it will earn a competitive rate of return on the capital we have invested in this business. - 2 - 3 REBUILDING OUR FINANCIAL STRENGTH We have been working diligently on rebuilding Bethlehem's financial strength. We have a highly leveraged balance sheet due primarily to our legacy obligations for pensions and health care. Our objective is to have a capital structure that will earn us an investment grade credit rating. Our debt level and maturities over the next few years are relatively modest. Our debt to invested capital ratio was 36 percent in 1996, increasing by two percent over 1995 from the restructuring decision. Over the past three years, we have reduced our unfunded pension liability by about three-quarters of a billion dollars. At the end of 1996, our pension fund had assets of more than $4.2 billion. Our unfunded liability was reduced to $870 million from 1995's $1.1 billion. Eliminating our unfunded pension liability is one of our highest priorities because it will significantly reduce pension expense and strengthen our financial position. We are also working vigorously on another major capital structure and legacy cost issue -- health care costs for retirees and their families -- through a number of initiatives. These include greater use of Health Maintenance Organizations and other managed health care options, capping certain health care costs for retirees, and innovations such as our Bethlehem, Pennsylvania family health center. IMPROVING CONTINUOUSLY An important part of our strategy is to have continuous improvement in all of our activities. During 1996, we made many improvements especially with regard to our objectives related to customers, suppliers, employees and citizenship. CUSTOMERS Bethlehem has won many quality awards and other certifications from automakers. Burns Harbor and, more recently, Burns Harbor's Lackawanna, New York, Galvanized Products Division have received the QS-9000 automotive quality certification. With both facilities now certified, we are well positioned to supply our automotive customers. In 1996, through our Burns Harbor Division, Bethlehem was named a "Supplier of the Year" by General Motors-the only steel producer in the world to be so honored-and was also selected to supply all the sheet steel for General Motors' popular Saturn line of cars. Sparrows Point's plate mill received Q-Plus certification from the Carrier Corporation on the basis of the quality systems at the Division. During the course of the year, Pennsylvania Steel Technologies was qualified as a supplier of head-hardened rail by all the Class One railroads in the United States and doubled its shipments of this premium rail product compared to 1995. SUPPLIERS In 1996, we made significant progress through our Strategic Sourcing initiative and expect further progress this year. We established new relationships with suppliers covering a substantial portion of the $3 billion in raw materials, energy, equipment, goods and services we purchase annually. These relationships are achieving the key objectives of Strategic Sourcing: to forge a strong, competitive base of supply partners who share our commitment to deliver superior value to our customers; to realize significant, immediate and sustainable improvements in the total cost, quality and value of our purchased goods and services; and to establish mutual commitments to continuous improvement. - 3 - 4 EMPLOYEES We are fortunate that we have capable and dedicated employees who will lead us into the next century, and we are helping to provide them with the skills they need. During 1996, we continued to develop partnership activities among all employees. We initiated additional employee education and training programs to help develop the skilled and knowledgeable work force required to compete in an increasingly competitive, global business environment. In 1996, various educational programs provided more than 550,000 employee training hours, an average of over 30 hours per employee. For example, more than half of our employees have already completed a custom financial management program that includes financial concepts, measurements and business fundamentals. This program is designed to help our employees focus their efforts on increasing our return on net assets and stockholder value. The 1996 contract reopener of 1993's six-year agreement with the United Steelworkers of America was completed, and we now have a contract through mid-1999. We are committed to the safety and health of our employees and believe that safety is a fundamental corporate value which must not be compromised. During the past year we continued to improve our safety performance and expand safety training. Our total injury incidence rate was 21 percent better than 1995. Over the past two years, we reduced our disabling injuries by more than 40 percent. For the 16th time in the past 28 years, our Railroad subsidiary in Bethlehem, Pennsylvania won a Harriman Institute Award for its safety performance. In a joint effort with the USWA, we began implementing a new "employee safety process" to provide greater involvement of all employees in creating the best possible safety environment, both on and off the job. We continued with activities to have profit sharing for our employees based upon performance and to increase employee ownership of Bethlehem stock so that our employees' interests are aligned with those of our stockholders. We have initiated many other activities among our employees that are aimed at making continuous improvement in all aspects of our business a way of life at Bethlehem. CITIZENSHIP We believe that being a good citizen helps generate value for our stockholders. Citizenship is expressed in many ways, including environmental performance, community support and economic development. During 1996, we issued our first annual Environmental Progress Report, which is consistent with our endorsement of the CERES Principles, an environmental code of conduct. To explore environmental and other issues of mutual interest with our communities, Burns Harbor and Sparrows Point established Community Awareness Panels in their local areas. We received the Pennsylvania Governor's Award for Environmental Excellence for developing a process to treat the dust captured from electric furnaces. We also received an award from the U.S. Environmental Protection Agency for our comprehensive waste reduction program to recycle office waste materials and increase the use of recycled products. We provided leadership in United Way and other charitable organizations, with Sparrows Point and Burns Harbor each contributing, largely through employee giving, more than $1 million to their local United Way campaigns. We are actively supporting efforts to revitalize the properties on the South Side of Bethlehem and certain other communities that have been affected by the restructuring of our businesses. - 4 - 5 CHANGES TO THE BOARD During this past year, Shirley D. Peterson, President of Hood College, joined our Board. We look forward to continuing to work with Shirley and having her advice and counsel. We also want to acknowledge and thank Thomas L. Holton and Winthrop Knowlton, who will be retiring as Directors in April, for their many years of outstanding and loyal service to Bethlehem. OUR BUSINESS OUTLOOK IS POSITIVE We believe that the domestic economy will continue on a course of moderate and sustainable growth and low inflation. We also believe that the global economy will show some additional strength this year compared to 1996. Based on this economic environment, we believe that steel markets will continue to be relatively good in the United States and that domestic industry steel shipments in 1997 will be close to the estimated 100 million tons shipped in 1996. We recognize, however, that competition will be intense as new capacity enters the marketplace, and unfairly traded imports continue to be of concern. We will continue to take actions to improve our competitiveness by enhancing our customer service and reliability, increasing the utilization of our facilities, aggressively reducing costs and improving our productivity. While 1996 was certainly a challenging year for Bethlehem, it was also a year in which many important decisions were made that have strengthened our company. We enter 1997 with a skilled work force, excellent facilities and a company better positioned to take advantage of the opportunities of the future and to improve stockholder value. Fair and open trade is important for Bethlehem and its customers. We fully support international trade initiatives that will open foreign markets and help cause fair trade in the global marketplace. In 1997 and beyond, our Vision is to be the Premier Steel Company-our Strategy to achieve that Vision is to concentrate on steel, rebuild our financial strength and have continuous improvement in all our activities-our Objectives are to serve our customers, partner with our employees, be good citizens, and increase the value of our company for our stockholders. We have four principal goals for 1997: to successfully execute our business plans at every Business Division, Service Unit, Department and for the Corporation as a whole; to effectively implement our Restructuring Plan; to continue progress with respect to our pension and health care legacy costs; and to continue to advance plans for the improvement of Bethlehem's future profitability. We are determined to be the supplier of choice for our customers, the employer of choice for our employees and the communities in which we operate, and the investment of choice for our stockholders. /s/ Hank Barnette Curtis H. Barnette, Chairman January 29, 1997 - 5 - 6 FINANCIAL REVIEW AND OPERATING ANALYSIS Bethlehem Steel Our net loss of $309 million in 1996 included restructuring charges of $465 million ($382 million after tax) as a result of a Restructuring Plan that will result in our exiting five businesses. We plan to exit Bethlehem Structural, BethForge, CENTEC and BethShip Sparrows Point Shipyard. In the third quarter of 1996, we sold and leased assets of our Eagle Nest coal mine. We also wrote off impaired assets at Bethlehem Coke, which will continue to operate two coke oven batteries in Bethlehem, Pennsylvania. See Note C to the Consolidated Financial Statements. Excluding the restructuring charges, we reported net income of $73 million ($.28 per share) in 1996, compared to net income of $180 million in 1995 and $81 million in 1994. Results for 1996 declined from 1995 principally from lower average realized steel prices and shipments, partially offset by a higher valued product mix. The improvement in 1995 over 1994 was from higher realized steel prices, partially offset by lower shipments and higher operating costs. Sales in 1996 decreased to $4.68 billion from $4.87 billion in 1995 and $4.82 billion in 1994. SEGMENT RESULTS BASIC STEEL OPERATIONS. Our Basic Steel Operations segment had a loss from operations of $87 million in 1996, including $255 million of restructuring charges for exiting Bethlehem Structural, writing off impaired assets at Bethlehem Coke, and the sale and lease of certain assets of our Eagle Nest coal mine. Excluding restructuring charges, income from operations was $168 million in 1996, compared to $311 million in 1995 and $166 million in 1994. 1996's results declined due to lower realized steel prices and lower structural product shipments, partially offset by an improved product mix from lower structural product shipments and a higher percentage of coated and cold rolled sheet products shipped at the Sparrows Point and Burns Harbor Divisions. Average realized prices were 3% lower in 1996 than they were in 1995. Shipments were 8.8 million tons in 1996 compared to 9.0 million tons in 1995. The improvement in 1995 from 1994 was from higher realized steel prices, partially offset by lower shipments and higher operating costs. Shipments fell to 9.0 million tons in 1995 from 9.3 million tons in 1994 principally from the softening in automotive markets and higher customer inventories at the beginning of 1995. Average realized prices were 5% higher than 1994. Employment costs were higher principally from higher profit sharing. Scrap and alloy market prices and depreciation expense were also higher. The effects of changes in average realized steel prices, shipments (including coal) and product mix on basic steel segment sales during the last two years were as follows: Increase (decrease) from prior year ----------------------------------- 1996 1995 ---- ---- Realized prices (3)% 5% Shipments (3) (4) Product mix 2 1 ---- --- Total sales (4)% 2% ==== === Raw steel production decreased to 9.4 million tons in 1996 from 10.4 million tons in 1995 as a result of closing Bethlehem Structural's steelmaking facilities. Raw steel production was 9.8 million tons in 1994. The Burns Harbor Division shipped 4.8 million tons of steel products in 1996, compared to 4.6 million tons in 1995 and 5.1 million tons in 1994. Despite an increase in shipments and lower purchased steel and raw material costs in 1996, Burns Harbor's operating results declined principally from lower average realized prices on all flat rolled products. In 1996, Burns Harbor completed a capital expenditure project to increase annual steelmaking capability by nearly 400,000 tons to reduce its reliance on higher cost purchased steel. Burns Harbor is also realizing energy savings at its blast furnaces from the coal injection technology installed in 1995. We recently approved upgrading Burns Harbor's No. 1 caster to improve productivity and costs. The work will be performed during a planned blast furnace reline in 1998. The Sparrows Point Division shipped 3.2 million tons of steel products to trade customers in 1996, compared to 3.0 million tons in 1995 and 2.9 million tons in 1994. Despite increased shipments, improvements in its tin mill and hot strip mill operations and a better product, mix from shipping more coated and cold rolled sheet products, Sparrows Point's 1996 results declined principally from lower average realized prices on all light flat rolled products. Shipments declined slightly at Pennsylvania Steel Technologies (PST) due to lower semifinished and large-diameter pipe shipments; however, shipments of PST's premium head-hardened rail were double 1995's levels. Extreme cold weather and a flood in early 1996 also affected PST's results. PST has been a supplier of semifinished steel to Bethlehem Structural and BethForge. Although total shipments at PST could be lower due to our exiting Bethlehem Structural and BethForge, we believe there are market opportunities for higher margin semifinished products that could offset the loss of this business. - 8 - 7 In 1995, we discontinued iron and steelmaking operations, production of heavy structural shapes and foundry operations in Bethlehem, Pennsylvania. In 1996, we announced a restructuring plan to improve financial performance and stockholder value, which included exiting the Bethlehem Structural business entirely. Efforts to sell Bethlehem Structural have been unsuccessful; therefore, Bethlehem Structural will cease production during the first quarter of 1997. PERCENTAGE OF BETHLEHEM'S NET SALES BY SEGMENT AND MAJOR PRODUCT 1996 1995 1994 ---- ---- ---- BASIC STEEL OPERATIONS Steel mill products: Hot rolled sheets 14.7% 15.9% 16.6% Cold rolled sheets 16.0 14.4 17.0 Coated sheets 32.0 29.7 25.9 Tin mill products 7.0 6.1 6.6 Plates 15.3 15.1 14.0 Structural shapes and piling 3.8 6.7 6.7 Rail products 3.5 3.2 2.8 Other steel mill products 1.6 2.7 2.5 Other products and services (including raw materials) 3.6 4.2 5.5 ------ ------ ------ 97.5 98.0 97.6 STEEL RELATED OPERATIONS 2.5 2.0 2.4 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ====== PERCENTAGE OF STEEL MILL PRODUCT SHIPMENTS BY PRINCIPAL MARKET (Based on tons shipped) 1996 1995 1994 ---- ---- ---- Service Centers, Processors and Converters (including semifinished customers) 45.2% 41.0% 45.9% Transportation (including automotive) 26.0 24.8 24.2 Construction 12.6 14.2 14.7 Containers 5.2 5.2 5.7 Machinery 5.1 5.2 4.9 Other 5.9 9.6 4.6 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ====== STEEL RELATED OPERATIONS. Our Steel Related Operations segment (BethShip, BethForge and CENTEC) reported a loss from operations of $241 million in 1996, including $210 million of restructuring charges related to our decision to exit all of the businesses in this segment. These businesses are continuing to operate while we are trying to sell them. Excluding the restructuring charges, the Steel Related segment had losses from operations of $31 million in 1996, compared to losses of $42 million in 1995 and $32 million in 1994. Losses in 1996, excluding restructuring charges, improved from 1995 because of lower costs at BethForge and improved pricing and productivity at BethShip. In late 1995, BethForge shut down its electric furnace shop, incurring higher costs in the process, and began receiving ingots from PST. Losses in 1994 were due to costs related to severe winter weather, high operating costs at BethForge and a weak ship repair market. LIQUIDITY AND CAPITAL STRUCTURE At December 31, 1996, total liquidity, comprising cash, cash equivalents and funds available under our bank credit arrangement, totaled $446 million compared to $512 million at December 31, 1995. Cash provided from operating activities in 1996 declined to $341 million from $586 million in 1995 from lower earnings and changes in working capital. Cash provided from operating activities was $384 million in 1994. Principal uses of cash during 1996 included capital expenditures of $259 million, pension funding of $170 million and debt repayments of $92 million. During 1996, long-term interest rates increased and the equity markets provided strong total returns for financial assets, including our pension fund assets. Better than market performance on our pension fund assets, a decrease in our pension obligation caused by the increase in interest rates, and our $170 million contribution to our pension fund more than offset the increase in our pension obligation from current year pension expense, actuarial losses and our restructuring charges. The resulting reduction in our pension obligation during 1996 from $1.1 billion to $870 million also eliminated 1995's charge to our stockholders' equity of $67 million under required accounting rules. We have contributed amounts to our pension fund substantially in excess of amounts required under current law and regulations. As a result, we currently have a funding standard credit balance that would allow us to defer pension funding for about two years, although we presently have no plans to do so. - 9 - 8 Major projected uses of funds for 1997 include an estimated $280 million of capital expenditures, repayment of about $50 million of debt and capital lease obligations, and pension funding. We expect to maintain an adequate level of liquidity throughout 1997 from cash flow from operations, reductions in working capital, proceeds from the sale of our interests in the Iron Ore Company of Canada, and available funds under our credit arrangement. COMMON STOCK MARKET AND DIVIDEND INFORMATION 1996 Prices* 1995 Prices* ------------------- ------------------- Period High Low High Low ---- --- ---- --- First Quarter $15.875 $13.125 $19.125 $14.125 Second Quarter 14.500 11.500 16.375 13.625 Third Quarter 12.000 9.250 18.250 13.750 Fourth Quarter 10.313 7.625 14.750 12.625 *The principal market for Bethlehem Common Stock is the New York Stock Exchange. Bethlehem Common Stock is also listed on the Chicago Stock Exchange. The high and low sales prices of Bethlehem's Common Stock as reported in the consolidated transaction system are shown. The trading symbol for Bethlehem Common Stock is BS. Bethlehem has not paid a dividend on its Common Stock since the fourth quarter of 1991. CAPITAL EXPENDITURES Capital expenditures were $259 million in 1996 compared to $267 million in 1995 and $445 million in 1994. Major strategic projects during 1996 included the upgrade of the 160-inch plate mill and the modernization of the hot strip mill at Burns Harbor. In 1996, Burns Harbor completed a project to increase the heat size of its basic oxygen furnaces, reducing its need to purchase higher cost semifinished steel. Construction of the Chicago Cold Rolling joint venture has been completed and operations began during the first quarter of 1997. At December 31, 1996, the estimated cost of completing authorized capital expenditures was about $386 million compared to $400 million at December 31, 1995. Such authorized capital expenditures are expected to be completed during the 1997-1999 period. EMPLOYEES AND EMPLOYMENT COSTS At year-end 1996, we had about 17,500 employees compared to about 18,300 employees at the end of 1995 and 19,900 employees at the end of 1994. About three-quarters of our employees are covered by our labor agreements with the United Steelworkers of America (USWA). Under the terms of our 1993 labor agreements with the USWA, most employees at our steel operations received a bonus in 1996 of $.50 per hour worked (maximum payment of $1,000) based on our having achieved the required level of 1995 adjusted consolidated pre-tax income. Also, profit sharing of 8% of adjusted consolidated annual income before taxes, unusual items and expenses applicable to the plan plus 2% of adjusted profits of certain operations is paid to USWA represented employees in the following year. Profit sharing is also paid to non-represented employees based on specific Corporate and Business Unit plans and performance. We paid about $75 million in 1996 and expect to pay about $45 million for income related bonus, profit-sharing and shortfall amounts in early 1997. The 1993 labor agreements provided for Reopener Negotiations in March 1996 for certain wage and benefit provisions (excluding pensions and health care benefits) with any changes to be effective August 1, 1996, and continuing through the expiration of the labor agreement on August 1, 1999. We did not reach a settlement with the USWA, and the parties submitted unresolved issues to arbitration. The Arbitrator selected our final offer which includes three wage increases totaling $1.00 per hour, lump sums totaling up to $2,000 (one-half depends on achieving certain annual profits in 1997 and 1998) and continuing one floating holiday each year for the next three years. As a result of the Arbitrator's decision, most employees at steel operations received a $.50 per hour wage increase on August 1, 1996 and will receive a $.25 per hour wage increase on August 1, 1997 and 1998. Under other provisions of the labor agreements, we are required to pay "shortfall amounts" each year up to 10% of the first $100 million and 20% in excess of $100 million of consolidated income before taxes, unusual items and expenses applicable to the shortfall plan. Shortfall amounts arise when - 10 - 9 employees terminate employment and ESOP Preference Stock, held in trust for employees in reimbursement for wage and benefit reductions in prior years, is converted into Common Stock and sold for amounts less than the stated value of the Preference Stock ($32 for Series A and $40 for Series B). We issued approximately 61,000 shares of Series B Preference Stock in 1996 and approximately 40,800 shares in 1995 to a trustee for the benefit of employees for 1995 and 1994, respectively, and expect to issue about 35,000 shares in early 1997 for the 1996 plan year. Additional information concerning our employment costs is presented below. EMPLOYMENT COST SUMMARY - ALL EMPLOYEES (Dollars in millions) 1996 1995 1994 - --------------------- ---- ---- ---- Salaries and Wages $ 966 $1,058 $ 999 Employee Benefits Pension Plans: Actives 111 105 108 Retirees 81 105 95 Medical and Insurance: Actives 148 151 152 Retirees 115 116 115 Payroll, Taxes 85 95 90 Workers' Compensation 28 33 47 Savings Plan and Other 21 21 27 ------ ------ ------ Total Benefit Costs 589 626 634 ------ ------ ------ Total Employment Costs $1,555 $1,684 $1,633 ====== ====== ====== Employment Costs as a Percent of Net Sales 33% 35% 34% ====== ====== ====== ENVIRONMENTAL MATTERS We are subject to various federal, state and local environmental laws and regulations concerning, among other things, air emissions, waste water discharges, and solid and hazardous waste disposal. During the five years ended December 31, 1996, we spent approximately $160 million for environmental control equipment. Expenditures for new environmental control equipment totaled approximately $29 million in 1996, $36 million in 1995 and $44 million in 1994. The costs incurred in 1996 to operate and maintain existing environmental control equipment were approximately $115 million (excluding interest costs but including depreciation charges of $19 million) compared to $120 million in 1995 and $115 million in 1994. Negotiations between Bethlehem and federal and state regulatory agencies are being conducted to resolve differences in interpretation of certain environmental control requirements. In some instances, those negotiations are being held in connection with the resolution of pending environmental proceedings. We believe that there will not be any significant curtailment or interruptions of any of our important operations as a result of these proceedings and negotiations. Existing environmental laws could be amended, new laws could be enacted by Congress and state legislatures, and new environmental regulations could be issued by regulatory agencies. For these reasons, we cannot predict the specific environmental control requirements that we will face in the future. Based on existing and anticipated regulations promulgated under presently enacted legislation, we currently estimate that capital expenditures for installation of new environmental control equipment will average about $30 million per year over the next two years. However, estimates of future capital expenditures and operating costs required for environmental compliance are subject to numerous uncertainties, including the evolving nature of regulations, possible imposition of more stringent requirements, availability of new technologies and the timing of expenditures. Although it is possible that our future results of operations, in particular quarterly or annual periods, could be materially affected by the future costs of environmental compliance, we believe that the future costs of environmental compliance will not have a material adverse effect on our consolidated financial position or on our competitive position with respect to other integrated domestic steelmakers that are subject to the same environmental requirements. Since 1946, Bethlehem has had a formal program of environmental control. We were one of the first industrial companies in the United States to recognize our obligation to our communities, their citizens and our environment. We continue to expand our commitment to the environment through the development and implementation of progressive environmental programs consistent with the goals identified in our Corporate Environmental Policy and the CERES Principles that we first endorsed last year. - 11 - 10 CONSOLIDATED STATEMENTS OF INCOME Bethlehem Steel Year Ended December 31 - ------------------------------------------------------------------------------ (Dollars in millions, except per share data) 1996 1995 1994 - ------------------------------------------------------------------------------ NET SALES $4,679.0 $4,867.5 $4,819.4 --------- --------- --------- COSTS AND EXPENSES: Cost of sales 4,168.2 4,202.8 4,287.3 Depreciation (Note A) 268.7 284.0 261.1 Selling, administration and general expense 105.5 111.8 137.4 Estimated restructuring loss (Note C) 465.0 - - --------- --------- --------- TOTAL COSTS AND EXPENSES 5,007.4 4,598.6 4,685.8 --------- --------- --------- INCOME (LOSS) FROM OPERATIONS (328.4) 268.9 133.6 FINANCING INCOME (EXPENSE): Interest and other financing costs (Note A) (53.3) (60.0) (46.2) Interest income 5.9 7.7 7.1 --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (375.8) 216.6 94.5 Benefit (Provision) for Income Taxes (Note D) 67.0 (37.0) (14.0) --------- --------- --------- NET INCOME (LOSS) (308.8) 179.6 80.5 Dividends on Preferred and Preference Stock 41.9 42.4 43.1 --------- --------- --------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCK - ($3.15), $1.24 AND $.35 PER SHARE $ (350.7) $ 137.2 $ 37.4 ========= ========= ========== The accompanying Notes are an integral part of the Consolidated Financial Statements. - 12 - 11 CONSOLIDATED BALANCE SHEETS Bethlehem Steel December 31 - -------------------------------------------------------------------------- (Dollars in millions, except per share data) 1996 1995 - -------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents (Note A) $ 136.6 $ 180.0 Receivables (Note E) 311.6 374.6 Inventories (Notes A and E) Raw materials and supplies 332.0 335.5 Finished and semifinished products 667.0 604.9 Contract work in progress less billings of $.5 and $10.9 18.3 17.8 -------- --------- Total Inventories 1,017.3 958.2 Other current assets 22.9 13.0 -------- --------- TOTAL CURRENT ASSETS 1,488.4 1,525.8 INVESTMENTS AND MISCELLANEOUS ASSETS (Note A) 106.7 112.3 PROPERTY, PLANT AND EQUIPMENT less accumulated depreciation of $3,924.2 and $4,329.5 (Note A) 2,419.8 2,714.2 DEFERRED INCOME TAX ASSET -- NET (Note D) 935.0 885.0 INTANGIBLE ASSET -- PENSIONS (Note G) 160.0 463.0 --------- --------- TOTAL ASSETS $5,109.9 $5,700.3 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 410.4 $ 381.4 Accrued employment costs 163.3 208.0 Postretirement benefits other than pensions (Note H) 150.0 150.0 Accrued taxes (Note D) 67.9 72.4 Debt and capital lease obligations (Note E) 49.3 91.5 Other current liabilities 116.5 146.3 -------- --------- TOTAL CURRENT LIABILITIES 957.4 1,049.6 PENSION LIABILITY (Notes C and G) 870.0 1,115.0 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Notes C and H) 1,445.0 1,415.0 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (Note E) 497.4 546.8 OTHER LONG-TERM LIABILITIES 374.1 335.6 STOCKHOLDERS' EQUITY (Notes I, J,and K): Preferred Stock -- at $1 per share par value (aggregate liquidation preference of $481.2); Authorized 20,000,000 shares 11.6 11.6 Preference Stock -- at $1 per share par value (aggregate liquidation preference of $86.2); Authorized 20,000,000 shares 2.5 2.6 Common Stock -- at $1 per share par value; Authorized 250,000,000 shares; Issued 113,851,199 and 112,699,869 shares 113.9 112.7 Common Stock -- Held in Treasury, 2,017,662 and 1,992,189 shares at cost (59.7) (59.4) Additional Paid-in Capital 1,886.3 1,850.6 Accumulated Deficit (988.6) (679.8) -------- --------- TOTAL STOCKHOLDERS' EQUITY 966.0 1,238.3 -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,109.9 $5,700.3 ========= ========= The accompanying Notes are an integral part of the Consolidated Financial Statements. - 13 - 12 CONSOLIDATED STATEMENTS OF CASH FLOWS BETHLEHEM STEEL Year Ended December 31 - ------------------------------------------------------------------------------- (Dollars in millions) 1996 1995 1994 - ------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net Income (Loss) $(308.8) $ 179.6 $ 80.5 Adjustments for items not affecting cash from operating activities: Estimated restructuring loss (Note C) 465.0 - - Depreciation 268.7 284.0 261.1 Deferred income taxes (67.0) 35.0 13.0 Other - net 9.1 2.1 15.8 Working capital (excluding investing and financing activities): Receivables - operating 9.1 114.9 (22.7) Receivables - sold (Note E) 54.0 30.0 - Inventories (58.8) (79.0) (28.1) Accounts payable 28.9 (5.6) 20.6 Employment costs and other (60.6) 35.8 45.8 Other - net 1.2 (10.5) (2.3) -------- -------- --------- CASH PROVIDED FROM OPERATING ACTIVITIES 340.8 586.3 383.7 -------- -------- --------- INVESTING ACTIVITIES: Capital expenditures (259.0) (266.8) (444.6) Cash proceeds from asset sales and other 7.7 17.6 31.0 -------- -------- --------- CASH USED FOR INVESTING ACTIVITIES (251.3) (249.2) (413.6) -------- -------- --------- FINANCING ACTIVITIES: Pension financing (funding) (Note G): Pension expense 192.0 210.0 203.1 Pension funding (170.0) (330.0) (472.3) Long-term debt borrowings (Note E) 3.1 3.6 31.1 Long-term debt and capital lease payments (Note E) (91.8) (120.7) (99.9) Cash dividends paid (Note K) (40.4) (40.4) (40.4) Common Stock issued (Note K) - - 355.3 Other payments (25.8) (39.1) (16.4) -------- -------- --------- CASH USED FOR FINANCING ACTIVITIES (132.9) (316.6) (39.5) -------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (43.4) 20.5 (69.4) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 180.0 159.5 228.9 -------- -------- --------- - END OF PERIOD $ 136.6 $ 180.0 $ 159.5 ======== ======== ========= SUPPLEMENTAL CASH PAYMENT INFORMATION: Interest, net of amount capitalized $ 52.8 $ 61.1 $ 41.6 Income taxes (Note D) $ 3.7 $ - $ .2 ======== ======== ========= The accompanying Notes are an integral part of the Consolidated Financial Statements. - 14 - 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Bethlehem Steel A. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Bethlehem Steel Corporation and all majority-owned subsidiaries and joint ventures. CASH AND CASH EQUIVALENTS - Cash equivalents consist primarily of overnight investments, certificates of deposit and other short-term, highly liquid instruments generally with original maturities at the time of acquisition of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates market. INVENTORIES - Inventories are valued at the lower of cost (principally FIFO) or market. Contract work in progress is valued at cost less billings. Estimated losses are recognized when first apparent and partial profits are based on percentage of completion. INVESTMENTS - Investments in associated enterprises accounted for by the equity method were $50 million and $49 million at December 31, 1996 and 1995. Associated enterprises are primarily 50% or less interests in steel sheet coating and mining operations. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at cost. Maintenance, repairs and renewals that neither materially add to the value of the property nor appreciably prolong its life are charged to expense. Gains or losses on dispositions of property, plant and equipment are recognized in income. Interest is capitalized on significant construction projects and totaled $7 million, $5 million and $31 million in 1996, 1995 and 1994. Our property, plant and equipment by major classification is: - ------------------------------------------------------------------------------ December 31 ------------------------ (Dollars in millions) 1996 1995 - --------------------- ---- ---- Land (net of depletion) $ 26.9 $ 35.8 Buildings 633.1 689.3 Machinery and equipment: Steel manufacturing 5,095.1 5,572.2 Other 407.4 610.4 --------- --------- 6,162.5 6,907.7 Accumulated depreciation (3,924.2) (4,329.5) --------- --------- 2,238.3 2,578.2 Construction-in-progress 181.5 136.0 --------- --------- Total $2,419.8 $2,714.2 ========= ========= DEPRECIATION - Depreciation, which includes amortization of assets under capital leases, is based upon the estimated useful lives of each asset group. The estimated useful life is 18 years for most steel producing assets. Steel assets, other than blast furnace linings, and most raw material producing assets are depreciated on a straight-line basis adjusted by an activity factor. This factor is based on the ratio of production and shipments for the current year to the average production and shipments for the current and preceding four years at each operating location. Annual depreciation after adjustment for this activity factor is not less than 75% nor more than 125% of straight-line depreciation. Depreciation after adjustment for this activity factor was $13 million, $16 million and $10 million more than straight-line in 1996, 1995 and 1994. Through December 31, 1996, $6 million more accumulated depreciation has been recorded under this method than would have been recorded under straight-line depreciation. The cost of blast furnace linings is depreciated on a unit-of-production basis. FOREIGN CURRENCY, INTEREST RATE AND COMMODITY PRICE RISK MANAGEMENT - Periodically, we enter into financial contracts to manage risks. We use foreign currency exchange contracts to manage the cost of firm purchase commitments for capital equipment or other purchased goods and services denominated in a foreign currency. We use interest rate swap agreements to fix the interest rate on certain floating rate debt. We use commodity contracts to fix the cost of a portion of our annual requirements for natural gas, zinc and other metals. Generally, foreign currency and commodity contracts are for periods of less than a year. The gains or losses on these contracts are reflected in the cost of goods or services purchased. Net payments or receipts on interest rate swaps are reflected in interest expense. Gains or losses on swaps settled or terminated are deferred and amortized to interest expense over the life of the related debt. Currency and commodity contracts outstanding during the years and at year end were not material. Also, see Note E, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS. USE OF ESTIMATES - In preparing these financial statements, Bethlehem's management makes estimates and uses assumptions that affect some of the reported amounts and disclosures. See, for example, Note D, TAXES; Note F, COMMITMENTS AND CONTINGENT LIABILITIES; Note G, POSTRETIREMENT PENSION BENEFITS; and Note H, POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. In the future, actual amounts received or paid could differ from these estimates. - 15 - 14 B. INDUSTRY SEGMENT INFORMATION - ------------------------------------------------------------------------------ (Dollars in millions) 1996 1995 1994 - --------------------- ---- ---- ---- SALES: Trade: Basic Steel Operations $4,561.9 $4,768.6 $4,702.4 Steel Related Operations 117.1 98.9 117.0 Intersegment: Basic Steel Operations 18.9 8.2 3.8 Steel Related Operations 23.3 19.4 19.4 Eliminations (42.2) (27.6) (23.2) --------- --------- --------- Total $4,679.0 $4,867.5 $4,819.4 ========= ========= ========= ESTIMATED RESTRUCTURING LOSS: Basic Steel Operations $ 255.0 - - Steel Related Operations 210.0 - - --------- --------- --------- Total $ 465.0 $ - $ - ========= ========= ========= INCOME (LOSS) FROM OPERATIONS: Basic Steel Operations $ (87.3) $ 310.7 $ 166.0 Steel Related Operations (241.1) (41.8) (32.4) --------- --------- --------- Total $ (328.4) $ 268.9 $ 133.6 ========= ========= ========= SHIPMENTS (TONS IN THOUSANDS): Basic Steel Operations 8,764 8,970 9,251 ========= ========= ========= IDENTIFIABLE ASSETS: Basic Steel Operations $3,862.3 $4,048.3 $4,106.0 Steel Related Operations 57.8 115.5 102.7 Corporate 1,189.8 1,536.5 1,573.7 --------- --------- --------- Total $5,109.9 $5,700.3 $5,782.4 ========= ========= ========= DEPRECIATION: Basic Steel Operations $ 263.2 $ 277.3 $ 252.6 Steel Related Operations 5.5 6.7 8.5 --------- --------- --------- Total $ 268.7 $ 284.0 $ 261.1 ========= ========= ========= CAPITAL EXPENDITURES: Basic Steel Operations $ 251.7 $ 253.4 $ 432.1 Steel Related Operations 7.3 13.4 12.5 --------- --------- --------- Total $ 259.0 $ 266.8 $ 444.6 ========= ========= ========= A general description of our segments and their products and services is contained under the heading "Bethlehem's Segments" on page 7 of this Report. Intersegment sales are generally at market prices. Corporate assets consist primarily of cash and cash equivalents, investments, deferred income tax asset and intangible asset-pensions. C. ESTIMATED RESTRUCTURING LOSS AND IMPAIRMENT OF LONG-LIVED ASSETS During 1996, we announced a Restructuring Plan to improve financial performance and stockholder value. We plan to exit our Bethlehem Structural, BethForge, CENTEC, and BethShip Sparrows Point Shipyard businesses. We will operate these units for a period of time while efforts are being made to sell them, but we expect all units to be sold or shut down by the end of 1997. In the third quarter of 1996, we sold and leased assets of our Eagle Nest coal mine. Additionally, our Coke Division in Bethlehem, Pennsylvania was written off as an impaired asset but will continue to operate. Accordingly, we recorded restructuring losses in 1996 totaling $465 million ($382 million after tax or $3.43 per share). These losses included $250 million for the net book value of certain assets, $180 million for employee benefit related costs ($120 million for pensions, $30 million of postretirement benefits other than pensions, and $30 million for severance and other benefits) and $35 million for future contractual and other costs. We expect to reduce our work force by 2,250 employees as a result of our decision. D. TAXES Our benefit (provision) for income taxes consisted of: (Dollars in millions) 1996 1995 1994 - --------------------- ---- ---- ---- Federal - deferred $ 67 $(35) $(13) Federal, state and foreign - current - (2) (1) ---- ----- ----- Total benefit (provision) $ 67 $(37) $(14) ==== ===== ===== The benefit (provision) for income taxes differs from the amount computed by applying the federal statutory rate to pre-tax income (loss). The computed amounts and the items comprising the total differences follow: (Dollars in millions) 1996 1995 1994 - --------------------- ---- ---- ---- PRE-TAX INCOME (LOSS): United States $(392) $203 $87 Foreign 16 14 8 ---- ----- ----- Total $(376) $217 $95 ==== ===== ===== Computed amounts $132 $(76) $(33) Valuation allowance (67) 37 13 Percentage depletion 5 5 8 Dividend received deduction 2 3 3 State and foreign taxes - - (1) Other differences - net (5) (6) (4) ---- ----- ----- Total benefit (provision) $ 67 $(37) $(14) ==== ===== ===== - 16 - 15 The components of our net deferred income tax asset are as follows: December 31 - ------------------------------------------------------------------ (Dollars in millions) 1996 1995 ---- ---- TEMPORARY DIFFERENCES: Employee benefits $ 835 $ 830 Depreciable assets (255) (300) Other 115 115 ------ ------ Total 695 645 Operating loss carryforward 650 600 ------ ------ Deferred income tax asset 1,345 1,245 Valuation allowance (410) (360) ------ ------ Deferred income tax asset-net $ 935 $ 885 ====== ====== Temporary differences represent the cumulative taxable or deductible amounts recorded in our financial statements in different years than recognized in our tax returns. Our employee benefits temporary difference includes amounts expensed in our financial statements for pensions, health care, life insurance and other postretirement benefits that become deductible in our tax return upon payment or funding in qualified trusts. The depreciable assets temporary difference represents principally tax depreciation in excess of financial statement depreciation. Other temporary differences represent principally various expenses accrued for financial reporting purposes that are not deductible for tax reporting purposes until paid. At December 31, 1996, we had regular tax net operating loss carryforwards of $1.8 billion and alternative minimum tax loss carryforwards of $800 million. Regular federal tax net operating loss carryforwards of $315 million expire in 1998, with the balance expiring in varying amounts from 1999 through 2011. FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES, requires that we record a valuation allowance when it is "more likely than not that some portion or all of the deferred tax assets will not be realized." It further states, "forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years." The ultimate realization of this deferred tax asset depends on our ability to generate sufficient taxable income in the future. Bethlehem reported income before restructuring charges and accounting changes in eight of the past ten years. Bethlehem has undergone substantial restructuring and made substantial strategic capital expenditures during the last several years. Also, we have significant tax planning opportunities to manage taxable income including selection of depreciation methods and timing of contributions to our pension trust fund. We believe that our deferred tax asset will be realized by future operating results together with tax-planning opportunities. However, our significant net operating loss carryforwards and future tax deductions from temporary differences make it appropriate to record a valuation allowance. Accordingly, we have provided a valuation allowance equal to 50% of the total deferred tax asset related to our operating loss carryforward and our temporary differences exclusive of postretirement benefits other than pensions. If we have a tax loss in any year in which our tax deduction for postretirement benefits other than pensions exceeds our financial statement expense, the tax law currently provides for a 15-year carryforward of that loss against future taxable income. We, therefore, have ample time to realize these future tax benefits. We believe, therefore, a valuation allowance is not appropriate for the deferred tax asset related to our temporary difference for postretirement benefits other than pensions. If we are unable to generate sufficient taxable income in the future through operating results or tax-planning opportunities, we will be required to increase our valuation allowance through a charge to expense (reducing our stockholders' equity). On the other hand, if we achieve sufficient profitability to use all of our deferred income tax asset, we will reduce the valuation allowance through a decrease to expense (increasing our stockholders' equity). In addition to income taxes, we incurred costs for certain other taxes as follows: (Dollars in millions) 1996 1995 1994 - --------------------------------------------------------------------------- Employment taxes $ 85.1 $ 95.2 $ 90.1 Property taxes 25.1 24.6 24.7 State and foreign taxes 11.0 11.2 9.1 Federal excise tax on coal 2.0 2.6 3.1 ------ ------ ------ Total other taxes $123.2 $133.6 $127.0 ====== ====== ====== - 17 - 16 E. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS December 31 - --------------------------------------------------------------- (Dollars in millions) 1996 1995 - --------------------- ---- ---- 5.69%-5.99% Galvanizing lines financing $149.7 $187.1 NOTES AND LOANS: 10 3/8% Senior Notes, Due 2003 105.0 105.0 2%-9.64%, Due 1997-2009 14.6 25.5 DEBENTURES: 6 7/8%, Due 1999 11.8 15.7 8 3/8%, Due 2001 41.6 41.6 8.45%, Due 2005 90.7 90.7 POLLUTION CONTROL AND INDUSTRIAL REVENUE BONDS: 7 1/2%-8%, Due 2015-2024 128.9 128.9 Capital lease obligations 5.6 45.2 Unamortized debt discount (1.2) (1.4) ------- ------- Total 546.7 638.3 Amounts due within one year (49.3) (91.5) ------- ------- Long-term $497.4 $546.8 ======= ======= Maturities and sinking fund requirements for the next five years are $49 million in 1997, $46 million in 1998, $45 million in 1999, $48 million in 2000 and $50 million in 2001. The galvanizing lines financing is collateralized by such equipment at our Sparrows Point and Burns Harbor Divisions and will be repaid in equal semiannual installments through 2000. The 10 3/8% Senior Notes are senior in right of payment to all existing and future subordinated indebtedness of Bethlehem. As unsecured senior obligations, the Notes will effectively be subordinate to secured senior indebtedness of Bethlehem. These Notes contain covenants that impose certain limitations on Bethlehem's ability to incur or repay debt, to pay dividends and make other distributions on or redeem capital stock, or to sell, merge, transfer or encumber assets. See Note K, STOCKHOLDERS' EQUITY. We have a credit arrangement, which expires on September 11, 2000, with a group of 13 domestic and international banks for $500 million, $150 million of which can be used for letters of credit. The arrangement consists of a $300 million receivables sale/purchase agreement through a wholly-owned special purpose subsidiary and a $200 million secured credit agreement. As of December 31, 1996, we had sold to the banks an ownership interest in trade receivables of $190 million in exchange for $84 million in cash, $73 million in letters of credit and required reserves of $33 million. The receivables were sold at a discount, based on defined short-term, investment grade, interest rates and a fixed fee per annum for the letters of credit. The banks are required to pay us cash for the face amount of the letters of credit upon expiration. We pay a .1875% per annum fee on the daily available commitment. Receivables from banks are for cash and required reserves that will be returned to us upon expiration of the letters of credit and liquidation of receivable ownership. Supplemental information on the receivable balances at December 31, 1996 and 1995 follows: December 31 ----------- (Dollars in millions) 1996 1995 - --------------------- ---- ---- Trade $219.2 $286.5 Banks 105.6 105.9 Other 7.6 1.7 Allowances (20.8) (19.5) ------- ------- Total receivables - net $311.6 $374.6 ======= ======= Under the secured credit agreement, inventories are pledged as collateral for any borrowings and letters of credit. Borrowings under the agreement are subject to collateral coverage requirements and incur interest based on defined short-term interest rates. No borrowings were outstanding under this agreement at December 31, 1996. We pay a .5% per annum fee on the daily available commitment. Our secured credit agreement and galvanizing lines financing agreements contain restrictive covenants that require Bethlehem to maintain a minimum adjusted consolidated tangible net worth. At December 31, 1996, our adjusted tangible net worth as defined by these agreements exceeded the more restrictive of these requirements by about $700 million. At December 31, 1996, outstanding interest rate swap agreements with notional amounts totaling $74 million effectively fix the interest rate on our floating rate financings at 5.75% to 8.70%. These interest rate swap agreements expire in 2000 and 2001. At December 31, 1996 and 1995, the estimated fair value of our debt and interest rate swap agreements was not materially different from the recorded amounts. Future minimum payments under noncancellable operating leases at December 31, 1996 were $18 million in 1997, $14 million in 1998, $10 million in 1999, $8 million in 2000, $5 million in 2001 and $19 million thereafter. Total rental expense under operating leases was $40 million, $42 million and $38 million in 1996, 1995 and 1994. - 18 - 17 F. COMMITMENTS AND CONTINGENT LIABILITIES We own a portion of an iron ore enterprise and are committed to purchase certain ore produced. We received 1.7 million net tons of such iron ore in 1996, 2.2 million tons in 1995, and 2.7 million tons in 1994 at a net cost of $39 million, $58 million and $82 million. At December 31, 1996, we had outstanding approximately $41 million of purchase orders for additions and improvements to our properties. We, as well as other steel companies, are subject to various environmental laws and regulations imposed by federal, state and local governments. Because of the continuing evolution of the specific regulatory requirements and available technology to comply with the requirements, we cannot reasonably estimate the future capital expenditures and operating costs required to comply with these laws and regulations. Although it is possible that our future operating results in a particular quarterly or annual period could be materially affected by the future costs of environmental compliance, we believe that such costs will not have a material adverse effect on our consolidated financial position or on our competitive position with respect to other integrated domestic steelmakers subject to the same environmental requirements. In the ordinary course of our business, we are involved in various pending or threatened legal actions. In our opinion, adequate reserves have been recorded for losses that are likely to result from these proceedings. If such reserves prove to be inadequate, however, we would incur a charge to earnings that could be material to the results of operations in a particular future quarterly or annual period. We believe that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position. G. POSTRETIREMENT PENSION BENEFITS We have noncontributory defined benefit pension plans that provide benefits for substantially all our employees. Defined benefits are based on years of service and the five highest consecutive years of pensionable earnings during the last ten years prior to retirement or a minimum amount based on years of service. We fund annually the amount required under ERISA minimum funding standards plus additional amounts as appropriate. In 1996, we changed the measurement date for our pension obligation to November 30 to facilitate timely preparation and analysis of plans and results. The following sets forth the plans' actuarial assumptions used and funded status at year end together with amounts recognized in our consolidated balance sheets: Nov. 30 Dec. 31 ------- ------- (Dollars in millions) 1996 1995 - --------------------- ---- ---- ASSUMPTIONS: Discount rate 7.75% 7.25% Average rate of compensation increase 3.10% 3.10% ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS: Vested benefit obligation $4,910 $4,895 Accumulated benefit obligation 5,075 5,065 Projected benefit obligation 5,325 5,365 PLAN ASSETS AT FAIR VALUE: Fixed income securities 1,656 1,814 Equity securities 2,381 1,943 Cash and marketable securities 178 193 ------ ------ Total plan assets $4,215 $3,950 ====== ====== Projected benefit obligation in excess of plan assets 1,110 1,415 Unrecognized net loss (36) (382) Remaining unrecognized net obligation resulting from adoption of Statement No. 87 (173) (219) Unrecognized prior service cost from plan amendments (201) (244) Adjustment required to recognize minimum liability - Intangible asset 160 463 - Additional paid-in capital (pre-tax) (Note K) - 82 December accruals/contributions - net 10 - ------ ------ Pension liability at December 31 $ 870 $1,115 ====== ====== - 19 - 18 The assumptions used in each year and the components of our annual pension cost follow: (Dollars in millions) 1996 1995 1994 - --------------------- ---- ---- ---- ASSUMPTIONS: Return on plan assets 8.75% 10.00% 8.75% Discount rate 7.25% 9.00% 7.50% PENSION COST: Service cost - benefits earned during the period $ 59 $ 45 $ 52 Interest on projected benefit obligation 372 402 375 Return on plan assets - actual (616) (849) 60 - deferred 287 532 (365) Amortization of initial net obligation 36 36 37 Amortization of unrecognized prior service cost from plan amendments 32 32 33 ----- ----- ----- Total 170 198 192 PBGC premiums, administration fees, etc. 22 12 11 ----- ----- ----- Total cost $ 192 $ 210 $ 203 ===== ===== ===== H. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In addition to providing pension benefits, we currently provide health care and life insurance benefits for most retirees, and their dependents. In 1996, we changed the measurement date for our other postretirement obligation to November 30 to facilitate timely preparation and analysis of plans and results. Information regarding our plans' actuarial assumptions, funded status and liability follows: Nov. 30 Dec. 31 ------- ------- (Dollars in millions) 1996 1995 - --------------------- ---- ---- ASSUMPTIONS: Discount rate 7.75% 7.25% Trend rate - beginning next year 7.00% 8.00% - ending year 2000 4.60% 4.60% ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION: Retirees $1,705 $1,605 Fully eligible active plan participants 145 170 Other active plan participants 150 230 ------- ------- Total 2,000 2,005 PLAN ASSETS AT FAIR VALUE: Fixed income securities 130 140 ------- ------- Accumulated postretirement benefit obligation in excess of plan assets 1,870 1,865 Unrecognized net loss, etc. (275) (300) ------- ------- Total obligation at December 31 1,595 1,565 Current portion (150) (150) ------- ------- Long-term obligation $1,445 $1,415 ======= ======= - 20 - 19 The assumptions used in each year and the components of our postretirement benefit cost follow: (Dollars in millions) 1996 1995 1994 - --------------------- ---- ---- ---- ASSUMPTIONS: Return on plan assets 8.75% 10.00% 8.75% Discount rate 7.25% 9.00% 7.50% Trend rate - beginning current year 8.00% 9.00% 9.00% - ending year 2000 4.60% 4.60% 4.60% POSTRETIREMENT BENEFIT COST: Service cost $ 10 $ 7 $ 11 Interest on accumulated postretirement benefit obligation 140 148 139 Amortization of unrecognized net loss 8 - - Return on plan assets - actual (7) (24) 5 - deferred (5) 12 (18) ----- ----- ----- Total cost $146 $143 $137 ===== ===== ===== A one percentage point increase or decrease in the assumed health care trend rate would increase or decrease the accumulated postretirement benefit obligation by about $145 million and 1996 expense by about $10 million. I. STOCKHOLDER RIGHTS PLAN We have a Stockholder Rights Plan under which holders of Common Stock have rights to purchase a new series of Preference Stock. When exercisable, each right entitles the holder to purchase one one-hundredth of a share of Series A Junior Participating Preference Stock at an exercise price of $80 per unit. The rights will become exercisable only if a person or group acquires 15% or more of Common Stock or begins a tender offer or exchange offer that would result in that person or group beneficially owning 20% or more of Common Stock. Subsequently, upon the occurrence of certain events, holders of rights will be entitled to purchase Common Stock of Bethlehem or a third-party acquiror worth twice the right's exercise price. Until the rights become exercisable, we will be able to redeem them at one cent per right. The rights expire on October 18, 1998. J. STOCK OPTIONS At December 31, 1996, we had options outstanding under Plans approved by our stockholders in 1988 and 1994. New options can be granted only under the 1994 Plan, which reserved 4,000,000 shares of Common Stock for such use. At December 31, 1996, options on 1,605,500 shares of Common Stock were available for granting. The option price is the fair market value of our Common Stock on the date the option is granted. Options issued under the 1994 Plan become exercisable one to four years after the date granted and expire ten years from the date granted. Exercisable options may be surrendered for the difference between the option price and the quoted market price of the Common Stock on the date of surrender. Depending on the circumstances, option holders receive either Common Stock, cash or a combination of Common Stock and cash. Because of the surrender component in our options, related expense is recognized periodically based on the difference between the option price and current quoted market prices. Compensation expense recognized and weighted average fair value for the options granted in 1996, 1995 and 1994 were not material. Changes in options outstanding during 1996, 1995 and 1994 under the Plans were as follows: Weighted Number of Average Options Price --------- -------- Balance December 31, 1993 2,879,915 $18 Granted 561,900 20 Terminated or cancelled (256,264) 25 Surrendered or exercised (685,303) 17 ---------- Balance December 31, 1994 2,500,248 19 Granted 635,100 15 Terminated or cancelled (111,373) 18 Surrendered or exercised (6,900) 14 ---------- Balance December 31, 1995 3,017,075 18 Granted 620,600 14 Terminated or cancelled (144,025) 19 Surrendered or exercised (2,000) 8 ---------- BALANCE DECEMBER 31, 1996 3,491,650 17 ========== === Options exercisable at the end of 1996, 1995 and 1994 were 1,976,300, 1,848,375 and 1,689,298. - 21 - 20 Information on our stock options at December 31, 1996 follows:
Range of Number of Average Average Number of Average Exercise Options Exercise Contractual Options Exercise Prices Outstanding Price Life Exercisable Price - --------- ----------- -------- ---------- ----------- -------- $13-14 1/2 1,779,400 $14 7 Years 531,200 $14 17 5/8-19 675,150 19 5 Years 675,150 19 20 3/8-21 3/4 1,037,100 21 4 Years 769,950 21 --------- --------- Total 3,491,650 17 6 Years 1,976,300 18 ========= ========= K. STOCKHOLDERS' EQUITY
(Shares in thousands Preferred Stock Preference Stock Common Stock Common Stock Additional and dollars in millions, $1.00 Par Value $1.00 Par Value $1.00 Par Value Held in Treasury Paid-in Accumulated except per share data) Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit ------ ------ ------ ------ ------ ------ ------ ------ -------- ----------- BALANCE DECEMBER 31, 1993 11,623 $11.6 2,811 $2.8 93,413 $ 93.4 2,004 $59.7 $1,588.4 $(939.9) Net income for year 80.5 Minimum pension liability adjustment (Note G) 50.0 Dividends on Preferred Stock (40.4) Preference Stock: Stock dividend 135 .1 (.1) Issued 134 .1 2.6 Converted (461) (.4) 461 .4 Common Stock Issued 18,008 18.1 (7) (.2) 348.1 ------ ---- ------ ----- ------- ------ ------ ------ -------- -------- BALANCE DECEMBER 31, 1994 11,623 11.6 2,619 2.6 111,882 111.9 1,997 59.5 1,948.6 (859.4) Net income for year 179.6 Minimum pension liability adjustment (Note G) (67.0) Dividends on Preferred Stock (40.4) Preference Stock: Stock dividend 133 .1 (.1) Issued 41 .1 .7 Converted (205) (.2) 205 .2 Common Stock Issued 613 .6 (5) (.1) 8.8 ------ ---- ------ ----- ------- ------ ------ ------ -------- -------- BALANCE DECEMBER 31, 1995 11,623 11.6 2,588 2.6 112,700 112.7 1,992 59.4 1,850.6 (679.8) Net loss for year (308.8) Minimum pension liability adjustment (Note G) 67.0 Dividends on Preferred Stock (40.4) Preference Stock: Stock dividend 129 .1 (.1) Issued 62 .1 .8 Converted (261) (.3) 261 .3 Common Stock Issued 890 .9 26 .3 8.4 ------ ---- ------ ----- ------- ------ ------ ------ -------- -------- BALANCE DECEMBER 31, 1996 11,623 $11.6 2,518 $2.5 113,851 $113.9 2,018 $59.7 $1,886.3 $(988.6) ====== ===== ====== ==== ======= ====== ===== ====== ======== ======== - 22 -
21 Preferred and Preference Stock issued and outstanding: December 31 -------------------- (Shares in thousands) 1996 1995 - --------------------- ---- ---- PREFERRED STOCK - AUTHORIZED 20,000 SHARES $5.00 Cumulative Convertible Preferred Stock 2,500 2,500 $2.50 Cumulative Convertible Preferred Stock 4,000 4,000 $3.50 Cumulative Convertible Preferred Stock 5,123 5,123 PREFERENCE STOCK - AUTHORIZED 20,000 SHARES Series "A" 5% Cumulative Convertible Preference Stock 1,818 1,920 Series "B" 5% Cumulative Convertible Preference Stock 700 668 Each share of $3.50 Cumulative Convertible Preferred Stock issued in 1993 is convertible into 2.39 shares of Common Stock, subject to certain events. Each share of the $5.00 Cumulative Convertible Preferred Stock and the $2.50 Cumulative Convertible Preferred Stock issued in 1983 is convertible into 1.77 and .84 shares of Common Stock, subject to certain events. In accordance with our labor agreements, we issue Preference Stock to a trustee under the Employee Investment Program. Series "A" and Series "B" of Preference Stock have a cumulative dividend of 5% per annum payable at our option in cash, Common Stock or additional shares of Preference Stock. Each share of Preference Stock is entitled to vote with Common Stock on all matters and is convertible into one share of Common Stock. Under the covenants of our 10-3/8% Senior Notes, we can pay future dividends on our common stock, among certain other restrictions, only if such cumulative dividends do not exceed the aggregate net cash proceeds from the sale of capital stock plus 50% of our consolidated net income and minus 100% of our consolidated net loss since the second quarter of 1993, excluding certain restructuring charges and other adjustments. The amount available at December 31, 1996 under this covenant was about $450 million. L. QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------ (Dollars in millions, except per share data) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q - ------------------------------------------------------------------------------------------------------------------------ Net sales $1,118.5 $1,236.9 $1,174.6 $1,149.0 $1,240.7 $1,250.2 $1,224.7 $1,151.9 Cost of sales 1,009.9 1,092.9 1,043.3 1,022.1 1,068.9 1,061.6 1,069.6 1,002.7 Net income (loss) 0.1 26.6 11.0 (346.5) 52.5 60.3 34.4 32.4 Net income (loss) per Common share $ (0.09) $ 0.14 $ - $ (3.19) $ .38 $ .45 $ .22 $ .20 - ------------------------------------------------------------------------------------------------------------------------
- 23 - 22 REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF BETHLEHEM STEEL CORPORATION We have audited the accompanying consolidated balance sheets of Bethlehem Steel Corporation and its subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income and of cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the financial position of Bethlehem Steel Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Price Waterhouse LLP 1177 Avenue of the Americas New York, NY 10036 January 29, 1997 - 24 - 23
FIVE-YEAR FINANCIAL AND OPERATING SUMMARIES BETHLEHEM STEEL - ------------------------------------------------------------------------------------------------------------------ (Dollars in millions, except per share data) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------ EARNINGS STATISTICS Net sales $ 4,679.0 $ 4,867.5 $ 4,819.4 $ 4,323.4 $ 4,007.9 ------------ ------------ ------------ ------------ ------------ Costs and expenses: Employment costs 1,555.0 1,683.5 1,633.0 1,547.1 1,664.0 Materials and services 2,680.6 2,592.7 2,754.8 2,404.2 2,242.0 Depreciation 268.7 284.0 261.1 277.5 261.7 Taxes (other than employment and income taxes) 38.1 38.4 36.9 39.8 43.2 Estimated restructuring loss 465.0 - - 350.0 - ------------ ------------ ------------ ------------ ------------ Total costs and expenses 5,007.4 4,598.6 4,685.8 4,618.6 4,210.9 ------------ ------------ ------------ ------------ ------------ Income (loss) from operations (328.4) 268.9 133.6 (295.2) (203.0) Financing income (expense): Interest and other financing costs (53.3) (60.0) (46.2) (63.2) (57.2) Interest income 5.9 7.7 7.1 7.1 4.9 Benefit (provision) for income taxes 67.0 (37.0) (14.0) 85.0 45.0 Cumulative effect of changes in accounting - - - - (340.0) ------------ ------------ ------------ ------------ ------------ Net income (loss) (308.8) 179.6 80.5 (266.3) (550.3) Dividends on Preferred and Preference Stock 41.9 42.4 43.1 39.8 24.3 ------------ ------------ ------------ ------------ ------------ Net income (loss) applicable to Common Stock $ (350.7) $ 137.2 $ 37.4 $ (306.1) $ (574.6) ------------ ------------ ------------ ------------ ------------ Net income (loss) per Common share $ (3.15) $ 1.24 $ .35 $ (3.37) $ (7.01) ------------ ------------ ------------ ------------ ------------ BALANCE SHEET STATISTICS Cash and cash equivalents $ 136.6 $ 180.0 $ 159.5 $ 228.9 $ 208.2 Receivables, inventories and other current assets 1,351.8 1,345.8 1,409.6 1,362.2 1,261.3 Current liabilities (957.4) (1,049.6) (1,011.2) (914.2) (893.2) ------------ ------------ ------------ ------------ ------------ Working capital $ 531.0 $ 476.2 $ 557.9 $ 676.9 $ 576.3 Current ratio 1.6 1.5 1.6 1.7 1.6 Property, plant and equipment - net $ 2,419.8 $ 2,714.2 $ 2,759.3 $ 2,634.3 $ 2,804.5 Total assets 5,109.9 5,700.3 5,782.4 5,876.7 5,493.0 Total debt and capital lease obligations 546.7 638.3 757.3 813.8 796.0 Stockholders' equity 966.0 1,238.3 1,155.8 696.6 789.4 Total debt as a percent of invested capital 36% 34% 40% 54% 50% ------------ ------------ ------------ ------------ ------------ OTHER STATISTICS Capital expenditures $ 259.0 $ 266.8 $ 444.6 $ 327.1 $ 328.7 Raw steel production capability (net tons in thousands) 10,500 11,500 11,500 11,500 16,000 Raw steel production (net tons in thousands) 9,447 10,449 9,817 10,303 10,544 Steel products shipped (net tons in thousands) 8,782 8,986 9,262 9,016 9,062 Pensioners receiving benefits at year end 70,100 71,000 71,700 70,900 70,500 Average number of employees receiving pay 17,800 19,500 19,900 20,700 24,900 Common Stock outstanding at year end (shares in thousands) 111,834 110,708 109,886 91,409 90,509 Common stockholders at year end 37,000 39,000 41,000 43,000 46,000 - ------------------------------------------------------------------------------------------------------------------
- 26 - EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 137 0 333 21 1017 23 6344 3924 5110 957 497 0 14 114 838 5110 4679 4679 4168 5007 0 0 53 (376) (67) (309) 0 0 0 (351) (3.15) (3.15)
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