-----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, IAwlwpD0VemALNG/q25Hcgu2/hPwn/Onyl74sDaFLk8D+Lpl+QZtzs1BY5IOVny2 nbuvfaaCRmVshtA/TjfM8g== 0000950152-99-001467.txt : 19990303 0000950152-99-001467.hdr.sgml : 19990303 ACCESSION NUMBER: 0000950152-99-001467 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LTV CORP CENTRAL INDEX KEY: 0000060731 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 751070950 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04368 FILM NUMBER: 99554814 BUSINESS ADDRESS: STREET 1: 200 PUBLIC SQUARE STREET 2: P O BOX 655003 CITY: CLEVELAND STATE: OH ZIP: 44115-1069 BUSINESS PHONE: 2166225000 MAIL ADDRESS: STREET 1: 25 WEST PROSPECT AVENUE CITY: CLEVELAND STATE: OH ZIP: 44114-2308 FORMER COMPANY: FORMER CONFORMED NAME: LING TEMCO ELECTRONICS INC DATE OF NAME CHANGE: 19710317 FORMER COMPANY: FORMER CONFORMED NAME: LING TEMCO VOUGHT INC DATE OF NAME CHANGE: 19660907 FORMER COMPANY: FORMER CONFORMED NAME: LING ALTEC ELECTRONICS INC DATE OF NAME CHANGE: 19660907 10-K405 1 THE LTV CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File Number 1-4368 ------------------ THE LTV CORPORATION (Exact name of registrant as specified in its charter) Delaware 75-1070950 (State or other jurisdiction of incorporation) (I.R.S. Employer Identification Number) 200 Public Square Cleveland, Ohio 44114-2308 (Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (216) 622-5000 --------------------------- Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, par value $0.50 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes |X| No ___ State the aggregate market value of the voting stock held by non-affiliates of the registrant. Approximately $633.9 Million (As of February 16, 1999) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 99,793,666 shares of Common Stock (As of February 16, 1999) Documents Incorporated by Reference: Annual Report to Shareholders for fiscal year 1998 (Part II); Annual Proxy Statement for 1999 Annual Meeting (Part III) 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 ] 2 PART I ITEM 1. BUSINESS. FORWARD LOOKING STATEMENTS "Item 1. Business," "Item 2. Properties" and "Item 3. Legal Proceedings" of this report include forward-looking statements. The use of the words "outlook," "anticipates," "believes," "estimate," "expect" and similar words are intended to identify these statements as forward-looking. These statements represent the Company's current judgment on what the future holds. While the Company believes them to be reasonable, a number of important factors could cause actual results to differ materially from those projected. These factors include relatively small changes in market price or market demand; changes in domestic capacity; changes in raw material costs; increased operating costs; loss of business from major customers, especially for high value-added product; unanticipated expenses; substantial changes in financial markets; labor unrest; unfair foreign competition; major equipment failure; unanticipated results in pending legal proceedings or difficulties in implementing information technology, including Year 2000 compliant systems. INTRODUCTION The LTV Corporation ("LTV") was organized as a Delaware corporation in November 1958 as a successor to a California corporation organized in 1953. LTV's principal office is located at 200 Public Square, Cleveland, Ohio 44114-2308 and its telephone number is (216) 622-5000. LTV and its subsidiaries are collectively referred to herein as "LTV" or the "Company" unless the context otherwise requires. LTV is a leading domestic integrated steel producer and has recently acquired interests in metal fabrication and leading steel technologies. For financial reporting purposes, LTV has disaggregated the results of its operations and certain other financial information into three segments: Integrated Steel, Metal Fabrication and Corporate and Other which includes leading steel technologies. The notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operation set forth certain financial information relating to LTV's business segments. The table below shows the percentage contribution to LTV's net sales of each segment for the periods indicated.
1998 1997 1996 ---- ---- ---- Integrated Steel 84% 88% 92% Metal Fabrication 16% 12% 8% Corporate and Other -- -- --
Integrated Steel. LTV's integrated steel segment manufactures and sells a diversified line of coated sheet and cold rolled and hot rolled sheet and strip and tin mill products. Coated sheet and cold rolled, hot rolled sheet and strip are used to make products such as automobile bodies, appliances and other consumer durable goods, farm equipment, industrial machinery, office equipment, machine parts and tubular products. Tin mill products are used by the container industry in the manufacture of cans and closures. LTV is engaged in such operations primarily through its subsidiary, LTV Steel Company, Inc. ("LTV Steel"). - 1 - 3 Based on 1998 shipments (as compiled by LTV based primarily on publicly filed data), LTV believes it is the third largest domestic integrated steel producer, the second largest producer of flat rolled steel and a leading supplier of quality-critical, flat rolled steel to the transportation, appliance and electrical equipment industries in the United States. In its integrated steel operation, LTV operates two domestic integrated steel mills (Cleveland Works and Indiana Harbor Works) and various finishing, galvanizing and processing facilities, as well as tin mill operations. Also included in LTV's integrated steel operation are iron ore and limestone operations (which provide raw materials to its steelmaking facilities) and short line railroad operations (which primarily transport raw materials and steel products to support the manufacturing operations). See Item 2. Properties for a description of these assets and operations. Metal Fabrication. LTV's metal fabrication segment (i) manufactures pipe, conduit and other tubular products for use in transportation, agriculture, construction and oil and gas industries (ii) manufactures preengineered, metal buildings for low rise commercial and industrial applications ("VP Buildings") and (iii) includes interests in a steel tailor welded blank operation for automotive applications ("TWB") and a steel processing and blanking operation in Puebla, Mexico and a similar operation to be built in Silao, Mexico ("Lagermex"). Corporate and Other. LTV's corporate and other segment includes (i) a 50% interest in a steel minimill operation ("Trico Steel") which began production in April 1997, (ii) a 46.5% interest in a reduced iron plant in the Republic of Trinidad and Tobago ("CAL") which began commissioning procedures in the first quarter of 1999 and (iii) corporate investments and related income and other expense. SIGNIFICANT DEVELOPMENTS Steel Imports. During 1998, imports of flat rolled product (excluding slabs) surged to record levels, averaging on an annual basis an estimated 25% of total domestic shipments. The Company believes that a significant portion of the recent imports have been unfairly traded and that this unfair trade has injured the Company by reducing its production, shipping rates and average steel selling prices. In response to this surge, the Company cut back raw steel production at its Cleveland Works and Indiana Harbor Works, idling certain facilities and announcing the closing of others, reduced iron ore pellet production and reduced its workforce through layoffs. Trade Cases. In September 1998, LTV joined with eleven other domestic steel companies, the United Steelworkers of America ("USWA") and the Independent Steelworkers Union in filing unfair trade cases covering certain hot rolled steel products against Japan, Russia and Brazil. The Company is continuing to monitor the surge in unfairly traded imports and its effects on the Company's operations and anticipates that additional unfair trade cases may be filed. See "Trade Cases." Trico Steel. LTV's joint venture steel minimill operation, Trico Steel, has experienced equipment problems that have prevented Trico Steel from achieving its rated capacity of 2.2 millions tons and product mix. Such equipment problems are continuing into 1999, although efforts are ongoing to correct such problems. However, transformer outages at the minimill will likely result in substantially reduced production into the second quarter of 1999. The recent surge in steel imports has also negatively affected sales which in turn has negatively affected production levels at Trico Steel. Due to the low production levels experienced by Trico Steel, LTV and its other two partners have entered into a credit commitment to lend to Trico Steel on a junior subordinated basis up to an additional $50 million. LTV's portion of such commitment is $25 million. The $50 million commitment is in addition to a $30 million loan - 2 - 4 commitment (LTV's share of which is $15 million) made in mid-1998 ($24 million of which was loaned in 1998). PBGC Agreement. The agreement executed between LTV and the Pension Benefit Guaranty Corporation (the "PBGC") at the time of LTV's reorganization was substantially restructured in 1998. Prospectively, the restated agreement normalizes funding requirements under Employee Retirement Income Security Act of 1974 for LTV's major defined benefit plans, and deletes or modifies restrictive financial covenants to make them no more restrictive than those in the Company's existing senior note securities. In connection with the restructuring, the Company prepaid a promissory note payable to PBGC in the amount of $62 million, including accumulated interest. INTEGRATED STEEL STEEL MILL PRODUCTS During the years 1998, 1997 and 1996, LTV's integrated steel operation accounted for 7.1%, 7.3% and 7.6%, respectively, of total domestic industry shipments of steel mill products, based on American Iron and Steel Institute ("AISI") reports. The net tons of steel mill products shipped by LTV's integrated steel operations during these periods were: 1998--7,238,000; 1997--7,655,000 and 1996--7,605,000. LTV's integrated steel mill product mix is reflected in the following table which shows the revenue dollars for the periods indicated:
YEAR ENDED DECEMBER 31, --------------------------------------------- (DOLLARS IN MILLIONS) 1998 1997 1996 REVENUE* REVENUE* REVENUE* -------- -------- -------- Hot and cold flat rolled products $1,861 $2,036 $2,017 Galvanized products 1,213 1,230 1,203 Tin mill products 395 502 453 Other 121 137 140 --- --- --- Total $3,590 $3,905 $3,813 ====== ====== ======
* Excludes intersegment steel shipments to the Company's metal fabrication operation. Hot and cold flat rolled and galvanized product are used in the manufacture of automobile bodies, appliances and other consumer durable goods, farm equipment, industrial machinery, office equipment, machine parts and tubular products. Tin mill products are used by the container industry in the manufacture of cans and closures. Sales in 1998 decreased from 1997 due to a surge in unfairly traded imports which resulted in lower average steel selling prices and lower shipments at the Company. STEEL PRODUCTION The following table sets forth raw steel production and estimated capability information for both LTV and the domestic steel industry during the periods indicated: - 3 - 5
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ---- ---- ---- Capability (net tons in thousands) LTV-Integrated Steel 8,600 8,400 8,400 Industry(b) 125,000 121,400 116,100 Percent of industry 6.8% 6.9% 7.2% Production (net tons in thousands) LTV-Integrated Steel 8,100 8,900 8,800 Industry(b) 107,600 107,500 104,400 Percent of industry 7.6% 8.3% 8.4% Production as a percentage of capability LTV-Integrated Steel(a) 95.0% 106.0% 105.0% Industry(b) 85.9% 88.5% 89.9%
(a) The Company follows industry standards in calculating its maximum operating rate which is based on 95% of blast furnace capacity, which recognizes the average effect of blast furnace relines. LTV re-rated its capacity in 1998 which resulted in a 2.3% increase in AISI rated capacity. (b) The information relating to the domestic steel industry is as reported by or is derived from data reported by the AISI and is preliminary for 1998. A net ton is 2,000 pounds. In its integrated steel operation, LTV produces its steel using the basic oxygen furnace process at its Cleveland Works and Indiana Harbor Works. With three continuous casters, LTV continuously casts 100% of its steel production. LTV has supplemented its own steel production in recent years with purchases of semi-finished steel. In 1998, 1997 and 1996, LTV purchased approximately 36,000 tons, 322,000 tons and 168,000 tons, respectively, of semi-finished slabs from other domestic and foreign steel producers. Individual facilities are operated at rates that best serve LTV's overall need at the time and can be significantly higher or lower than LTV's average operating rate. LTV does not believe data regarding the utilization of individual facilities is necessarily meaningful. CUSTOMERS The following table sets forth the percentage of integrated steel shipments by tonnage distributed among LTV's various markets for the periods indicated: - 4 - 6
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 ---- ---- ---- Steel service centers 25% 26% 32% Transportation 27 25 23 Converters and processors 18 19 17 Electrical, agricultural and other machinery 8 8 8 Household appliances and office equipment 7 6 6 Containers and packaging 7 8 7 Construction 6 6 5 Exports 2 2 2 All other --- --- --- ----- ----- ----- Total 100% 100% 100%
Direct sales to General Motors, the Company's largest customer, accounted for approximately 9%, 11% and 11% of the Company's consolidated revenues in 1998, 1997 and 1996, respectively. In September 1999, the principal labor agreements are scheduled to expire at GM and the two other largest domestic automotive manufacturers. SALES AND MARKET DISTRIBUTION Approximately 60% of LTV's integrated steel products are sold under sales arrangements, most of which are negotiated on an annual basis. Almost all of LTV's integrated steel sales to its larger customers in the transportation, appliance, electrical equipment and food and beverage can markets are made pursuant to such sales arrangements. LTV's sales arrangements generally provide for set prices for the products ordered during the period they are in effect. As a result, LTV may experience a delay in realizing price changes related to its long-term integrated steel business. Much of the remainder of LTV's integrated steel product is sold under contracts covering shorter periods at the then prevailing market prices for such product. The Company's integrated steel sales organization is located at LTV's headquarters. Employees performing commercial, marketing and customer service functions are organized along market lines. LTV also maintains regional offices for integrated steel sales functions. LTV's export sales of integrated steel product were 2.2% of total dollar steel sales in 1998, 2.0% in 1997 and 2.1% in 1996. COMPETITION LTV competes directly with domestic and foreign flat rolled carbon steel producers and indirectly with producers of plastics, aluminum and other materials such as ceramics and wood which sometimes can be substituted for flat rolled carbon steel in manufactured products. The primary factors that have affected competition include price, quality, delivery performance and customer service. LTV targets quality-critical, value-added applications and believes it is able to differentiate certain of its products from those of its competitors on the basis of product quality, technology, modern facilities and customer product and technical support. Foreign Domestic steel producers have faced significant and intense competition from foreign producers. The intensity of foreign competition is affected by the relative strength of foreign economies and - 5 - 7 fluctuations in the value of the U.S. dollar against foreign currencies. During 1998, steel imports increased significantly due to a surge of unfairly traded steel, a rise in the value of the dollar in relation to certain foreign currencies, some of which were significantly devalued, and a weakening of certain economies particularly in Eastern Europe, Asia and Pacific Rim countries. Many foreign steel producers are owned, controlled or subsidized by their governments. Decisions by such foreign producers with respect to production and sales are often influenced to a greater degree by political and economic policy considerations than by prevailing market conditions. For a description of the recent trade cases filed against Japan, Russia and Brazil in 1998 as well as final dumping and subsidy decisions issued in 1992, some of which are still the subject of pending appeals, see "Trade Cases" below. Based on preliminary AISI reports, imports of flat rolled products increased significantly during each of the last two years, surging to record levels during 1998. Based on AISI reports, during the three years 1998, 1997 and 1996, imports of flat rolled products (excluding semi finished steel) totaled approximately 20 million, 14 million and 12 million net tons, respectively, or approximately 25% of total domestic steel consumption in 1998, approximately 19% in 1997 and 17% in 1996. Domestic LTV also competes with other domestic integrated producers, some of which have greater resources than the Company, and with mini-mills which are relatively efficient, low-cost producers that generally produce steel from scrap in electric furnaces, have lower employment and environmental costs and generally target regional markets. Recently developed thin slab casting technologies have allowed some mini-mill producers to enter certain sectors of the flat rolled market, which have traditionally been supplied by integrated producers, and others have announced their intention to do the same. Because of their technology, mini-mills are currently highly dependent upon scrap and susceptible to fluctuating scrap prices. In weak markets, minimills benefit from falling scrap prices, their principal raw material. See "Corporate and Other" for information regarding LTV's 50% participation in Trico Steel, a mini-mill joint venture. TRADE CASES United States Trade Cases 1998 Cases - In September 1998, LTV Steel joined with eleven other domestic steel producers, the USWA and the Independent Steelworkers Union in filing antidumping and/or countervailing duty petitions against Japan, Russia and Brazil alleging injury resulting from subsidies and dumping in the importation of certain hot rolled carbon steel products. On November 13, 1998, the International Trade Commission ("ITC") determined that there is a reasonable indication that the U.S. steel industry is threatened with material injury from such imports. Further, on November 23, 1998, the Department of Commerce ("DOC") found that "critical circumstances" exist with respect to such imports from Russia and Japan (i.e., that there were massive imports from these two countries over a relatively short period of time with knowledge that the trade cases were imminent). The critical circumstances determination means that steelmakers from such countries could be liable for antidumping duties on such steel imported into the U.S. since mid-November 1998. In February 1999, DOC issued preliminary determinations that set substantial dumping margins on hot rolled steel product from Japan, Russia and Brazil and countervailing duty margins on such product from Brazil. The preliminary findings mean that importers from the three countries must file bonds to cover the preliminary dumping margins on such imports. With respect to Japan and Russia, such bonds - 6 - 8 must cover imports dating back to mid-November 1998. Ultimately, liability for dumping duties will depend on affirmative final determinations of injury and dumping by the ITC and DOC in mid-1999. On February 22, l999, the DOC announced that the U.S. government had reached a tentative agreement with the Russian Federation that, if finalized, would preclude the imposition of dumping duties in the pending trade cases against Russia and would roll back Russia's recent 700% increase in hot rolled steel product imports (from 508,000 metric tons in 1995 to 3,468,000 metric tons in 1998) to 1996 import levels (750,000 metric tons). The suspension agreement would also impose a six month moratorium on any future hot rolled product import from Russia and would establish a minimum price of $255 per metric ton at which such product could thereafter be sold in the United States. LTV has announced that it intends to oppose the suspension agreement and will likely prosecute to conclusion its trade case pending against Russia. If the suspension agreement is not finalized, a successful prosecution of LTV's trade case would allow Russia full access to the U.S. market (i.e. no quota would be imposed) but would no longer allow importers of product from Russia to import such product at dumped prices without incurring substantial dumping duties. The DOC also announced that a tentative comprehensive agreement had been negotiated with the Russian Federation, covering all other steel product, which, if finalized, would reduce the level of imports of such other steel product to 1997 levels. 1992 Cases - As a result of the 1992 filing of numerous anti-dumping and countervailing duty cases by U.S. steel producers, including LTV Steel, there are orders imposing dumping and countervailing duties on imports of cold rolled steel coils from three countries and on coated steel coils from six countries. For the most part, these additional duties have reduced the volume of imports of the dutiable products from these countries. The orders under which these additional duties have been imposed will remain in effect until changed as a result of a periodic "Administrative Review," which would consider the appropriateness of the existing duty margin, or by an order following a "Sunset Review." Sunset Reviews of the orders will begin in 1999. Under the Sunset Review provisions, dumping and countervailing duties will be eliminated unless it is determined that revocation of the order is likely to lead to a continuation or recurrence of dumping or countervailable subsidies and a continuation or recurrence of injury to United States steel producers. Canada and Mexico Trade Cases In Canada, dumping duties have been imposed on LTV Steel exports of hot dipped galvanized steel coils, except for hot dipped galvanized steel used for exterior auto bodies that are sold to Canadian customers. Canadian administrative reviews have established "normal values" for the dutiable LTV Steel products exported to Canada. "Normal value" is the price at which goods can be sold without incurring dumping penalties. Dumping duties formerly imposed on LTV Steel exports of cold rolled steel coils were rescinded by the Canadian International Trade Tribunal in 1998. The rescission has been appealed to a bi-national review panel pursuant to the North American Free Trade Agreement. If the decision is reversed, the former dumping duties would be assessed on a retroactive basis to the date of the rescission. In Mexico, dumping duties were established for LTV Steel on hot rolled steel and plate-in-coil exports. However, the Mexican courts have found that these dumping duties were imposed illegally. The decisions voiding the dumping duties have been appealed by the Mexican government, and LTV Steel and other importers of record must continue to post a bond to cover possible dumping duties in the event these decisions are reversed by an appellate court. Because the total LTV Steel shipments of these products to Canada and Mexico are relatively small, these duties should have an insignificant effect on the Company's results of operations. - 7 - 9 METAL FABRICATION LTV's metal fabrication segment (i) manufactures pipe, conduit and other tubular products for use in oil and gas, transportation, agriculture and construction industries through its tubular division, (ii) manufactures pre-engineered, metal buildings for low rise commercial and industrial applications (VP Buildings) and (iii) includes interests in a steel tailor welded blank operation for automotive applications (TWB) and steel processing and blanking operations in Puebla, Mexico (Lagermex) and a similar operation to be built in Silao, Mexico. Tubular. LTV's tubular products include standard, line and oil country pipe used primarily in the oil and gas, and construction industries and a variety of tubing products such as electrical conduit, conveyor tubing, axle tubing, prop shaft tubing, condenser and pressure tubing and drawn tubing used in the automotive, agriculture and construction industries. Tubular products are sold through a separate sales organization divided into four regions and through independent sales representatives. The U.S. market for tubular products is heavily affected by imports; foreign products accounted for 49% of the market in 1998, 37% in 1997 and 34% in 1996. LTV recently completed construction and began commissioning a new technologically advanced tubing manufacturing facility in Marion, Ohio. The facility, which is expected to begin shipments in the first quarter of 1999, will manufacture high-quality tubing for the automotive mechanical tubing market, including for the manufacture of hydroformed parts. The automotive mechanical tubing market is expected to grow as automobile manufacturers increase their use of tubular products in order to reduce the weight of vehicles and the cost of vehicle construction. The facility has a rated processing capacity of 146,000 tons of steel annually. In the fourth quarter of 1998, the Company announced that it would shut down its electricweld tubular operations at its Cleveland tubular products plant. In 1998, the Company processed 36,000 tons of electricweld tubular product at such plant. Metal Buildings. VP Buildings was acquired on July 2, 1997. VP Buildings' metal buildings are typically custom designed or pre-engineered, one-to-two story metal buildings for commercial and industrial uses, such as office buildings, aircraft hangars, manufacturing facilities, warehouses, schools, shopping centers and churches. Principal metal building systems components are primary structural members, secondary structural components and a variety of wall and roof components. The components are fabricated according to specifications and shipped to building sites for assembly by independent builders. In April 1998, VP Buildings acquired United Panel, Inc. ("UPI") which manufactures fiberglass panels with imbedded aggregate for commercial buildings. LTV believes, based on Metal Building Manufacturers Association ("MBMA") data, that VP Buildings has the second largest market share in the domestic industry. VP Buildings designs and manufactures metal building systems at eight domestic locations and markets them through approximately 1,000 builders and distributors in the United States and Canada, and directly to large national and international accounts. VP Buildings also has metal building systems production joint ventures or licensing arrangements in Argentina, Brazil, Chile, China, Egypt, Japan, Mexico, South Korea, and Spain. - 8 - 10 VP Buildings is a major user of flat rolled steel, but is not currently a significant customer of LTV's integrated steel operations. VP Buildings has developed a proprietary software system intended to significantly improve the ability of customers to develop engineering designs, obtain immediate pricing and order various building design configurations. Metal buildings compete with conventional forms of non-residential building construction, with competition primarily based on cost, construction time, appearance, thermal efficiency and other customer requirements. VP Buildings also competes with numerous other metal building systems manufacturers. The largest five such manufacturers (including VP Buildings) account for approximately 70% of industry sales, according to MBMA. Competition among metal building systems companies is based primarily on price, service, product design and performance, and marketing capabilities. Other. LTV's metal fabrication operation also includes an approximate 11% interest in a tailor welded blanking operation (TWB) in Monroe, Michigan (acquired in 1997) which adds value to product sold to domestic automotive customers. Other partners in the joint venture are Worthington Industries, Inc., Thyssen Krupp A.G. and two domestic steel producers. The operation in Michigan uses new technology to weld together two or more steel blanks which may be of different grade or thickness for automotive stamping operations. Automotive parts currently being made with laser tailor welded blanks, which have recently experienced growing acceptance for their ability to reduce cost and weight, include body side frames, wheel house panels, center pillars, pillar reinforcements, motor compartment rails, floor panels and front and rear door panels. LTV also owns a 25% interest in Lagermex (acquired in 1997), a joint venture which operates automotive steel processing and blanking operations in Puebla, Mexico and a second to be built in Silao, Mexico. The venture in Puebla, Mexico supplies to Volkswagen de Mexico and its parts suppliers in Puebla inventory management, slitting and blanking products and services required to produce the Volkswagen plant's steel stampings. Partners in the joint venture are Krupp Hoesch Stahlexport GmbH and local plant management. The operation to be built in Silao, Mexico will supply blanks and offer warehouse services to a local supplier of a General Motors plant. CORPORATE AND OTHER LTV's corporate and other segment includes leading steel technology operations which consist of interests in a steel minimill and a foreign reduced iron facility (which produces a substitute for steel scrap for use in electric furnace steel manufacturing operations) and corporate investments and related income and other expense. Steel Minimill. LTV's joint venture steel minimill operation, Trico Steel, is located in Decatur, Alabama, and began commercial operations in the second quarter of 1997. Trico Steel, which is owned 50% by a subsidiary of LTV and 25% each by subsidiaries of Sumitomo Metal Industries, Ltd. ("Sumitomo") and British Steel plc ("British Steel"), produces commercial and higher quality hot rolled steel. Trico Steel has a rated annual capacity of 2.2 million tons. The steel produced by Trico Steel is sold by a sales force of a wholly owned subsidiary of LTV which is dedicated solely to the sale of Trico Steel product. The Trico Steel investment is expected to provide LTV and its partners with a modern facility and improved market access to the southeastern portion of the United States. Trico Steel has experienced equipment problems that have prevented Trico Steel from achieving its rated capacity of 2.2 million tons. Such equipment problems continue, although efforts to correct such problems are ongoing. The recent surge in steel imports has also negatively affected production levels at Trico Steel. See "Significant Developments." - 9 - 11 Reduced Iron Facility. LTV's reduced iron joint venture with Cleveland-Cliffs Inc and Lurgi AG, Cliffs and Associates ("CAL"), is constructing a facility in the Republic of Trinidad and Tobago to produce reduced iron briquettes (a substitute for steel scrap) for use in electric furnace steelmaking operations. The joint venture, CAL, which began commissioning procedures in the first quarter of 1999, is 46.5% owned by a subsidiary of LTV with the remainder owned by subsidiaries of Cleveland-Cliffs Inc (46.5%) and Lurgi AG (7%). The project utilizes the new CIRCORED(R) process and is expected to have an annual rated capacity of 500,000 metric tons. Operation of the facility is managed by Cliffs Reduced Iron Management Company, a subsidiary of Cleveland-Cliffs Inc. Headquarters and Other. Headquarters and other expense includes corporate investments and related income and expenses. EMPLOYEES AND LABOR MATTERS As of December 31, 1998, LTV and its consolidated subsidiaries had approximately 14,800 active employees. Of these employees, approximately 12,100 employees are employed in the integrated steel segment and approximately 2,700 employees are employed in the metal fabrication segment. Approximately 10,500 active employees, primarily hourly workers, are represented by unions. Of the union represented employees, approximately 9,600 are represented by the USWA (primarily in the integrated steel segment and in the tubular operations included in metal fabrication segment) and approximately 900 are represented by either the teamsters union or by the sheet metal workers union (in the metal fabrication segment). LTV's current steel labor agreements with the USWA covering approximately 9,500 active employees expires on August 1, 1999. The USWA's labor agreements with several other domestic integrated steel producers also expire on August 1, 1999. LTV is unable to predict whether, or on what terms, it will be able to negotiate new steel labor contracts in 1999, or what the effects on LTV might be. A prolonged work stoppage by USWA represented employees would have a material adverse effect on LTV. LTV also has other labor agreements covering approximately 145 USWA-represented employees at LTV's two electro-galvanizing joint ventures which expire on August 1, 1999. Additionally, four of twenty-three union contracts covering LTV's railroads are currently being renegotiated. The Company's labor agreement with the teamsters union is scheduled to expire at year-end 1999, and the Company's two labor agreements with the sheet metal workers union are scheduled to expire in April 1999 and January 2000, respectively. VP Buildings' labor contract with the USWA at its Wisconsin plant is scheduled to expire on April 1, 2001. OTHER ASPECTS OF LTV RESEARCH AND DEVELOPMENT LTV's research and development efforts focus on developing new production processes to improve the quality and reduce the cost of LTV's product lines, provide product and technical support to customers and create new steel products. LTV operates a research and development facility and customer technical center in Cleveland to develop new steel products, improve existing steel products and develop more efficient operating procedures to meet the continually increasing demands of the transportation, appliance, electrical equipment and container markets. The employees of LTV's research and development facilities include chemists, metallurgists and engineers. - 10 - 12 LTV also has a product application office in Detroit that works closely with customers in identifying optimum steel and manufacturing methods, evaluating steel product performance and solving customer manufacturing problems. Expenditures for research and development totaled $14 million in 1998 and 1997 and $15 million in 1996. These expenditures do not include the efforts of sales and manufacturing employees in working to meet customer technical demands. ENVIRONMENTAL LIABILITIES LTV is subject to changing and increasingly stringent environmental laws and regulations concerning air emissions, water discharges and waste disposal. The Company spent approximately $14 million in 1998 and $32 million in 1997 for compliance-related capital expenditures, primarily in connection with its integrated steel operations, and expects to spend an average of approximately $30 million annually in capital expenditures for the next five-year period, primarily in connection with its integrated steel operation, to meet environmental standards (including requirements of the 1990 Clean Air Act Amendments). Estimates for future capital expenditures and operating costs required for environmental compliance are difficult to determine, however, due to numerous uncertainties, including the evolving nature of the regulations, the possible imposition of more stringent requirements and the availability of new technologies. Also, the Company spent approximately $24 million in 1998 and $16 million during 1997 for environmental clean-up and related matters at operating and idled facilities and had a recorded liability of $136 million at December 31, 1998 (including costs related to the demolition, closure and clean-up of closed facilities) and $154 million at December 31, 1997 for known and identifiable environmental clean-up and related matters that are probable to occur, based on current law and existing technology. Most of these expenditures are expected to be incurred by the Company over the next five-year period, primarily in connection with its integrated steel operation. Other requirements for environmental matters, which could increase these costs, may arise in the future. See the discussion of "Environmental Liabilities and Related Costs" included in Management's Discussion and Analysis included in the Company's 1998 Annual Report to Shareholders which is incorporated herein by reference. - 11 - 13 YEAR 2000 READINESS DISCLOSURE Although LTV does not currently manufacture any products containing embedded chips or any computerized products, LTV (like most companies) has been faced with the task of addressing the Year 2000 issue, which is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or any hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. Since the commencement of its Year 2000 readiness effort in late 1996, LTV has been engaged in a company-wide effort to achieve Year 2000 readiness for both information technology (IT) and non-information technology (Non-IT) systems. The Company expects to achieve company-wide Year 2000 readiness mid 1999. LTV has formed a Steering Committee for Year 2000 issues, which meets regularly and is comprised of high level executives and other management personnel and Year 2000 consultants. LTV is primarily using its own employees to achieve readiness in most of its manufacturing and operations systems, augmented by outside expertise related to specific systems. LTV has contracted with its principal Year 2000 outside contractor (the "Outside Contractor") to achieve Year 2000 readiness with respect to its business and related information technology infrastructure systems ("Business Systems"). In addition to the Company's Year 2000 program described above, LTV is continuing to implement a business reengineering project, which began in 1994 and which includes, among other activities, replacing certain information systems with systems that are Year 2000 ready. As a result, those systems scheduled for replacement during 1999 under the business reengineering project have been excluded from the Year 2000 readiness program and costs which are disclosed below. LTV's Year 2000 readiness program involves several stages, including (l) an inventory stage to locate programs and devices that may have date sensitivities, (2) a risk assessment and prioritization stage to determine the degree of noncompliance and the potential impact on LTV's business, (3) a remediation stage for affected systems and devices, (4) a test stage to determine if the repaired program or device is ready, and (5) an implementation stage to return the program or device back into operation. Management believes that the Company has made, and continues to make, significant progress toward Year 2000 readiness; such progress and the appropriateness of the Company's approach have both been confirmed by a major automotive customer and an outside professional firm. Currently, the Company's systems are at various stages of readiness. The inventory stage has been completed for manufacturing and operations systems, which include Non-IT systems such as smart sensors, logic controllers, distributed control systems and embedded microprocessors. Remediation, testing and implementation for these systems is approximately 90% complete with the remainder scheduled to be completed by the end of the first quarter of 1999. The Outside Contractor has completed remediation, testing and implementation of mission critical Business Systems. In the event the Company and material third parties such as critical suppliers and/or customers fail to become Year 2000 compliant, a most reasonably likely worst case scenario could result in a system failure or miscalculations causing disruptions of operations, including, among other things, production difficulties, a temporary inability to process transactions, send invoices, or engage in similar normal business activities which could result in a material adverse effect on the Company's business and results of operations. In addition, the Company is in the process of developing a strategy to address the additional potential consequences that may result from unresolved Year 2000 issues, which will include the development of one or more contingency plans by mid 1999. LTV has been querying material third - 12 - 14 parties, including suppliers, utility and other resource providers and customers to assess their Year 2000 readiness efforts. Positive statements of readiness have been received from 70% of the Company's suppliers. The Company has assumed that any nonresponsive third party will be noncompliant for the purpose of risk assessment. The Company is implementing a supply chain plan for most sole source and mission critical suppliers and customers. This plan includes telephone interviews and on-site visits. The Company has budgeted approximately $55 million for its Year 2000 readiness efforts, with $8 million designated for remediation of manufacturing and operation systems and $47 million allocated for Business Systems. These expenses include replacing some outdated, noncompliant hardware and noncompliant software as well as identifying and remediating known Year 2000 problems. LTV expensed $8 million of Year 2000 costs in 1997, and $35 million in 1998. The funds expensed for Year 2000 are outside of the normal information technology budget. Because LTV's readiness program is not yet fully implemented and is subject to certain risks and uncertainties, including the readiness efforts of material third parties, there can be no assurance that LTV will not incur material costs beyond the anticipated costs described above. The cost of the Year 2000 project and the dates by which LTV believes it will be Year 2000 ready are based on management's current best estimates, which were derived based on numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. There can be no guarantee, however, that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and imbedded computer technology in a timely manner and the ability of LTV's suppliers and customers to become Year 2000 compliant in a timely manner. NOTE: THE DISCLOSURE ABOVE IS DESIGNATED AS YEAR 2000 READINESS DISCLOSURE UNDER THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the executive officers of LTV.
NAME AGE* OFFICE Peter Kelly 57 Chairman of the Board, President and Chief Executive Officer James F. Haeck 52 Executive Vice President Richard J. Hipple 46 Executive Vice President Arthur W. Huge 53 Executive Vice President and Chief Financial Officer Jeffrey A. Saxon 50 Executive Vice President Glenn J. Moran 51 Senior Vice President, General Counsel and Secretary George T. Henning 57 Vice President and Controller John C. Skurek 54 Vice President and Treasurer
* As of December 31, 1998. - 13 - 15 OFFICERS The only employee of LTV and its subsidiaries who is a director of LTV is Mr. Kelly, the Chairman of the Board, President and Chief Executive Officer of LTV. Mr. David H. Hoag, who had been Chairman of the Board, retired as Chairman of the Board and as a director of LTV effective January 31, 1999. All officers, except Messrs. Henning and Saxon, have been employed by LTV or its subsidiaries for more than the last five years. Mr. Kelly became Chairman of the Board of LTV in February 1999, and Chief Executive Officer of LTV in September 1998. He has been a director of LTV since July 1997. Additionally, since July 1997, he has been President and Chief Operating Officer of LTV. Prior thereto, since February 1991, he was a Group Vice President of LTV. He has been President and a director of LTV Steel since February 1991. He also serves as a director of National City Bank. Mr. Haeck was elected an Executive Vice President of LTV in February 1998. Prior thereto, since January 1996, he served as Senior Vice President-Commercial of LTV. During the last five years, Mr. Haeck has also served as Senior Vice President-Commercial and Senior Vice President-Flat Rolled Operations at LTV Steel, Vice President and General Manager of Cleveland Works and Vice President and General Manager of Tubular Products at LTV Steel. Mr. Hipple was elected an Executive Vice President of LTV in February 1998. Prior thereto, since February 1997 he served as Senior Vice President-Purchasing, Engineering and Strategic Planning of LTV. During the last five years, Mr. Hipple has also served in a variety of officer positions at LTV Steel with responsibilities in the purchasing, engineering, environmental and strategic planning areas. Mr. Huge was elected Executive Vice President in February 1998 and has served as Chief Financial Officer of LTV since June 1993. Prior to his election as an Executive Vice President, Mr. Huge served as a Senior Vice President of LTV. Mr. Huge has also served as Vice President and Chief Financial Officer of LTV Steel for more than the past five years. Mr. Saxon joined the Company as an Executive Vice President in February 1998. Prior thereto, since 1994, Mr. Saxon served as Group Vice President-Specialty Plastics of The BFGoodrich Company. Mr. Moran has been Senior Vice President and General Counsel of LTV since September 1992 and Secretary since July 1993. He has also served for the last five years as Vice President and Group Counsel of LTV Steel. Mr. Henning was elected Vice President and Controller of LTV in September 1995. Prior thereto, Mr. Henning was Vice President and Chief Financial Officer of Pioneer Companies, Inc., a manufacturer of chlorine, caustic soda and related products. Mr. Skurek has been Vice President and Treasurer of LTV since February 1993. Mr. Skurek has also served as Vice President and Treasurer of LTV Steel since September 1992. ITEM 2. PROPERTIES. CORPORATE HEADQUARTERS LTV's corporate headquarters is in Cleveland, Ohio and occupies 238,000 square feet under a lease expiring in 2011. The lease provides LTV three consecutive five-year renewal options to extend the lease term through 2026. - 14 - 16 INTEGRATED STEEL PRODUCING FACILITIES The Company has two integrated steel mills, Cleveland Works and Indiana Harbor Works, and various finishing, galvanizing and processing facilities as well as stand alone tin mill operations. During the last five years, the Company has spent approximately $1.3 billion to modernize and upgrade these core integrated steel facilities. In November 1998, the Company announced the permanent closure of certain finishing operations at LTV's Cleveland Works. The Cleveland Works at Cleveland, Ohio produces a variety of flat rolled products. Major facilities include three blast furnaces, two basic oxygen furnaces, two continuous slab casters, one vacuum degassing and two ladle metallurgy systems, two hot strip mills, two cold reducing mills, a continuous anneal line, sheet finishing facilities and an electroplate line. In November 1998, the Company announced the closing in 1999 of certain finishing facilities at the Cleveland Works. The Indiana Harbor Works at East Chicago, Indiana produces a variety of flat rolled products. Major facilities include two blast furnaces, a basic oxygen furnace, a continuous slab caster, a vacuum degassing and ladle reheating system, a hot strip mill, a cold reducing mill, two sheet finishing facilities, two hot dipped galvanizing lines and a tin mill. Responding to the recent surge in unfairly traded steel imports, the Company curtailed operations at its Cleveland and Indiana Harbor Works beginning in the fourth quarter of 1998, including idling certain facilities for a two week period at the Cleveland Works. LTV also operates a tin mill in Aliquippa, Pennsylvania. The Company's two tin mills (which includes one at Indiana Harbor Works as described above) have a combined operating capacity aggregating 840,000 tons and operated at a combined rate of 88% of capacity during 1998. LTV also operates finishing operations in Hennepin, Illinois. The Hennepin facilities, which receive semi-finished products from the steel producing facilities, include a cold reducing mill, a sheet finishing mill and a hot dipped galvanizing line. LTV also currently operates coke batteries in Chicago, Illinois and Warren, Ohio. Electro-Galvanizing Lines. LTV owns interests in two electro-galvanizing lines. The first, involving a joint venture owned 60% by a subsidiary of LTV and 40% by a subsidiary of Sumitomo, is located at LTV's Cleveland Works. The line produces one-sided and two-sided zinc-coated flat rolled steel products and has an annual capacity of approximately 420,000 tons of coated products. The second line, located in Columbus, Ohio and involving a joint venture that is owned equally by subsidiaries of LTV and Sumitomo, produces zinc, nickel/zinc and nickel/zinc/organic coated products and has an annual capacity of approximately 360,000 tons of coated product. Substantially all of the cold rolled steel that is coated at these facilities is produced by LTV, and LTV is responsible for all sales and marketing of coated products processed by the joint venture. The two electro-galvanizing lines operated at a combined rate of 80% of capacity during 1998. In January 1999, the partnership entered into a new operating lease covering the equipment at the Cleveland electro-galvanizing line, extending the lease term until 2009. The partnership has an option to renew the lease or purchase the equipment at the end of the lease. The Company is considering the feasibility of entering into a joint venture with a third party for the purpose of converting the Columbus facility to a hot dipped galvanizing line capable of producing 500,000 tons of hot dip galvanize product annually. - 15 - 17 Railroads. LTV owns all of the capital stock of the following six terminal switching railroad companies: Aliquippa and Southern Railroad Company, serving the Aliquippa tin mill; The Cuyahoga Valley Railway Company and The River Terminal Railway Company, serving the Cleveland Works; The Mahoning Valley Railway Company, serving the Youngstown electric weld pipe mill; The Monongahela Connecting Railroad Company in Pittsburgh; and the Chicago Short Line Railway Company, serving the Indiana Harbor Works. All are common carriers subject to regulation by the Surface Transportation Board and are used primarily by LTV. Suitability LTV's steel-related facilities are well maintained, considered adequate for their intended purposes and being utilized for their intended purposes. USWA Collateral Arrangement LTV has agreed with the USWA to grant liens on property used in the Company's flat rolled steel operations with an appraised value of $500 million to secure payment of (i) certain retiree health benefits to salaried and hourly employees and retirees and (ii) certain employer contributions under a defined contribution plan for hourly employees (collectively, the "Secured Obligations"). The maximum amount recoverable to pay the Secured Obligations upon foreclosure of the collateral is $250 million. Pursuant to such agreement, LTV has granted liens on certain plant, property and equipment at its Cleveland Works and a royalty free license or sublicense with respect to intellectual properties used in connection with the manufacture of products at such facilities. RAW MATERIALS-LTV'S INTEGRATED STEEL OPERATIONS Iron Ore LTV owns interests in two iron ore mining operations which are used in LTV's flat rolled steel operations. LTV's share of production at these mines during 1998 was sufficient to meet 100% of its iron ore requirements. LTV's share of reserves at these mines is sufficient to meet its anticipated iron ore requirements in the near term. LTV estimates that as of January 1, 1999, the total of its proven crude ore reserves and of its proportionate share of such reserves of the companies in which it has an ownership interest was such that, when mined and beneficiated, there could be produced for use by LTV approximately 447 million gross tons (a gross ton is equivalent to 2,240 pounds) of iron pellets averaging approximately 64% iron content. These ore reserves at the end of 1998, and 1998 activity, were as follows: - 16 - 18
PROVEN 1998 NET ANNUAL SHARE OF DELIVERIES INTEREST IN IRON ORE 1998 TO STEEL RESERVES(a) CONTENT ENTITLEMENT PRODUCTION PLANTS(b) ----------- ------- ----------- ---------- --------- (GROSS TONS IN THOUSANDS) Properties: LTV Steel Mining Company(c)............. 407,000 64% 7,500(c) 7,109 7,436 Empire Iron Mining Partnership(d)....... 39,500 64% 2,000 1,967 1,884 ------ ----- ----- ----- Total Properties.......................... 446,500 9,500 9,076 9,320
(a) LTV's ownership interest in reserves is stated in gross tons of pellets. (b) "1998 Deliveries to Steel Plants" does not include the sale of ore products to third parties. (c) LTV owns 100% of LTV Steel Mining Company located in Minnesota. The entitlement is based on normal annual plant capacity, and the production level can be reduced at LTV's discretion. (d) LTV holds a 25% interest in Empire Iron Mining Partnership which operates an iron ore mine and pellet facility in Michigan. LTV can reduce its annual ore purchase requirements. Minimum ore purchase requirements in 1998 totaled 1,333,333 gross tons. Ore reserves are expected to be exhausted prior to the expiration dates of the various leases associated with LTV's mining properties. LTV is committed to pay its share of the annual cost of the Empire Iron Mining operations either through cash advances or purchases of ore at market prices. During 1998, the average blast furnace charge consisted of approximately 92% pellets and 8% sinter. During 1998, 98% of LTV's pellet and sinter requirements came from affiliated sources. Metallurgical Coal and Coke Metallurgical coal is used to make coke which is used in blast furnaces in LTV's integrated steel operations to make iron in the raw steelmaking process. All LTV's metallurgical coal requirements are purchased from unaffiliated third parties under a number of short and intermediate term contracts. LTV produced 45% of its coke requirements for its integrated steel operations during 1998 and expects to produce 40% of its anticipated requirements for 1999 at its owned coke batteries. The operational life of LTV's batteries located at Warren, Ohio and Chicago, Illinois could be adversely affected by increasingly stringent environmental regulations or their inability to continue to meet existing environmental standards. LTV shut down its coke plant in Pittsburgh, Pennsylvania in 1998. LTV anticipates, however, that its internal coke supply, together with coke purchased from third parties (approximately 60%), will meet substantially all of its near-term coke requirements. See "Item 1. Business--Significant Developments" and "Item 3. Legal Proceedings" for information relating to existing and threatened environmental proceedings involving the Company's coke batteries. Other Raw Materials LTV has a 53.5% interest in Presque Isle Corporation which operates a limestone quarry located in Michigan for use in LTV's integrated steel operations. LTV's share of Presque Isle Corporation's proven limestone reserves was approximately 123,900,000 gross tons as of December 31, 1998. In 1998, LTV used approximately 433,000 gross tons of limestone from Presque Isle and other sources in its steelmaking operations. LTV owns a burnt lime processing plant at Grand River, Ohio, which processes limestone from Presque Isle and other sources into burnt lime. In 1998, approximately 44% of the 311,000 net tons of high calcite burnt lime consumed by LTV's flat rolled steel operations came from these sources. - 17 - 19 Substantially all other raw materials for use in LTV's integrated steel operations are purchased in the open market from domestic and foreign sources. Most of such raw materials, including scrap, nickel, tin, zinc and ferroalloys, are expected to continue to be in sufficient supply, although market prices have historically been subject to wide fluctuations. During the past three years, the Company has purchased a significant amount of semi-finished slabs from other steel producers to supplement its own production. The availability of such slabs, and the prices at which they can be purchased, may vary, especially during periods of peak production in the steel industry. See "Steel Production" above. Energy The Company uses substantial amounts of electricity, natural gas, fuel oil and coal, particularly in its flat rolled steel operations, all of which are purchased at competitive or prevailing market prices. Adequate sources of supply exist for all the Company's requirements. METAL FABRICATION FACILITIES The Company's tubular products facilities are located in Ferndale, Michigan; Cleveland, Marion, Youngstown and Elyria, Ohio; Counce, Tennessee; and Cedar Springs, Georgia and manufacture electric weld pipe and welded tubing (pressure tubing, mechanical tubing, cold drawn tubing and electrical metallic conduit). VP Building's headquarters is located in Memphis, Tennessee and occupies 40,800 square feet of office space. Metal building systems components are manufactured by VP Buildings at plants located in Alabama, Arkansas, California, Missouri, North Carolina, Ohio, Texas and Wisconsin. UPI's plant is located in Mt. Bethel, Pennsylvania. CORPORATE AND OTHER FACILITIES The Trico Steel minimill operation, in which the Company owns an interest, is located in Decatur, Alabama. The CAL facility, in which the Company owns an interest, is located in the Republic of Trinidad and Tobago. PROPERTY ADDITIONS AND CAPITAL EXPENDITURES Capital expenditures and depreciation and amortization for the periods indicated are as follows: - 18 - 20
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Capital Expenditures....................... Integrated Steel.................... 310 310 240 Metal Fabrication................... 52 16 3 Corporate and Other................. -- -- -- ---- ---- ---- Total............................... 362 326 243 Depreciation and Amortization.............. Integrated Steel.................... 247 255 263 Metal Fabrication................... 12 8 3 Corporate and Other................. -- -- -- ---- ---- ---- Total............................... 259 263 266
The expenditures for integrated steel operations during 1998, 1997 and 1996 were mainly to refurbish blast furnaces and for equipment and facilities which are designed to reduce cost, increase production efficiency and improve quality and for environmental control projects. During this three year period, the Company also made substantial expenditures for the development of a new information systems project to support the Company's business processes. LTV is currently engaged in the implementation phase of the project. All existing and future information systems supporting these business processes are being maintained principally by outside information systems providers under long-term contracts. Included in the above under Metal Fabrication are capital expenditures for the construction of the new Marion, Ohio tubular plant. Capital spending for environmental control projects, primarily for the Integrated Steel operations, during 1998, 1997 and 1996 was $14 million, $32 million and $27 million, respectively. Capital expenditures in 1999 are expected to aggregate approximately $300 million, which include the cost of a blast furnace reline at the Cleveland Works. Additionally, LTV's investment in its leading steel technologies operations totaled $80 million in 1998 and $101 million in 1997 primarily for Trico Steel and the construction of the direct reduced iron plant in the Republic of Trinidad and Tobago. ITEM 3. LEGAL PROCEEDINGS. In addition to matters specifically discussed below, LTV is involved in various legal proceedings occurring in the normal course of its business. LTV cannot predict with certainty the outcome of any legal proceedings to which it is subject. However, in the opinion of LTV's management, adequate provision has been made for losses for which management can make a reasonable estimate of the range of possible outcomes that are likely to result from these actions. To the extent that such reserves prove to be inadequate, LTV would incur a charge to earnings, which could have a material adverse effect on LTV's results of operations for the applicable period. The outcome of these proceedings, however, is not currently expected to have a material adverse effect on the financial position of LTV. Trade Cases For information concerning trade cases covering flat rolled steel products and other steel products, see "Business-Trade Cases." - 19 - 21 Environmental Proceedings Legal and administrative actions have been taken or are being threatened against LTV and its subsidiaries, as discussed below, by the EPA and the States of Indiana, Illinois and Ohio or their environmental agencies for alleged violations of various federal and state environmental laws and regulations. The Company has accrued for losses and costs associated with these actions that are probable and estimable or otherwise provided for studies which will provide a basis for estimation. In December 1998, the U.S. Department of Justice, representing the U.S. EPA, filed a complaint against LTV Steel in the United States District Court for the Northern District of Ohio. The complaint charges that LTV Steel allegedly violated applicable opacity standards at the C-5 blast furnace top and cast house, the C-6 blast furnace cast house and the No. 1 BOF shop precipitator stacks at the Cleveland Works and applicable sulfur oxide emission standards at the C-1 blast furnace stoves and a boiler at the Cleveland Works at various times over a period of several years. The complaint also charges that LTV Steel discharged pollutants into the Mahoning River without authorization pursuant to or in violation of the terms of its NPDES permit at its Warren coke plant and alleges violations of applicable regulations relating to hazardous waste materials at the Warren coke plant. The complaint seeks to enjoin LTV Steel from further violations of the Clean Air Act, Clean Water Act and the Resource Conservation and Recovery Act and civil penalties of up to $25,000 or $27,500 per violation, depending on the date of the violation, for each day of violation of these Acts. In March 1998, the U.S. Department of Justice filed a civil action on behalf of the U.S. EPA in the United States District Court for the Western District of Pennsylvania alleging LTV Steel violated applicable pushing and combustion stack opacity emission standards in connection with the operation of its Pittsburgh coke plant in and after October 1996. In January 1999, the United States amended its complaint to allege that violations had occurred as early as November 1994. The complaint seeks civil penalties not to exceed $25,000 per day per violation for alleged violations occurring on or before January 30, 1997 and $27,500 per day per violation for alleged violations that occurred after January 30, 1997. In April 1998, the Allegheny County Health Department filed a motion to intervene and a separate complaint in the case. The complaint seeks penalties for alleged violations in the amount of $25,000 per day. The Group Against Smog and Pollution and Allegheny County have been granted intervenor status in the action. Operations at the coke plant, which has been permanently closed, ceased February 28, 1998. In January 1999, the U.S. EPA issued a Notice of Violation with respect to LTV Steel's Grand River, Ohio lime plant. The Notice of Violation alleges that violations of the opacity standards applicable to the kiln precipitators have occurred at various times over the past several years and constitute violations of the Clean Air Act subject to the remedies provided therein. State of Indiana. In April 1995, LTV Steel received a NOV issued by the Indiana Department of Environmental Management ("IDEM") which alleges that releases of contaminants onto and beneath the ground have occurred at the Indiana Harbor Works in violation of applicable environmental regulations. IDEM is seeking to have the Company undertake a comprehensive remediation program to clean up the alleged on-ground and below-ground contamination at the facility. The NOV is broad-based and, depending upon the nature of the remediation program that might be imposed upon the subsidiary and IDEM's authority to require a comprehensive clean-up, the cost of such work could be substantial. In May 1998, LTV Steel received a Notice of Violation from the IDEM alleging that LTV Steel exceeded applicable opacity standards at the H-3 blast furnace cast house at its Indiana Harbor Works on certain days in May, June and November 1997. IDEM is seeking civil penalties of up to $25,000 for each day of violation of the applicable standards and the installation of additional pollution control equipment - 20 - 22 at the H-3 blast furnace cast house. LTV Steel and IDEM are engaged in discussions in an effort to settle the Notice of Violation. IDEM had also issued NOVs to LTV Steel relating to basic oxygen furnace ("BOF") precipitator stack emissions and fugitive emissions from the BOF roof monitors at the Indiana Harbor Works. The NOVs were resolved pursuant to an Agreed Order entered into between LTV Steel and IDEM which has now terminated. The Order provided for a civil penalty of $426,750, all but $85,350 of which has been satisfied by the construction of certain environmental projects. In addition, LTV Steel was required to demonstrate compliance through July 1, 1998 with applicable air quality standards at the BOF roof monitors or install further controls if compliance is not demonstrated. The compliance demonstration was made as required. In November 1996, IDEM and the United States Department of Interior informed the Company and 15 other companies of their intent to perform a National Resource Damage Assessment ("NRDA") of the Grand Calumet River System. Each of the 16 entities was asked to contribute an unspecified amount of funding for the study, which will cover a significant area that has been used for industrial purposes for over a century. No cost estimate or schedule for implementation of the study has been provided. IDEM also indicated that the Company has been identified as a potentially responsible party in connection with the release of hazardous substances and oil and the subsequent damages resulting from natural resource injury. Because of the preliminary nature of this matter, the Company is unable to predict whether any action might be recommended or required as a result of this study or the potential cost to the Company of any such action. In addition, the Army Corps of Engineers (the "Corps") has issued a feasibility report concerning dredging of the federal channel within the Indiana Harbor and Indiana Harbor Ship Canal. Preliminary estimates of the cost of the dredging are approximately $135 million. According to the Corps' report, if dredging occurs, it will be funded primarily by the federal government. However, the Corps also indicated that some non-federal funding may be necessary. No claims have been filed against the Company with respect to the dredging project, and the Company has not been asked to contribute to the cost of the project. State of Illinois. After notifying the Illinois EPA ("IEPA") of two separate deposits of hazardous wastes discovered at LTV Steel's Chicago plant, LTV submitted to IEPA remediation plans for clean-up at both sites. The Company and the IEPA have reached an agreement on one of the remediation plans, which is expected to cost less than $3 million, and clean-up work is nearing completion. The cost of the other plan, now being reviewed by IEPA, is expected to be immaterial. State of Ohio. On July 8, 1998, the Ohio Attorney General filed a complaint in the Cuyahoga County Court of Common Pleas alleging various instances of noncompliance with LTV Steel's NPDES permit at its Cleveland Works over an approximate five year period. Concurrent with this filing, a consent agreement was filed with the court resolving the allegations in the complaint. The agreement requires a payment of $419,000 in civil penalties and the implementation of a number of water pollution control studies at the plant. LTV Steel may or may not be required to install modifications to its water pollution control facilities depending upon the results of these studies. Patent Litigation In July 1991, Inland Steel Company ("Inland") filed an action against LTV Steel and another domestic steel producer in the U.S. District Court for the Northern District of Illinois, Eastern Division, alleging defendants infringed two of Inland's steel-related patents. Inland seeks monetary damages of up to approximately $600 million and an injunction against future infringement. LTV Steel in its answer and counterclaim alleges the patents are invalid and not infringed and seeks a declaratory judgment to such effect. In May 1993, at a jury trial, LTV Steel was found to have infringed the patents. The District - 21 - 23 Court proceeding on the validity of the patents has been stayed informally pending the conclusion of proceedings in the U.S. Patent Office described below, and the decision on infringement is not appealable until the validity issue is tried. In July 1993, the U.S. Patent Office rejected the claims of the two Inland patents upon a reexamination at the request of LTV Steel and another domestic steel producer, in essence concluding that the patents should not have been granted and are invalid. Inland filed a response which sought to have the U.S. Patent Office reverse its decision; however, in July 1994, the U.S. Patent Office affirmed its decision. Inland's appeal to the Patent Office Board of Appeals has been heard, and a decision by the Board of Appeals is pending. Other In 1996, LTV Steel filed an action in the U.S. Court of Federal Claims seeking recovery of approximately $25 million in Federal Insurance Contribution Act ("FICA") and Federal Unemployment Tax Act ("FUTA") taxes which were paid by LTV Steel to the U.S. government during the period 1987 through 1993 in connection with certain pension make-up payments made to certain hourly and salaried retirees. The Company's position is that these pension payments are not subject to FICA and FUTA taxes. On October 19, 1998, the U.S. Court of Federal Claims granted LTV Steel summary judgment. The parties have stipulated the amount of the judgment, which is still subject to appeal, to be approximately $24.6 million, plus statutory interest which the Company estimates to be approximately $25 million. The judgment will cover taxes collected by the U.S. Internal Revenue Service on certain pension payments for the tax years 1987 through 1993. Approximately one-third of the total amount recovered by LTV will be refunded to eligible retirees. In January 1999, the Illinois Circuit Court (Tenth Judicial Circuit) dismissed the purported class action filed on behalf of retirees described in the Company's Report on Form 10-Q for the Second Quarter of 1998 after the Company sent the notice to retirees sought by plaintiffs and offered to such retirees the requested retiree benefits. In connection with the dismissal, the Company agreed to pay plaintiffs' attorneys fees. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. "Shareholders' Information" on the inside back cover, "Five-Year Financial Summary" on page 30, "Quarterly Financial Information" on page 31 and "Liquidity and Financial Resources" on page 6 of the 1998 Annual Report to Shareholders are incorporated herein by reference. BY-LAW AMENDMENTS: ADVANCE STOCKHOLDER NOTICE REQUIREMENTS AND OTHER PROVISIONS LTV has provisions in its By-Laws intended to promote the efficient functioning of its annual meetings. The provisions describe LTV's right to determine the time, place and conduct of stockholder meetings, require advance notice by mail or delivery to LTV of stockholder proposals or director nominations for annual meetings and require persons wishing to conduct a solicitation of written consents of stockholders or to call a special meeting of stockholders to apply to the Board of Directors to set a - 22 - 24 record date for the consent solicitation or to determine whether the requisite number of stockholders desire to call a special meeting. Under the By-Laws, stockholders must provide LTV with at least 60 days, but no more than 90 days, notice prior to the announced Tentative Meeting Date of (i) business the stockholder is proposing for consideration at that meeting and (ii) persons the stockholder intends to nominate for election as directors at that meeting. The LTV Board of Directors has selected April 28, 2000 as the Tentative Meeting Date for the Annual Meeting of Stockholders in 2000. Accordingly, stockholders who intend to propose business for consideration, or to nominate persons for election as directors at the 2000 Annual Meeting, will be required to provide notice and the required information to the Company no earlier than January 29, 2000 and no later than February 28, 2000. REQUIRED APPROVAL FOR CERTAIN PURCHASES OF COMMON STOCK For the purpose of preserving LTV's ability to utilize certain favorable tax attributes, Article Ninth of LTV's Restated Certificate of Incorporation prohibits, with certain limited exceptions, any unapproved acquisition of Common Stock that would cause the ownership interest percentage of the acquirer or any other person to increase to 4.5% or above. A person's ownership interest percentage for purposes of Article Ninth is determined by reference to specified federal income tax principles, including attribution of shares from certain related parties, deemed exercise of rights to acquire stock and aggregation of shares purchased by persons acting in concert. PURCHASES OF COMMON STOCK FROM ANY PERSON OTHER THAN THE COMPANY ARE SUBJECT TO THE LIMITATIONS IMPOSED BY ARTICLE NINTH, AND ANY UNAPPROVED PURCHASE IN EXCESS OF THE AMOUNTS PERMITTED BY ARTICLE NINTH WILL BE VOID AB INITIO. A PROSPECTIVE PURCHASER OF COMMON STOCK WHO BELIEVES THAT IT MAY BE SUBJECT TO THE LIMITATIONS IMPOSED BY ARTICLE NINTH SHOULD CONSULT WITH THEIR ADVISORS OR LTV IN ADVANCE OF ACQUIRING SUCH SECURITIES TO DETERMINE IF ADVANCE APPROVAL MUST BE OBTAINED FROM LTV'S BOARD OF DIRECTORS. LTV's Board of Directors was required by Article Ninth of LTV's Restated Certificate of Incorporation to consider during 1996 whether to waive the transfer restrictions in Article Ninth with respect to all future transfers of securities. At its October 1996 meeting, the Board of Directors, after considering all relevant factors, determined not to waive Article Ninth at that time. ITEM 6. SELECTED FINANCIAL DATA. "Five-Year Financial Summary" on page 30 of the 1998 Annual Report to Shareholders is incorporated herein by reference. - 23 - 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. "Management's Discussion and Analysis" on pages 4 through 9 of the 1998 Annual Report to Shareholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. "Quantitative and Qualitative Disclosure About Market Risk on page 8 of the 1998 Annual Report to Shareholders is incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The listing on page F-1 lists all financial statements which are filed as a part of this Report and which are incorporated herein by reference. "Quarterly Financial Information" on page 31 of the 1998 Annual Report to Shareholders is incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information relating to the directors of LTV to be included in LTV's Annual Proxy Statement for the 1999 Annual Meeting of Stockholders, which LTV plans to file with the Commission in final form in early 1999, is incorporated herein by reference. Information relating to the executive officers of LTV is included in "Item 1. Business-Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION. Information relating to management remuneration and transactions included in LTV's Annual Proxy Statement for the 1999 Annual Meeting of Stockholders, which LTV plans to file with the Commission in final form in early 1999, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information relating to ownership of LTV stock by the directors and officers of LTV and owners of more than 5% of any class of LTV stock to be included in LTV's Annual Proxy Statement for the 1999 Annual Meeting of Stockholders, which LTV plans to file with the Commission in final form in early 1999, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information relating to certain relationships and related transactions to be included in LTV's Annual Proxy Statement for the 1999 Annual Meeting of Stockholders, which LTV plans to file with the Commission in final form in early 1999, is incorporated herein by reference. - 24 - 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) and (2) List of Financial Statements and Financial Statement Schedules. Reference is made to the listing preceding the financial statements and financial statement schedules attached hereto on page F-1 for a list of all financial statements and financial statement schedules filed as exhibits and part of this Report including the Financial Statements of Trico Steel Company, L.L.C. filed as part of this Annual Report pursuant to Rule 3.09 of Regulation S-X. (a)(3) List of Exhibits. Reference is made to the listing in (c) below for a list of all other exhibits filed as part of this Report. (b) Reports on Form 8-K. None to report. (c) Exhibits. Certain of the exhibits to this Report are hereby incorporated by reference, as specified below, to other documents filed with the Commission by LTV. Exhibit designations below correspond to the numbers assigned to exhibit classifications in Regulation S-K. (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this Report on page F-1. (2)-(1) - The LTV Second Modified Joint Plan of Reorganization (incorporated herein by reference to Exhibit (28)(a)-(3) to LTV's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1992, filed with the Commission (File No. 1-4368) on March 31, 1993) (2)-(2) - Confirmation Order of the United States Bankruptcy Court for the Southern District of New York entered on May 27, 1993, confirming the LTV Second Modified Joint Plan of Reorganization (which includes, as Exhibit C to the Confirmation Order, amendments to the LTV Second Modified Joint Plan of Reorganization) (incorporated herein by reference to Exhibit 2(2) to LTV's Current Report on Form 8-K, filed with the Commission (File No. 1-4368) on June 7, 1993) (3)-(1) - Restated Certificate of Incorporation of LTV dated June 28, 1993 (incorporated herein by reference to Exhibit 3.1 to LTV's Registration Statement on Form S-1 [Registration No. 33-50217])
- 25 - 27 (3)-(2) - Certificate of Designations for Series B Preferred Stock (incorporated herein by reference to Exhibit 4 to SMI America, Inc.'s 13D Filing) (3)-(3) - Amendments to LTV's By-Laws adopted on October 25, 1996 (incorporated herein by reference to Exhibit (3)-(1) to LTV's Report on Form 10-Q for the quarter ended September 30, 1996) (10)-(1) - LTV Executive Benefit Plan as amended and restated effective January 1, 1985 (incorporated herein by reference to Exhibit (10)(c)-(2) to LTV's Report on Form 10-K for the year ended December 31, 1985) (10)-(2) - Amendment to LTV Executive Benefit Plan adopted November 20, 1987 (incorporated herein by reference to Exhibit (10)(c)-(3) to LTV's Report on Form 10-K for the year ended December 31, 1987) (10)-(3) - LTV Excess Benefit Plan dated as of January 1, 1985 (incorporated herein by reference to Exhibit (10)(c)-(5) to LTV's Report on Form 10-K for the year ended December 31, 1984) (10)-(4) - Securities Purchase Agreement dated as of May 26, 1993 by and among LTV, LTV Steel Company, Inc. and SMI America, Inc. (incorporated herein by reference to Exhibit 2 to SMI America, Inc.'s 13D Filing) (10)-(5) - Common Stock Registration Rights Agreement dated as of June 28, 1993 by and between LTV and SMI America, Inc. (incorporated herein by reference to Exhibit 5 to SMI America, Inc.'s 13D Filing) (10)-(6) - Consultation and Management Participation Agreement dated as of June 28, 1993 between LTV and Sumitomo Metal Industries, Ltd. (incorporated herein by reference to Exhibit 6 to SMI America, Inc.'s 13D Filing) (10)-(7) - L-S Exchange Right and Security Agreement dated as of June 28, 1993 by and among LTV/EGL Holding Company, Sumikin EGL Corp., LTV, SMI America Inc., and Sumitomo Metal USA Corporation (incorporated herein by reference to Exhibit 7 to SMI America, Inc.'s 13D Filing) (10)-(8) - Amendments Nos. 1 and 2 to the Securities Purchase Agreement dated as of May 26, 1993 among LTV, LTV Steel Company, Inc. and SMI America, Inc. (incorporated herein by reference to Exhibit (10)-(20) to LTV's Report on Form 10-Q for the quarter ended September 30, 1994) (10)-(9) - Revolving Credit Agreement dated as of October 12, 1994 among LTV Sales Finance Company, the financial institutions parties thereto as banks, the issuing banks, the facility agent and collateral agent (incorporated herein by reference to Exhibit (10)-(22) to LTV's Report on Form 10-Q for the quarter ended September 30, 1994)
- 26 - 28 (10)-(10) - Receivables Purchase and Sale Agreement dated as of October 12, 1994 among LTV, LTV Steel Company, Inc., Continental Emsco Company, LTV Steel Tubular Products Company, Georgia Tubing Corporation and LTV Sales Finance Company (incorporated herein by reference to Exhibit (10)-(23) to LTV's Report on Form 10-Q for the quarter ended September 30, 1994) (10)-(11) - Accession Agreement dated as of October 12, 1994 among LTV Sales Finance Company, the financial institutions listed on the signature pages thereof, the issuing bank named thereon, and Bankers Trust Company as facility agent and collateral agent (incorporated herein by reference to Exhibit (10)-(24) to LTV's Report on Form 10-Q for the quarter ended September 30, 1994) (10)-(12) - Trust Termination Acknowledgment and Agreement, dated October 12, 1994, between LTV Sales Finance Company and Wilmington Trust Company (incorporated herein by reference to Exhibit (10)-(25) to LTV's Report on Form 10-Q for the quarter ended September 30, 1994) (10)-(13) - Assignment and Transfer Agreement, dated as of October 12, 1994, by and between LTV Master Receivables Trust and LTV Sales Finance Company (incorporated herein by reference to Exhibit (10)-(26) to LTV's Report on Form 10-Q for the quarter ended September 30, 1994) (10)-(14) - Collateral Trust Agreement dated as of May 25, 1993 among LTV, LTV Steel Company, Inc., United Steelworkers of America and Bank One Ohio Trust Company, NA, as Collateral Trustee (incorporated herein by reference to Exhibit 10.33 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993) (10)-(15) - Open-End Mortgage, Security Agreement and Fixture Filing dated as of June 28, 1993 by LTV Steel Company, Inc. to Bank One Ohio Trust Company, N.A. (incorporated herein by reference to Exhibit 10.34 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993) (10)-(16) - License Agreement dated as of June 28, 1993 between LTV Steel Company, Inc. and Bank One Ohio Trust Company, N.A. (incorporated herein by reference to Exhibit 10.35 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993) (10)-(17) - Settlement Agreement and Stipulated Order on behalf of the United States of America on behalf of the United States Environmental Protection Agency approved by the United States Bankruptcy Court Southern District of New York (the "Court") on April 15, 1993 and supplemented by Exhibit 10.38 below (incorporated herein by reference to Exhibit 10.38 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993)
- 27 - 29 (10)-(18) - Second Settlement Agreement and Stipulated Order supplementing 10.36 above and approved by the Court on May 19, 1993 (incorporated by reference to Exhibit 10.39 to LTV's Registration Statement on Form S-1 [Registration No. 33-50217]) (10)-(19) - Settlement Agreement and Stipulated Order on behalf of the State of Minnesota approved by the Court on May 19, 1993 (incorporated herein by reference to Exhibit 10.39 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993) (10)-(20) - Settlement Agreement and Stipulated Order on behalf of the State of Indiana on behalf of the Indiana Department of Environmental Management approved by the Court on May 24, 1993 (incorporated herein by reference to Exhibit 10.40 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993) (10)-(21) - Settlement Agreement and Stipulated Order on behalf of the State of New York and approved by the Court on May 24, 1993 (incorporated herein by reference to Exhibit 10.42 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993) (10)-(22) - Settlement Agreement and Stipulated Order on behalf of the State of Connecticut and approved by the Court on May 19, 1993 (incorporated herein by reference to Exhibit 10.43 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993) (10)-(23) - Settlement Agreement and Stipulated Order on behalf of the Commonwealth of Pennsylvania and approved by the Court on May 24, 1993 (incorporated herein by reference to Exhibit 10.44 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993) (10)-(24) - Settlement Agreement and Stipulated Order on behalf of the State of Ohio on behalf of the Ohio Environmental Protection Agency and approved by the Court on May 24, 1993 (incorporated herein by reference to Exhibit 10.45 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993) (10)-(25) - Settlement Agreement and Stipulated Order on behalf of the State of Georgia and approved by the Court on May 24, 1993 (incorporated herein by reference to Exhibit 10.46 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993) (10)-(26) - Closing Agreement Between LTV, its subsidiaries and the Commissioner of Internal Revenue as filed with the United States Bankruptcy Court for the Southern District of New York on May 14, 1993 (incorporated herein by reference to Exhibit 10.47 to LTV's Report on Form 10-Q for the quarter ended June 30, 1993)
- 28 - 30 (10)-(27) - The LTV Corporation Non-Employee Directors Stock Option Plan adopted on October 22, 1993 (incorporated herein by reference to Exhibit 10.49 to Amendment No. 2 to LTV's Registration Statement on Form S-1 [Registration No. 33-50217]) (10)-(28) - Amendment to LTV Executive Benefit Plan adopted October 22, 1993 (incorporated herein by reference to Exhibit 10.50 to Amendment No. 2 to LTV's Registration Statement on Form S-1 [Registration No. 33-50217]) (10)-(29) - LTV Executive Benefit Trust Agreement approved on October 22, 1993 (incorporated herein by reference to Exhibit 10.51 to Amendment No. 2 to LTV's Registration Statement on Form S-1 [Registration No. 33-50217]) (10)-(30) - The LTV Corporation Supplemental Management Retirement Plan adopted on October 22, 1993 (incorporated herein by reference to Exhibit 10.52 to Amendment No. 2 to LTV's Registration Statement on Form S-1 [Registration No. 33-50217]) (10)-(31) - The LTV Corporation Supplemental Management Retirement Trust Agreement approved on October 22, 1993 (incorporated herein by reference to Exhibit 10.53 to Amendment No. 2 to LTV's Registration Statement on Form S-1 [Registration No. 33-50217]) (10)-(32) - The LTV Corporation Management Incentive Program as amended on January 28, 1994 (incorporated by reference to Exhibit (10)-(53) to LTV's Report on Form 10-K for the year ended December 31, 1993) (10)-(33) - Amendment to The LTV Corporation Supplemental Management Retirement Plan adopted on January 28, 1994 (incorporated by reference to Exhibit (10)-(54) to LTV's Report on Form 10-K for the year ended December 31, 1993) (10)-(34) - Amendment to LTV Executive Benefit Plan adopted October 28, 1994 (incorporated herein by reference to Exhibit (10)-(48) to LTV's Report on Form 10-Q for the quarter ended September 30, 1994) (10)-(35) - Amendment to The LTV Corporation Management Incentive Program adopted October 28, 1994 (incorporated herein by reference to Exhibit (10)-(49) to LTV's Report on Form 10-Q for the quarter ended September 30, 1994) (10)-(36) - Amendment to The LTV Corporation Supplemental Management Retirement Plan adopted on October 28, 1994 (incorporated herein by reference to Exhibit (10)-(51) to LTV's Report on Form 10-Q for the quarter ended September 30, 1994) (10)-(37) - The Hourly Employee Stock Payment Alternative Plan (incorporated herein by reference to Exhibit 4.3 to LTV's Registration Statement on Form S-8 [Registration No. 33-56861])
- 29 - 31 (10)-(38) - Amendment No. 1 to the Receivables Purchase and Sale Agreement dated as of October 12, 1994 among LTV, LTV Steel Company, Inc., Continental Emsco Company, LTV Steel Tubular Products Company, Georgia Tubing Corporation and LTV Sales Finance Company (incorporated herein by reference to Exhibit (10)-(57) to LTV's Report on Form 10-Q for the quarter ended September 30, 1995) (10)-(39) - The LTV Corporation Amended and Restated Non-Employee Directors' Equity Compensation Plan adopted on November 22, 1996 (incorporated herein by reference to Exhibit (10)-(58) to LTV's Report on Form 10-K for the year ended December 31, 1996) (10)-(40) - The LTV Corporation Amended and Restated Non-Employee Directors' Deferred Compensation Plan adopted on November 22, 1996 (incorporated herein by reference to Exhibit (10)-(59) to LTV's Report on Form 10-K for the year ended December 31, 1996) (10)-(41) - The LTV Corporation Amended and Restated Executive Deferred Compensation Plan adopted on October 25, 1996 (incorporated herein by reference to Exhibit (10)-(60) to LTV's Report on Form 10-K for the year ended December 31, 1996) (10)-(42) - Indenture between LTV and The Chase Manhattan Bank, as Trustee, (incorporated by reference to Exhibit 4.1 to LTV's Registration Statement on Form S-4 [Registration No. 333-40425]) (10)-(43) - The LTV Change in Control and Severance Pay Plan I (filed as Exhibit 10.1 to Amendment No. 1 to LTV's Registration Statement on Form S-4 [Registration No. 333-40425]) (10)-(44) - Note Purchase and Letter of Credit Agreement dated as of February 26, 1998 among LTV Steel Company, Inc., various financial institutions (as defined therein), Chase Securities, Inc., as placement agent, The Chase Manhattan Bank, as administrative agent and The Chase Manhattan Bank, as collateral agent (incorporated by reference to Exhibit (10)-(52) to LTV's Report on Form 10-Q for the quarter ended June 30, 1998) (10)-(45) - Guaranty made as of February 26, 1998 by LTV Steel Products, LLC given in connection with the Note Purchase and Letter of Credit Agreement dated as of February 26, 1998 among LTV Steel Company, Inc., various financial institutions (as defined therein), Chase Securities, Inc., as placement agent, The Chase Manhattan Bank, as administrative agent and The Chase Manhattan Bank, as collateral agent (incorporated by reference to Exhibit (10)-(53) to LTV's Report on Form 10-Q for the quarter ended June 30, 1998)
- 30 - 32 (10)-(46) - Contribution and Sale Agreement dated as of February 26, 1998 among LTV Steel Products, LLC, as purchaser, LTV Steel Company, Inc., as servicer, and LTV Steel Company, Inc. and Georgia Tubing Corporation, as initial sellers (incorporated by reference to Exhibit (10)-(54) to LTV's Report on Form 10-Q for the quarter ended June 30, 1998) (10)-(47) - Inventory Processing and Servicing Agreement dated as of February 26, 1998 by and among LTV Steel Products, LLC, LTV Steel Company, Inc., as processor and servicer, and The Chase Manhattan Bank, as collateral agent (incorporated by reference to Exhibit (10)-(55) to LTV's Report on Form 10-Q for the quarter ended June 30, 1998) (10)-(48) - Trust Agreement dated as of February 26, 1998 among LTV Steel Products, LLC, as issuer, and The Chase Manhattan Bank as collateral agent (incorporated by reference to Exhibit (10)-(56) to LTV's Report on Form 10-Q for the quarter ended June 30, 1998) (10)-(49) - Amendment No. 2 dated as of March 1, 1998 to the Receivables Purchase and Sale Agreement dated as of October 12, 1994 among LTV, LTV Steel Company, Inc., Continental Emsco Company, LTV Steel Tubular Products Company, Georgia Tubing Corporation and LTV Sales Finance Company and Amendment No. 1 to Revolving Credit Agreement dated as of October 12, 1994 among LTV Sales Finance Company, the financial institutions parties thereto as banks, the issuing banks, the facility agent and collateral agent, both dated as of March 1, 1998 (incorporated by reference to Exhibit (10)-(57) to LTV's Report on Form 10-Q for the quarter ended June 30, 1998) (10)-(50) - Agreement dated as of December 2, 1998 between LTV, the PBGC, the Initial LTV Group (as defined in the Agreement) and LTV, as Administrator of the Restored Plans (filed herewith) (10)-(51) - Employment, Retirement and Non-Competition Agreement dated as of December 28, 1998 between LTV and David H. Hoag (filed herewith). (11) - Statement re Computation of Per Share Earnings (filed herewith) (13) - Portions of the 1998 Annual Report to Shareholders incorporated into this Report by reference (filed herewith) (21) - List of subsidiaries (filed herewith) (23) - Consent of Ernst & Young LLP (filed herewith) (27) - Financial Data Schedule (filed herewith)
- 31 - 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 26th day of February 1999. THE LTV CORPORATION By /s/ Glenn J. Moran --------------------- (Glenn J. Moran) 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 the Registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ J. PETER KELLY Chairman of the Board, President, February 26 , 1999 - -------------------------- Chief Executive Officer and a Director (J. Peter Kelly) /s/ ARTHUR W. HUGE Executive Vice President and February 26, 1999 - -------------------------- Chief Financial Officer (Arthur W. Huge) (Principal Financial Officer and Principal Accounting Officer) /s/ GEORGE T. HENNING Vice President and Controller February 26, 1999 - -------------------------- (George T. Henning) /s/ EDGAR L. BALL Director February 26, 1999 - -------------------------- (Edgar L. Ball)
- 32 - 34 /s/ COLIN C. BLAYDON Director February 26, 1999 - -------------------------- (Colin C. Blaydon) /s/ WILLIAM H. BRICKER Director February 26, 1999 - -------------------------- (William H. Bricker) /s/ JOHN E. JACOB Director February 26, 1999 - -------------------------- (John E. Jacob) /s/ EDWARD C. JOULLIAN III Director February 26, 1999 - -------------------------- (Edward C. Joullian III) /s/ M. THOMAS MOORE Director February 26, 1999 - -------------------------- (M. Thomas Moore) /s/ VINCENT A. SARNI Director February 26, 1999 - -------------------------- (Vincent A. Sarni) /s/ SAMUEL K. SKINNER Director February 26, 1999 - -------------------------- (Samuel K. Skinner) /s/ STEPHEN B. TIMBERS Director February 26, 1999 - -------------------------- (Stephen B. Timbers) /s/ FARAH M. WALTERS Director February 26, 1999 - -------------------------- (Farah M. Walters)
- 33 - 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 26th day of February 1999. THE LTV CORPORATION By _________________________ (Glenn J. Moran) 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 the Registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- ____________________________ Chairman of the Board, President, February 26, 1999 (J. Peter Kelly) Chief Executive Officer and a Director ____________________________ Executive Vice President and February 26, 1999 (Arthur W. Huge) Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) ____________________________ Vice President and Controller February 26, 1999 (George T. Henning) ____________________________ Director February 26, 1999 (Edgar L. Ball)
36 ____________________________ Director February 26, 1999 (Colin C. Blaydon) ____________________________ Director February 26, 1999 (William H. Bricker) ____________________________ Director February 26, 1999 (John E. Jacob) ____________________________ Director February 26, 1999 (Edward C. Joullian III) ____________________________ Director February 26, 1999 (M. Thomas Moore) ____________________________ Director February 26, 1999 (Vincent A. Sarni) ____________________________ Director February 26, 1999 (Samuel K. Skinner) ____________________________ Director February 26, 1999 (Stephen B. Timbers) ____________________________ Director February 26, 1999 (Farah M. Walters)
37 THE LTV CORPORATION FORM 10-K - ITEM 14 (a)(1) and (2) LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following is a listing of the consolidated financial statements which are incorporated herein by reference. The consolidated financial statements of LTV and subsidiaries and Ernst & Young LLP's report thereon, included in the 1998 Annual Report to Shareholders, are incorporated herein by reference in Item 8. With the exception of the pages listed in this index and the pages listed in Items 5, 6, 7 and 8, the 1998 Annual Report to Shareholders is not deemed to be filed as part of this Form 10-K.
Reference Page -------------- 1998 Annual Report to Shareholders Incorporated by Reference -------------- The LTV Corporation Report of Ernst & Young LLP, Independent Auditors................................... 29 At December 31, 1998 and 1997: Consolidated balance sheet..................................................... 11 For the years ended December 31, 1998, 1997 and 1996: Consolidated statement of operations........................................... 10 Consolidated statement of cash flows........................................... 12 Consolidated statement of changes in equity.................................... 13 Notes to consolidated financial statements.......................................... 14-28
The following is a listing of financial statements of Trico Steel Company, L.L.C. which are included as part of this Report.
Report of Ernst & Young LLP, Independent Auditors................................... T-1 At December 31, 1998 and 1997: Balance sheet.................................................................. T-2 For the years ended December 31, 1998 and 1997: Statement of operations........................................................ T-3 For the years ended December 31, 1998, 1997 and 1996: Statements of cash flows....................................................... T-4 Statements of changes in members' equity....................................... T-5 Notes to financial statements....................................................... T-6-T-12
All schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission have been omitted as the schedules are not required under the related instructions, are inapplicable, or the information required thereby is set forth in the financial statements or the notes thereto. F-1 38 Report of Ernst & Young LLP, Independent Auditors The Members Trico Steel Company, L.L.C. We have audited the accompanying balance sheets of Trico Steel Company, L.L.C. as of December 31, 1998 and 1997, and the related statement of operations for each of the two years then ended, and the related statements of changes in Members' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Trico Steel Company, L.L.C. at December 31, 1998 and 1997 and the results of its operations for each of the two years ended December 31, 1998 and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, in 1997 the Company changed its method of accounting for start-up costs. /s/ Ernst & Young LLP January 22, 1999 T-1 39 Trico Steel Company, L.L.C. Balance Sheets (In Thousands)
December 31, ASSETS 1998 1997 --------- --------- Current assets: Cash and cash equivalents $ 9,936 $ 15,763 Related party receivables, less allowances of $1,483 in 1998, and $1,626 in 1997 18,195 25,252 Other receivables 925 904 Inventories (Note 3) 24,774 26,471 Prepaid expenses and other 520 588 --------- --------- Total current assets 54,350 68,978 Property, plant and equipment (Note 1): Land and land improvements 29,769 28,666 Buildings 135,812 125,121 Machinery and equipment 400,323 370,103 Construction in progress 1,919 18,039 --------- --------- 567,823 541,929 Less accumulated depreciation 45,875 18,149 --------- --------- Net property, plant and equipment 521,948 523,780 Debt issuance costs (Note 1) 8,342 8,118 Other assets -- 928 --------- --------- TOTAL ASSETS $ 584,640 $ 601,804 ========= ========= LIABILITIES AND MEMBERS' EQUITY Current liabilities: Note payable $ -- $ 2,500 Accounts payable 24,187 32,042 Accrued liabilities 1,376 2,013 Accrued interest payable 1,675 1,574 --------- --------- Total current liabilities 27,238 38,129 Long-term debt (Note 4) 284,175 261,260 Deferred income (Note 1) 11,133 11,384 Members' equity: Paid-in capital 464,876 393,410 Retained deficit (202,782) (102,379) --------- --------- Total members' equity 262,094 291,031 --------- --------- TOTAL LIABILITIES AND MEMBERS' EQUITY $ 584,640 $ 601,804 ========= =========
The accompanying notes are an integral part of these financial statements. T-2 40 Trico Steel Company, L.L.C. Statement of Operations (In Thousands)
Year Ended December 31, 1998 1997 --------- --------- Sales to Trico Steel Company, Inc. $ 258,264 $ 98,396 Costs and expenses: Cost of products sold 298,971 139,777 Depreciation and amortization 28,020 18,355 Selling, general and administrative 14,864 17,620 Net interest expense 17,949 17,096 Other income (1,137) (6,973) --------- --------- Total 358,667 185,875 --------- --------- Net loss before cumulative effect of accounting change (100,403) (87,479) Cumulative effect of accounting change for start-up costs (Note 3) -- (14,900) --------- --------- NET LOSS ALLOCABLE TO MEMBERS $(100,403) $(102,379) ========= =========
The accompanying notes are an integral part of these financial statements. T-3 41 Trico Steel Company, L.L.C. Statements of Cash Flows (In Thousands)
Year Ended December 31, 1998 1997 1996 --------- --------- --------- OPERATING ACTIVITIES Net loss allocable to Members $(100,403) $(102,379) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 28,020 18,355 Cumulative effect of accounting change -- 14,900 Allowance for doubtful accounts and sales returns (143) 1,626 Changes in operating assets and liabilities: Related party receivables 7,200 (26,878) Other receivables (21) (904) Inventories 1,697 (22,862) $ (3,609) Prepaid expenses and other assets 996 -- (9,439) Accounts payable and other accrued liabilities (8,391) 22,124 10,186 --------- --------- --------- Net cash used in operating activities (71,045) (96,018) (2,862) INVESTING ACTIVITIES Additions to property, plant and equipment (25,894) (93,207) (280,362) --------- --------- --------- Net cash used in investing activities (25,894) (93,207) (280,362) FINANCING ACTIVITIES Payments on note payable (2,500) -- -- Increase in notes payable -- 2,500 -- Payments on long-term debt (1,085) -- -- Proceeds from issuance of long-term debt -- 98,260 163,000 Proceeds from Members' borrowing 24,000 -- -- Proceeds from Members' contributions 71,466 92,200 121,046 Debt issuance costs (1,135) (517) (2,626) Proceeds from grants 366 75 5,114 --------- --------- --------- Net cash provided by financing activities 91,112 192,518 286,534 --------- --------- --------- (Decrease) increase in cash and cash equivalents (5,827) 3,293 3,310 Cash and cash equivalents at beginning of year 15,763 12,470 9,160 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,936 $ 15,763 $ 12,470 ========= ========= ========= CASH PAID FOR INTEREST $ 18,080 $ 16,590 $ 1,932 ========= ========= =========
The accompanying notes are an integral part of these financial statements. T-4 42 Trico Steel Company, L.L.C. Statements of Changes in Members' Equity (In Thousands)
Total Paid-In Retained Members' Capital Deficit Equity --------- --------- --------- Balance at January 1, 1996 $ 180,164 $ 180,164 Members' contributions 121,046 121,046 --------- --------- --------- Balance at December 31, 1996 301,210 301,210 Net loss allocable to Members -- $(102,379) (102,379) Members' contributions 92,200 -- 92,200 --------- --------- --------- Balance at December 31, 1997 393,410 (102,379) 291,031 Net loss allocable to Members -- (100,403) (100,403) Members' contributions 71,466 -- 71,466 --------- --------- --------- BALANCE AT DECEMBER 31, 1998 $ 464,876 $(202,782) $ 262,094 ========= ========= =========
The accompanying notes are an integral part of these financial statements. T-5 43 Trico Steel Company, L.L.C. Notes to Financial Statements December 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND OPERATIONS Trico Steel Company, L.L.C. (the "Company"), formed on December 22, 1994, operates a steel mini-mill that utilizes an electric arc/thin slab casting process and pickle line facility in Decatur, Alabama. Steel production began in April 1997 with an expected annual capacity of 2.2 million tons. Prior to beginning steel production in 1997, the Company was in a development stage, and capitalized all start-up costs (see Note 2). The Company is a Delaware limited liability company owned by three entities (referred to as Members) that are wholly-owned subsidiaries of: The LTV Corporation (50%), Sumitomo Metal USA Corporation (25%), and British Steel plc (25%). The Members have contributed to the Company their respective ownership portion of $464.9 million as paid-in capital as of December 31, 1998. The Company operates in one industry segment. All sales are to Trico Steel Company, Inc. (a wholly-owned subsidiary of The LTV Corporation), its sole and exclusive distributor of product for resale. The Company records sales at time of shipment. All credit risks are borne by the Company. The Company extends credit on normal terms and management does not believe it has a significant concentration of credit risk in any one geographic area or market segment. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents as of December 31, 1998 and 1997 principally include cash and amounts invested in money market certificates. INVENTORIES Inventories are stated at lower of cost or market value. The Company's cost is based on the first-in, first-out (FIFO) method. T-6 44 Trico Steel Company, L.L.C. Notes to Financial Statements--Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is provided using the straight-line method. Estimated useful lives range from fifteen to twenty-five years for buildings and three to twenty years for machinery and equipment. Land is stated at estimated fair value as of the date of the grant. Interest associated with construction in progress was capitalized in the amount of $.6 million, $5.9 million and $3.0 million, in 1998, 1997 and 1996, respectively. DEBT ISSUANCE COSTS Costs related to debt issuance are deferred and amortized over the term of the related debt. Accumulated amortization was approximately $1.6 million at December 31, 1998 and $.7 million at December 31, 1997. INCOME TAXES For income tax purposes, the Members have elected to be taxed as a partnership. Consequently, no federal or state income tax provision or benefit is recorded by the Company. DEFERRED INCOME The Company recorded the fair value of donated land and proceeds received from various grants as deferred income. Such deferred amounts are accreted to income based on the lives of the assets to which they relate. Accumulated accretion was $1.1 million at December 31, 1998 and $.5 million at December 31, 1997. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform with the current period presentation. T-7 45 Trico Steel Company, L.L.C. Notes to Financial Statements--Continued 2. CHANGE IN ACCOUNTING PRINCIPLE In December 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants cleared its Statement of Position, "Reporting on the Costs of Start-up Activities", and on April 3, 1998, formally issued Statement of Position 98-5 which requires the costs of start-up activities to be expensed as incurred. The Company elected early adoption of this statement. The cumulative effect of this change as of January 1, 1997 was a charge of $14.9 million. 3. INVENTORIES Inventories are as follows (in thousands):
1998 1997 -------- -------- Raw Materials and mill supplies $ 19,228 $ 17,671 Products 5,546 8,800 -------- -------- $ 24,774 $ 26,471 ======== ========
4. FINANCING ARRANGEMENTS AND LONG-TERM DEBT Long-term debt consists of the following (in thousands):
1998 1997 -------- -------- Tax-Exempt Bonds, variable interest rate, approximately 4.20% at December 31, 1998, due 2026 and 2027 $ 75,000 $ 50,000 Taxable Bonds, variable interest rates, approximate effective interest rate of 7.27% at December 31, 1998, due from 2000 through 2027 174,175 211,260 Taxable Bonds, variable interest rates, approximate effective interest rate of 6.8% at December 31, 1998, due 2027 11,000 -- Members' debt, variable interest rates, approximate effective interest rate of 6.50% at December 31, 1998, unsecured, due 2008 24,000 -- -------- -------- $284,175 $261,260 ======== ========
Substantially all assets of the Company collateralize the tax-exempt and taxable bonds. T-8 46 Trico Steel Company, L.L.C. Notes to Financial Statements--Continued 4. FINANCING ARRANGEMENTS AND LONG-TERM DEBT--CONTINUED In November, 1995 the Company entered into a $285 million credit and reimbursement agreement (the facility) with a syndicate bank group. The facility was structured to support tax-exempt and taxable bonds. As of December 31,1998, $260 million was outstanding of which $75 million is in tax-exempt bonds. The tax-exempt bonds (for the purchase and construction of various solid waste disposal components of the project) are supported by a direct pay letter of credit issued by Chase Manhattan Bank. Until certain production capability criteria are met, as defined in the agreement, the maximum draw allowable under a $75 million revolving credit portion of the facility, is $52 million. The $52 million of borrowings are due in 2008. The facility contains covenants that include requirements to meet certain financial ratios, maintain restricted working capital and certain other restrictions and limitations. In July 1998, an agreement was made with the Members and the syndicated bank group that permitted the Company to borrow $30 million from its Members. In connection with this change, the date on which to compute the debt ratio covenant was changed from December 31, 1998 to December 31, 1999. An aggregate of $24 million was outstanding at December 31, 1998 under this agreement. On December 18, 1998, the Company and the syndicated bank group amended the debt agreements to allow for junior subordinated debt from its Members. The Company has executed an agreement to borrow up to $50 million at a rate of LIBOR plus a specified margin rate under a junior subordinated debt arrangement from the Members. The termination date for this facility is April 11, 2008 and there was no amount outstanding under this agreement at December 31, 1998. The Company has a credit agreement for letters of credit with an aggregate face amount not to exceed $1.5 million. At December 31, 1998, $.8 million was outstanding in letters of credit. As of January 22, 1999, the Company had borrowed the remaining $6 million available under the $30 million Members' debt arrangement and borrowed $3 million under the $50 million junior subordinated debt arrangement with the Members. T-9 47 Trico Steel Company, L.L.C. Notes to Financial Statements--Continued 4. FINANCING ARRANGEMENTS AND LONG-TERM DEBT--CONTINUED Future maturities of long-term debt as of December 31, 1998 are as follows (in thousands):
Year Ending: 1999 $ -- 2000 10,611 2001 11,491 2002 12,434 2003 13,475 Thereafter 236,164 ----------------- $ 284,175 =================
5. COMMITMENTS AND CONTINGENCIES The Company leases certain equipment under cancelable and non-cancelable leases that expire at various dates. Minimum future operating lease obligations in effect at December 31, 1998 are as follows (in thousands):
Year Ending: 1999 $ 1,532 2000 1,532 2001 1,529 2002 1,118 2003 343 ----------------- $ 6,054 =================
Rental expense on operating leases was $3.2 million for the year ended December 31, 1998 and $1.7 million for the year ended December 31, 1997. T-10 48 Trico Steel Company, L.L.C. Notes to Financial Statements--Continued 6. DEFERRED COMPENSATION AND EMPLOYEE BENEFITS PLANS Effective August 1, 1996, the Company adopted a 401(k) plan covering all employees. The Company provided a 25% match for the first 6% of the employee's qualified compensation contributed to the plan. Effective May 3, 1998, the Company increased the match to 50% for the first 6% of the employee's qualified compensation contributed to the plan. The amount of expense recorded by the Company with respect to these plans for the year ended December 31, 1998 and 1997 was $.3 million and $.1 million, respectively. 7. RELATED PARTY TRANSACTIONS The Company paid $15.3 million in 1998, $3.7 million in 1997 and $1.7 million in 1996 to related parties for goods and services. 8. SUBSEQUENT TRANSFORMER FAILURE (UNAUDITED) The Company experienced a failure of a second of three transformers for incoming power to the facility on January 27, 1999. The first transformer failure occurred in November, 1998. The Company's engineers and operators are reconfiguring and/or installing alternative sources of power supply. Management is currently investigating the causes of these failures. Management believes the property damage and business interruption caused by the failures should be substantially covered by insurance. 9. YEAR 2000 (UNAUDITED) The Year 2000 issue is the result of computer programs being written using two digits rather than four to define an applicable year. Any of the Company's computer programs that have time sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, production difficulties, a temporary inability to process transactions, send invoices or engage in similar normal business activities. Failure by the Company and or significant third parties such as power utility providers and other critical suppliers and major customers, to complete Year 2000 readiness activities in a timely manner could have an adverse effect on the Company's business. Since many of the Company's computer and operating systems have been purchased and installed subsequent to the discovery of the Year 2000 issue, testing was accomplished during installation and problems were resolved as discovered. T-11 49 Trico Steel Company, L.L.C. Notes to Financial Statements--Continued 9. YEAR 2000 (UNAUDITED)--CONTINUED The Company has formed a Steering Committee for Year 2000 issues, which meets regularly and is comprised of high-level executives and other management personnel to assess the readiness of the Company on this issue. The Committee believes that adapting systems to reflect the year 2000 will not have a material adverse effect on the results of operations. Costs associated with this issue have not been material to date and are not expected to have a material impact on the Company in the future. Management has begun a program of querying significant third parties, including suppliers, utility and other resource providers and customers to assess their Year 2000 readiness. Management is not presently aware of any known significant third parties which are not expected to be Year 2000 compliant. T-12 EX-10.5 2 EXHIBIT 10.5 1 Exhibit 10.50 AMENDED AND RESTATED SETTLEMENT AGREEMENT by and among Pension Benefit Guaranty Corporation, The LTV Corporation and each other member of the LTV Controlled Group (as herein defined) 2 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS ....................................................................................2 Section 1.1. Definitions.......................................................................2 Section 1.2. Accounting Terms.................................................................11 Section 1.3. Terms Generally..................................................................11 ARTICLE II PLAN MANAGEMENT................................................................................12 Section 2.1. Plan Merger......................................................................12 Section 2.2. Plan Splits......................................................................12 ARTICLE III RESTORATION PAYMENT SCHEDULE ORDERS............................................................13 Section 3.1. Issuance of Restoration Payment Schedule Orders...................................................13 Section 3.2. Amendment of RPSOs...............................................................15 Section 3.3. Funding Credit Balances..........................................................15 Section 3.4. RPSO Obligations Unaffected......................................................16 Section 3.5. Deferral Regulations.............................................................16 ARTICLE IV CONTRIBUTIONS..................................................................................17 Section 4.1. Joint and Several Obligations....................................................17 Section 4.2. GATT Exemption...................................................................17 ARTICLE V SATISFACTION; LITIGATION.......................................................................17 Section 5.1. Satisfaction of Republic Retirement Plan Claim........................................................17 Section 5.2. LTV Affirmation of Certain Obligations.......................................................18 Section 5.3 . Release of the PBGC.............................................................19 ARTICLE VI MERGERS, CONSOLIDATIONS, ETC.; DIVIDEND RESTRICTIONS...........................................19 Section 6.1. Dispositions and Acquisitions of Assets.........................................................19 Section 6.2. Dividends and Other Distributions................................................23 ARTICLE VII CONDITIONS.....................................................................................27 Section 7.1. Conditions to Obligations of LTV.................................................27 Section 7.2. Conditions to Obligations of the PBGC..........................................................27
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ARTICLE VIII GENERAL PROVISIONS.............................................................................28 Section 8.1. Entire Agreement.................................................................28 Section 8.2. Governing Law and Jurisdiction...................................................29 Section 8.3. Modifications....................................................................29 Section 8.4. Authority........................................................................29 Section 8.5. Notices..........................................................................30 Section 8.6. No Waiver........................................................................32 Section 8.7. Benefits.........................................................................32 Section 8.8. Execution........................................................................32 Section 8.9. Captions.........................................................................33 Section 8.10. Severability....................................................................33 Section 8.11. Survival........................................................................33 Section 8.12. Termination.....................................................................33 ARTICLE IX REPRESENTATIONS AND WARRANTIES.................................................................34 Section 9.1. General Representations and Warranties........................................................34 Section 9.2. Additional LTV Representations and Warranties....................................................34 (a) No Violation.................................................................34 (b) True and Complete Disclosure, No Material Misstatements......................35 (c) Persons under Common Control.................................................35 ARTICLE X ADDITIONAL COVENANTS AND AGREEMENTS............................................................35 Section 10.1. Further Assurances..............................................................35 Section 10.2. Information Covenants...........................................................36 (a) Annual Certificate by Public Accounting Firm.......................................................................36 (b) Annual Officer's Certificate.................................................36 (c) Notice of Default, Event of Default or Litigation.....................................................................37 (d) Auditors' Reports............................................................37 (e) Actuarial Valuation Reports; IRS Form 5500..............................................................37 (f) Other Information............................................................38 Section 10.3. Senior Debt Negative Covenants..................................................38 (a) Incorporation of Certain Senior Debt Negative Covenants....................................................38 (b) Expiration of Senior Debt Negative Covenants..................................................................39 (c) Notice of Expiration or Replacement of Senior Debt Negative Covenants..........................................42 Section 10.4. Additional Negative Covenants...................................................43
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(a) Transactions with Affiliates.................................................43 (b) Restrictive Agreements.......................................................44 (c) Limit on Investments in Trico................................................45 Section 10.5. Confidentiality.................................................................45 ARTICLE XI EVENTS OF DEFAULT..............................................................................47 (a) Contributions and Payments...................................................47 (b) Representations, Etc.........................................................47 (c) Special Agreements...........................................................48 (d) Covenants....................................................................48 (e) Default Under Other Agreements...............................................48 (f) Involuntary Bankruptcy, Etc..................................................49 (g) Voluntary Bankruptcy, Etc....................................................49 (h) Judgments....................................................................50 (i) Validity of This Agreement...................................................50 ARTICLE XII REMEDIES.......................................................................................51 Section 12.1. Acknowledgment..................................................................51 Section 12.2. Remedies of the PBGC............................................................51 Section 12.3. Fees and Expenses...............................................................53 Section 12.4. Survival of LTV's Obligations...................................................53 Section 12.5. Remedies Cumulative.............................................................53
iii 5 AMENDED AND RESTATED -------------------- SETTLEMENT AGREEMENT -------------------- This Amended and Restated Settlement Agreement (this "Agreement") is made as of December 2, 1998 by and among Pension Benefit Guaranty Corporation (the "PBGC") and The LTV Corporation, a corporation organized under the laws of Delaware ("LTV"), and each other member of the LTV Controlled Group (as hereinafter defined), and amends and restates the Settlement Agreement made as of June 28, 1993, as amended by eleven amendments to the date of this Agreement (as amended, the "Original Agreement"), by and among (1) the PBGC, (2) LTV and each other member of the Initial LTV Group (as hereinafter defined), including, without limitation, LTV Steel Company, Inc., a corporation organized under the laws of New Jersey ("LTV Steel"), and (3) The LTV Corporation, as Administrator (the "Administrator") of and on behalf of the LTV Steel (J&L) Hourly Pension Plan, the 1992 LTV Steel (J&L) Hourly Pension Plan, the LTV Steel (Republic) Hourly Pension Plan, the 1992 LTV Steel (Republic) Hourly Pension Plan, the Jones & Laughlin Retirement Plan and the 1992 J&L Salaried Retirement Plan (collectively, the "Restored Plans"). 1 6 RECITALS: A. The PBGC, LTV and the Administrator are parties to the Original Agreement. B. The PBGC and LTV desire to make certain changes to their agreements set out in the Original Agreement. C. Concurrently with the execution of this Agreement, an agreement (the "Transaction Agreement") pursuant to which the Administrator withdraws as a party to the Original Agreement and the PBGC and LTV consent and agree to such withdrawal will become effective. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the receipt, adequacy and sufficiency of which are hereby acknowledged, and intending to be legally bound, the PBGC and LTV amend and restate in its entirety the Original Agreement and agree as follows: ARTICLE I DEFINITIONS Section 1.1. DEFINITIONS. The following terms, as used herein, have the following meanings: "Administrator" has the meaning set forth in the Preamble hereto. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling 2 7 (including but not limited to all directors and officers of such Person), controlled by or under direct or indirect common control with such Person. For purposes of this definition only, a Person shall be deemed to control a corporation if such Person possesses directly or indirectly, the power (i) to vote 20% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management or policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Agreement" has the meaning set forth in the Preamble hereto. "Applicable Law" shall mean all applicable laws, including, without limitation, those relating to health, safety, wage and hour, employee benefit plans, the environment, taxes, securities and labor, ordinances, judgments, decrees, injunctions, writs, decisions, and orders of any Governmental Authority and rules, regulations, orders, interpretations, licenses and permits of any Governmental Authority. "Applicable Member" has the meaning set forth in Section 10.3(a). "Applicable Percentage" has the meaning set forth in Section 6.2(b). "Authorized Officer" shall mean any officer of LTV designated in writing to the PBGC to be an Authorized Officer. 3 8 "Business Day" shall mean any day excluding Saturday, Sunday and any day which shall be in The City of New York or in the District of Columbia a legal holiday or a day on which banks are authorized or required by law or other governmental action to be closed. "Calendar Year" shall mean the twelve calendar month period commencing each January 1. "Consolidated Net Income" (or "Consolidated Net Loss") shall mean, with respect to the LTV Consolidated Group for any period, the aggregate net income (or net loss) of the LTV Consolidated Group on a consolidated basis for such period taken as a single accounting period, after nonrecurring and extraordinary gains and losses and before reduction for any dividends or other distributions in respect of any capital stock, in each case, for such period, in accordance with GAAP. "Credit Enhanced Debt" has the meaning set forth in Section 10.3(b). "Default" shall mean an event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Effective Date" shall mean June 28, 1993. "Equity Fair Market Value" has the meaning set forth in Section 6.1. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Events of Default" has the meaning set forth in Article XI. 4 9 "Extraordinary Distribution" has the meaning set forth in Section 6.2(c). "FOIA" has the meaning set forth in Section 10.5. "Funding Credit Balance" has the meaning set forth in Section 3.3. "Funding Standard Account" shall mean the account defined by section 412(b) of the IRC. "GAAP" shall mean, at the time of any determination, generally accepted accounting principles in the United States of America as then in effect. "Governmental Authority" shall mean any Federal, state, county, municipal, regional or other government authority, agency, board, body, instrumentality or court. "Indenture" has the meaning set forth in Section 10.3(a). "Initial LTV Group" shall mean LTV and all Persons, including, without limitation, LTV Steel, who, as of the date of the Original Agreement, were under common control with LTV within the meaning of section 4001(b)(1) of ERISA and sections 414(b)-(c) of the IRC. "Investment Grade Date" shall mean the date on which the unsecured senior indebtedness of LTV has received a rating of at least BBB- from Standard & Poor's Corporation or its successors ("S&P") and a rating of at least Baa3 from Moody's Investment Service Inc. or its successors ("Moody's), or, if S&P 5 10 and Moody's or both shall not make a rating of the unsecured senior indebtedness of LTV, a comparable rating from another nationally recognized statistical rating agency. "IRC" shall mean the Internal Revenue Code of 1986, as amended. "LTV" has the meaning set forth in the Preamble hereto. "LTV Consolidated Group" shall mean, at any time of determination, LTV and all Persons whose financial statements are consolidated with LTV under then applicable GAAP and shall in any event include each and every member of the LTV Controlled Group. "LTV Controlled Group" shall mean, at any time of determination, LTV and all Persons under common control with LTV within the meaning of section 4001(b)(1) of ERISA and sections 414(b)-(c) of the IRC. "LTV Steel" has the meaning set forth in the Preamble hereto. "LTV Trico Entity" shall mean each or any of the LTV Trico Members and Trico Sales Co. "LTV Trico Member" shall mean, at any time, LTV-Trico, Inc., a Delaware corporation, and any other Person or Persons, each of which is, at such time, a wholly owned Subsidiary of LTV and a member of the Trico Joint Venture and does not, at such time, engage in any business or activities other than (i) as a member of the Trico Joint Venture, (ii) as 6 11 contemplated, with respect to members of the Trico Joint Venture, under the Trico Transaction Documents in effect on May 2, 1995, or (iii) other activities ancillary or incidental to the foregoing. "Merged Plan" has the meaning set forth in Section 2.1. "Moody's" has the meaning set forth in the definition of "Investment Grade Date." "New RPS; New RPSs" has the meaning set forth in Section 3.1. "New RPSOs" has the meaning set forth in Section 3.1. "Original Agreement" has the meaning set forth in the Preamble hereto. "Original RPS; Original RPSs" has the meaning set forth in Section 3.1. "Original RPSOs" has the meaning set forth in Section 3.1. "PBGC" shall mean Pension Benefit Guaranty Corporation, a United States Government corporation, located as of the date hereof at 1200 K Street, N.W., Washington, D.C. 20005, established under section 4002 of ERISA and responsible for the administration of Title IV of ERISA, or any agency that may succeed to the functions exercised by the PBGC. "Person" shall mean any natural person, corporation, business trust, joint stock company, trust, joint 7 12 venture, association, company, partnership or other entity. "Plan Sponsor" shall mean with respect to any of the Restored Plans the contributing sponsor thereof (within the meaning of section 4001(a)(13)(A) of ERISA) or its successor by merger or consolidation. "Plan Year" shall mean the plan year (as such term is used in section 412 of the IRC) with respect to which contributions are made to any Restored Plan. "Restored Plans" has the meaning set forth in the Preamble and Section 2.1. "RPS" has the meaning set forth in Section 3.1(a). "RPSOs" has the meaning set forth in Section 3.1(a). "S&P" has the meaning set forth in the definition of "Investment Grade Date." "Senior Debt Negative Covenants" has the meaning set forth in Section 10.3(a). "Senior Notes" has the meaning set forth in Section 10.3(a). "Subsidiary" shall mean with respect to any Person (herein referred to as the "parent"), any corporation, partnership, association, trust or other business entity (i) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, 8 13 at the time any determination is being made, owned, Controlled or held, or (ii) which is, at the time any determination is being made, otherwise Controlled, by the parent or one or more Subsidiaries of the parent or by the parent and one or more Subsidiaries of the parent; where "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Transaction Agreement" has the meaning set forth in Recital C hereof. "Trico Equity Investment" has the meaning set forth in Section 10.4(c). "Trico Investment" has the meaning set forth in Section 10.4(c). "Trico Joint Venture" shall mean Trico Steel Company, L.L.C., a Delaware limited liability company, or any successor entity thereto, that constructs and operates a steel minimill, manufactures steel products for distribution by Trico Sales Co., and engages in activities ancillary or incidental thereto. It is understood that under the transaction structure contemplated by the Trico Transaction Agreement as in effect as of the closing thereunder, the Trico Joint Venture is not a member of either the LTV Consolidated Group or the LTV Controlled Group. "Trico Loan" has the meaning set forth in Section 10.4(c). 9 14 "Trico Sales Co." shall mean Trico Steel Company, Inc., a Delaware corporation that (i) is a wholly owned Subsidiary of LTV on May 2, 1995 and (ii) does not engage in any business or activities other than as contemplated by the Trico Transaction Documents in effect on May 2, 1995 or other activities ancillary or incidental thereto. "Trico Subordination and Standstill Agreement" shall mean the Subordination and Standstill Agreement dated as of May 2, 1995 among the PBGC, LTV, and U.S. Trust Company of California, N.A., as independent fiduciary, and acknowledged and agreed to by the LTV Controlled Group. "Trico Transaction Agreement" shall mean the Transaction Agreement dated as of May 2, 1995 relating to the formation of the Trico Joint Venture. "Trico Transaction Documents" shall mean the Trico Transaction Agreement and each Transaction Document referred to in the Trico Transaction Agreement, each as amended, modified or supplemented from time to time; PROVIDED that, without the prior written consent of the PBGC, no amendment, restatement, modification or restructuring of the Trico Transactions Documents shall, at any time after May 2, 1995 (i) prohibit any performance or satisfaction by LTV or any member of the LTV Controlled Group of any obligation (whether due or not due and whether mandatory or voluntary) under this Agreement, or (ii) directly conflict with any rights of the PBGC. For purposes of this Agreement, the 10 15 Trico Transaction Documents in effect on May 2, 1995 shall be deemed to include the Commitment Letter dated May 2, 1995 among Chemical Bank, Chemical Securities Inc., LTV, Sumitomo metal Industries, Ltd. and British Steel plc and all Financing Documents (as defined in the Trico Transaction Agreement) entered into on or after May 2, 1995 that are substantially consistent with and implement the terms of such Commitment Letter. "United Steelworkers" has the meaning set forth in Section 10.4(b). "Working Capital Facilities" has the meaning set forth in Section 10.3(b). Section 1.2. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. Section 1.3. TERMS GENERALLY. The definitions in this Agreement shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. All the agreements or instruments defined in this Agreement shall mean such agreements or instruments as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted by, and in accordance with, the terms hereof and thereof. All references herein to Articles, Sections and Exhibits shall be deemed references to Articles and Sections of, 11 16 and Exhibits to, this Agreement unless the context shall otherwise require. The words "herein", "hereof", "hereunder" and other words of similar import refer to this instrument as a whole and not to any particular Article, Section or other subdivision unless clearly stated otherwise. ARTICLE II PLAN MANAGEMENT Section 2.1. PLAN MERGER. The PBGC will not assert any objection to a merger, in accordance with the requirements of section 414(1) of the IRC, and regulations thereunder, among any of the LTV Steel (J&L) Hourly Pension Plan, the LTV Steel (Republic) Hourly Pension Plan, the 1992 LTV Steel (J&L) Hourly Pension Plan and the 1992 LTV Steel (Republic) Hourly Pension Plan (any plan formed by such a merger, a "Merged Plan"), should LTV and LTV Steel desire to effect such mergers. If such mergers shall occur, for all purposes of this Agreement references herein to the "Restored Plans" shall be interpreted after the date of such merger as referring collectively to the Jones & Laughlin Retirement Plan, the 1992 J&L Salaried Retirement Plan and the Merged Plans. Section 2.2. PLAN SPLITS. LTV Steel has adopted the 1992 LTV Steel (J&L) Hourly Pension Plan, the 1992 LTV Steel (Republic) Hourly Pension Plan and the 1992 J&L Salaried Retirement Plan, such plans having been created by spinoffs from the LTV Steel (J&L) Hourly Pension Plan, the LTV Steel (Republic) 12 17 Hourly Pension Plan and the Jones & Laughlin Retirement Plan, respectively, in transactions intended to meet the requirements of section 414(1) of the IRC and regulations thereunder. For all purposes of this Agreement, except where the context clearly requires otherwise, with respect to periods of time on or after the effective date of the spinoffs, any reference to the LTV Steel (J&L) Hourly Pension Plan shall be deemed to include the 1992 LTV Steel (J&L) Hourly Pension Plan, any reference to the LTV Steel (Republic) Hourly Pension Plan shall be deemed to include the 1992 LTV Steel (Republic) Hourly Pension Plan, any reference to the Jones & Laughlin Retirement Plan shall be deemed to include the 1992 J&L Salaried Retirement Plan, and any reference to the Restored Plans shall be deemed to include the 1992 LTV Steel (J&L) Hourly Pension Plan, the 1992 LTV Steel (Republic) Hourly Pension Plan and the 1992 J&L Salaried Retirement Plan. ARTICLE III RESTORATION PAYMENT SCHEDULE ORDERS Section 3.1. ISSUANCE OF RESTORATION PAYMENT SCHEDULE ORDERS. As of July 19, 1996, the PBGC issued three revised Restoration Payment Schedule Orders (each, a "RPSO"), as described in 29 C.F.R. section 4047.3(b) (the "Original RPSOs"), which modified the Restoration Payment Schedules (each, an "RPS") established by the RPSO dated as of August 12, 1991 with respect to each of the Restored Plans (as modified, each, an "Original 13 18 RPS" and collectively, the "Original RPSs"). On or before December 31, 1999, the PBGC will issue further revised Restoration Payment Schedule Orders (the "New RPSOs"), which will modify the Original RPSs with respect to each of the Plans (as further modified, each, a "New RPS" and collectively, the "New RPSs") to take into account the terms of this Agreement. As revised, each New RPS will provide for amortization, in equal quarterly amounts, over 20 years of the outstanding balance as of December 31, 2000 of the initial restoration amortization base (as defined in IRC regulation section 1.412(c)(1)-3(b)(1)) with respect to each Restored Plan. The outstanding balance of the initial restoration amortization base as of December 31, 2000 shall be reduced by the discounted value of the quarterly payment due January 15, 2001. The New RPSOs shall also contain provisions to the substantive effect that (i) IRC regulation section 1.412(c)(1)-3(d) prescribes how the quarterly payment amounts prescribed by the New RPSs which are due before the end of the Plan Year are charged to the Funding Standard Accounts; and (ii) quarterly payment amounts prescribed by the New RPSs which are due after the end of the Plan Year must be discounted at the valuation interest rate to the last day of the Plan Year in order to determine the charge to the Funding Standard Accounts. The PBGC agrees that it will provide LTV with a reasonable opportunity to review and comment on the New RPSOs before their issuance. The parties agree that PBGC has authority to issue RPSOs as described in this Agreement. 14 19 Section 3.2. AMENDMENT OF RPSOS. As long as no member of the LTV Controlled Group is in default of any of its obligations or agreements under this Agreement or the Original RPSOs or the New RPSOs, as applicable, the PBGC will not amend the Original RPSOs or the New RPSOs, as applicable, without the consent of LTV, EXCEPT as provided in Section 3.1 of this Agreement or to the extent such amendment is required by mandatory provisions of Applicable Law (without giving effect to modifications thereof effected by the PBGC (other than the repeal described in Section 4.2)) or is necessary to correct errors relating to valuation or as otherwise provided pursuant to Article XII. If terminated, this Agreement, following such termination, shall not prevent the PBGC from amending such Original RPSOs or New RPSOs, as applicable, or LTV from challenging such amendment, all subject to the requirements of Applicable Law. Section 3.3. FUNDING CREDIT BALANCES. Any funding credit balance in the Funding Standard Account for each of the Restored Plans,increased and decreased after the Effective Date as provided in section 412 of the IRC and the rules thereunder (including both proposed and temporary rules) shall, as of any time of determination, be hereinafter referred to as a "Funding Credit Balance". A minimum Funding Credit Balance shall be maintained in the Funding Standard Account for each Restored Plan as follows: for the LTV Steel (J&L) Hourly Pension Plan, $36,265,785; for the LTV Steel (Republic) Hourly Pension Plan, $15,477,609; for the Jones & Laughlin Retirement Plan, 15 20 $6,645,517; for the 1992 LTV Steel (J&L) Hourly Pension Plan, $99,853,492; for the 1992 LTV Steel (Republic) Hourly Pension Plan, $90,804,670; and for the 1992 J&L Salaried Retirement Plan, $50,952,927. If at the end of any Plan Year, the Funding Credit Balance of one or more of the Restored Plans shall be less than the minimum, LTV shall make, by July 15 of the following year, additional contributions, in excess of any other contributions required by Applicable Law or under this Agreement, to the extent necessary to achieve the minimum Funding Credit Balance required by this Section 3.3; PROVIDED, that LTV shall not be required to make such additional contributions (i) in any year in excess of $50,000,000 in the aggregate to all of the Restored Plans, or (ii) to the extent that such contribution would not be deductible under Section 404 of the IRC. For purposes of the preceding sentence, deductibility shall be determined using the lowest interest rate in the permissible range for determining current liability under Section 412(1) of the IRC. Section 3.4. RPSO OBLIGATIONS UNAFFECTED. Nothing in this Agreement shall affect the obligations of the LTV Controlled Group under Applicable Law to make payments to the Restored Plans pursuant to the Original RPSOs or the New RPSOs, as applicable. Section 3.5. DEFERRAL REGULATIONS. This Agreement shall not affect the provisions with respect to deferral set forth in 26 C.F.R. section 1.412(c)(1)-3(c)(4) (and companion PBGC regulations, if any) or the rights and remedies thereunder. 16 21 ARTICLE IV CONTRIBUTIONS Section 4.1. JOINT AND SEVERAL OBLIGATIONS. Notwithstanding anything to the contrary contained in this Agreement, and notwithstanding that certain of the provisions of this Agreement are silent as to the Person or Persons liable for the applicable contributions, payments or obligations, each member of the LTV Controlled Group shall be jointly and severally liable for the contributions, payments and obligations required under or imposed by this Agreement, including, without limitation, those specified in Sections 3.3, 4.2 and 12.2(c). Section 4.2. GATT EXEMPTION. (a) LTV acknowledges that PBGC may seek repeal of the exemption in Section 769(a)(1) of Public Law 103-465 effective January 1, 2000, or later. LTV recognizes that repeal is appropriate in light of the matters provided for in this amendment and restatement of the Original Agreement, and agrees not to oppose any such efforts by PBGC. (b) Whether or not Section 769(a)(1) of Public Law 103-465 has been repealed, LTV agrees to fund the Restored Plans and otherwise act with respect to the Restored Plans as if Section 769(a)(1) had been repealed effective January 1, 2000. ARTICLE V SATISFACTION; LITIGATION Section 5.1. SATISFACTION OF REPUBLIC RETIREMENT PLAN CLAIM. (a) On the Effective Date, all members of the LTV Controlled Group were discharged for any and all liability under 17 22 Title IV of ERISA with respect to the termination of the Republic Retirement Plan (except for liability to the Section 4049 Trust pursuant to 29 U.S.C. section 1362(c)(Supp. IV, 1986)), such claims having been settled as provided in the Original Agreement. (b) This Agreement, and the payment prior to the date hereof of certain notes heretofore issued by LTV Steel to the PBGC, fully satisfies any and all liability of all members of the LTV Controlled Group to the PBGC for assumption of the Republic Retirement Plan, the PBGC hereby releases LTV and each member of the LTV Controlled Group from any such liability, and under no circumstances in the future shall the PBGC restore the Republic Retirement Plan under ERISA. Section 5.2. LTV AFFIRMATION OF CERTAIN OBLIGATIONS. LTV and each of the other members of the LTV Controlled Group hereby affirm and agree that (i) LTV Steel has assumed the maintenance and sponsorship of the Restored Plans, (ii) the members of the LTV Controlled Group have various statutory liabilities to the Restored Plans under ERISA, under section 412 of the IRC and the regulations thereunder and under 29 C.F.R. section 4047, (iii) the members of the LTV Controlled Group will fully comply with such liabilities, and (iv) any discharge shall not affect the rights or obligations hereunder, nor affect in any way the liability of the LTV Controlled Group under Section 302 of ERISA or Section 412 of the IRC and regulations thereunder for minimum funding contributions to the Restored Plans, nor affect in any way the liability of the LTV 18 23 Controlled Group for any termination of any pension plan that occurs after the Effective Date. Section 5.3. RELEASE OF THE PBGC. On the Effective Date, each member of the Initial LTV Group released the PBGC and its agents, advisors and representatives, and its Affiliates, including, without limitation, its current and former officers, directors, employees and fiduciaries, of and from any and all claims, obligations, rights, causes of action and liabilities (other than the right to enforce the PBGC's obligations under this Agreement) which such Person may have been entitled to assert, whether known or unknown, foreseen or unforeseen, then existing or thereafter arising, based in whole or in part on any act, omission or other occurrence taking place on or prior to the Effective Date in any way relating to the PBGC, and each such member of the Initial LTV Group which is a party to this Agreement reaffirms such release as of the date hereof. ARTICLE VI MERGERS, CONSOLIDATIONS, ETC.; DIVIDEND RESTRICTIONS Section 6.1. DISPOSITIONS AND ACQUISITIONS OF ASSETS. (a) Without the PBGC's prior written approval, no member of the LTV Consolidated Group shall sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or any part of its assets or any capital stock of any Subsidiary, EXCEPT that (i) each member of the LTV Consolidated Group may sell, transfer, lease or otherwise dispose 19 24 of property and assets in the ordinary course of business; (ii) this Section 6.1(a) shall not apply to assets acquired after the Effective Date or hereafter acquired, other than those acquired for the purpose of maintaining, improving or replacing the level of finished steel production capacity at the Effective Date; (iii) this Section 6.1(a) shall not prohibit sales, leases or transfers from LTV or a direct or indirect wholly-owned Subsidiary of LTV to LTV or to another direct or indirect wholly-owned Subsidiary of LTV; (iv) this Section 6.1(a) shall not prohibit sales, transfers, leases or other dispositions of other real or personal property determined by the Board of Directors of LTV to be no longer useful or necessary in the operation of LTV or other members of the LTV Consolidated Group, or otherwise in the best interest of LTV or the LTV Consolidated Group, and which do not exceed in the aggregate $150,000,000 in any year; (v) the Trico Joint Venture and each LTV Trico Entity may sell, transfer, lease or otherwise dispose of property and assets as contemplated by the Trico Transaction Documents as in effect on May 2, 1995; (vi) this Section 6.1(a) shall not apply to the sale or lease of assets forming part of a sale and leaseback transaction otherwise permitted by this Agreement; and (vii) this Section 6.1(a) shall not prohibit the pledge, sale, or transfer of senior secured notes or subordinated unsecured notes by LTV or any member of the LTV Consolidated Group pursuant to any financing arrangement otherwise permitted by this Agreement. 20 25 (b) Without the PBGC's prior written approval, no member of the LTV Consolidated Group shall acquire, through merger, consolidation, purchase of shares, purchase of assets or otherwise, the business of another Person not a member of the LTV Consolidated Group if, at the time of such acquisition, the present value of the "benefit liabilities" (as that term is defined in Title IV of ERISA) of the defined benefit pension plans of such Person or for which such Person is liable, valued on a termination basis, using assumptions prescribed in regulations of the PBGC, exceeds the fair market value of the assets of such plans by more than $300 million. (c) Notwithstanding anything to the contrary contained in this Agreement, each member of the LTV Controlled Group shall ensure that any Person merged into or consolidated with any member of the LTV Controlled Group or into which any member of the LTV Controlled Group shall merge or with which any member of the LTV Controlled Group shall consolidate or any Person purchased or otherwise acquired by any member of the LTV Controlled Group or which otherwise becomes a member of the LTV Controlled Group or succeeds to the rights or obligations of any member of the LTV Controlled Group hereunder shall agree in writing with LTV and the PBGC and shall execute such other documents or instruments as may be necessary or desirable to be jointly and severally liable under this Agreement and to be bound by the terms and provisions of this Agreement as if it had been a 21 26 member of the LTV Controlled Group; PROVIDED that the agreements, obligations and liabilities of each or any LTV Trico Entity under this Section 6.1(c) shall be subject to the Trico Subordination and Standstill Agreement. (d) Notwithstanding anything to the contrary contained in this Agreement, without the prior written consent of the PBGC, no member of the LTV Controlled Group may (i) merge into or consolidate with or be merged into or consolidated with any other Person, (ii) purchase or otherwise acquire any stock, assets or other properties, (iii) sell, transfer or otherwise dispose of any stock, assets or other properties, or (iv) take any other action, if, in any such case, the result thereof shall be that any Person that prior to such event or action is a member of the LTV Controlled Group shall after such event or condition no longer be a member of the LTV Controlled Group; PROVIDED, that this Section 6.1(d) shall not prohibit one or more members of the LTV Controlled Group from merging into or consolidating with another member of the LTV Controlled Group; PROVIDED, FURTHER, that the surviving or resulting Person shall be a member of the LTV Controlled Group and shall comply with Section 6.1(c); PROVIDED, FURTHER, that this Section 6.1(d) shall not prohibit Trico Sales Co. from ceasing to be a member of the LTV Controlled Group in the manner contemplated by Section 3.05, 10.2, 15.04, 15.06 or 15.07 of the Amended and Restated Limited Liability Company Agreement of the Trico Joint Venture or Section 5.01 of the Trico Transaction Agreement, each as in effect on May 2, 22 27 1995; and PROVIDED, FURTHER, that this Section 6.1(d) shall not apply to any transaction involving a member of the LTV Controlled Group which has an Equity Fair Market Value of less than $150 million. As used herein, "Equity Fair Market Value" means the price which could be negotiated in an arms-length free market transaction, for cash between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction, for the entire shareholder, member, partnership or other equity interest in the member of the LTV Controlled Group under consideration. Equity Fair Market Value shall be determined in the good faith reasonable judgment (x) of any executive officer of LTV, if not in excess of $25,000,000, or (y) by the Board of Directors of LTV, if in excess of $25,000,000, and a copy of the certification of such officer, or the resolution of the Board, as applicable, shall be delivered to the PBGC within 30 days after the completion of the relevant transaction. Section 6.2. DIVIDENDS AND OTHER DISTRIBUTIONS. (a) Until December 31, 2001, LTV may, if the conditions set forth in (A) and (B) below are satisfied or if the PBGC has otherwise given its express prior approval, (i) declare or pay dividends or make other distributions in respect of its capital stock (other than dividends or distributions to the extent payable in shares of its capital stock, which may be made whether or not the following conditions are met), or (ii) purchase, 23 28 redeem or otherwise acquire or retire for value shares of its capital stock or options, warrants or other rights to acquire shares of such stock or set aside amounts for any such purpose, or (iii) permit any member of the LTV Consolidated Group to declare or pay to Persons not members of the LTV Controlled Group dividends or make other distributions to Persons not members of the LTV Controlled Group in respect of any of the capital stock of such member (other than dividends or distributions to the extent payable in shares of its capital stock, which may be made whether or not the following conditions are met) or (iv) permit any member of the LTV Consolidated Group to purchase, redeem or otherwise acquire or retire for value from Persons not members of the LTV Controlled Group shares of its capital stock or any options, warrants or other right to acquire shares of such stock or set aside any amount for any such purpose; PROVIDED, that (A) after giving effect, as if paid, to the proposed dividend, distribution, payment or setting apart of a fund, the aggregate amount of such dividends, distributions and payments declared or made and funds set apart after the Effective Date (other than dividends or distributions to the extent payable in capital stock as hereinbefore provided), would not exceed (x) the sum of (1) the Consolidated Net Income, if any, of the LTV Consolidated Group for the period (treated as a single accounting period) from the Effective Date to the end of the most recent completed fiscal quarter preceding the date of computation (or if there shall be a Consolidated Net Loss for such period, minus 100% of the 24 29 Consolidated Net Loss), (2) the aggregate net consideration received by LTV subsequent to the Effective Date, from the issuance and sale or exchange of any shares of its capital stock (or rights or warrants to purchase or subscribe thereto) and (3) the aggregate net consideration received by other members of the LTV Consolidated Group subsequent to the Effective Date, from the issuance and sale or exchange to or with Persons who are not members of the LTV Consolidated Group of any shares of their capital stock (or rights or warrants to purchase or subscribe thereto) LESS (y) all such dividends, distributions and payments made and funds set apart for such purpose during such period; and (B) no Default or Event of Default shall have occurred and be continuing under this Agreement; PROVIDED, HOWEVER, that the provisions of this Section 6.2 shall not prevent the payment of any dividend on any such capital stock within sixty days after the date of declaration thereof if at the date thereof such declaration complied with the provisions of this Section 6.2 nor the purchase, for a price not to exceed an aggregate of $2 million in any Calendar Year, of shares of LTV common stock (x) to distribute to current or former employees, officers or directors of LTV and its Subsidiaries, (y) from current or former employees, officers or directors of LTV and its Subsidiaries or (z) otherwise in order to distribute as employee compensation. (b) In the case of shares of capital stock issued for property other than cash, or any distribution of property other than cash, the amount of consideration received or property 25 30 distributed, as the case may be, shall for the purposes of this Section 6.2 be deemed the fair value of such property as determined in good faith by the Board of Directors of LTV. (c) From and after December 31, 2001, LTV may (i) declare or pay dividends or make other distributions in respect of its capital stock, or (ii) purchase, redeem or otherwise acquire or retire for value shares of its capital stock or options, warrants or other rights to acquire shares of such stock or set aside amounts for any such purpose, or (iii) permit any member of the LTV Consolidated Group to declare or pay to Persons not members of the LTV Controlled Group dividends or make other distributions to Persons not members of the LTV Controlled Group in respect of any of the capital stock of such member, or (iv) permit any member of the LTV Consolidated Group to purchase, redeem or otherwise acquire or retire for value from Persons not members of the LTV Controlled Group shares of its capital stock or options, warrants or other rights to acquire shares of such stock or set aside any amount for any such purpose, in each case, without restriction hereunder; PROVIDED, HOWEVER, that LTV shall not, directly or indirectly, declare, pay or make any Extraordinary Distribution or permit any member of the LTV Consolidated Group, directly or indirectly, to declare, pay or make any Extraordinary Distribution to Persons not members of the LTV Controlled Group. For purposes of this Section 6.2(c), the term "Extraordinary Distribution" shall mean a dividend or other 26 31 distribution in respect of capital stock, of cash, property or assets of any member of the LTV Consolidated Group in excess of ordinary quarterly dividends consistent with past practice, as increased from time to time, declared by the Board of Directors of LTV or such member, as the case may be, but shall not include dividends or distributions (x) payable in shares of LTV's capital stock or (y) which would be exempt from the provisions of Section 6.1(d) by operation of the last PROVISO set forth therein. ARTICLE VII CONDITIONS Section 7.1. CONDITIONS TO OBLIGATIONS OF LTV. The obligations of LTV and the other members of the LTV Controlled Group under this Agreement are subject to the satisfaction (or waiver by LTV) of the following conditions: (a) On the date hereof, all representations and warranties of the PBGC contained herein shall be true and correct in all material respects; and (b) There shall not exist any judgment, order, injunction or other restraint precluding the consummation of, or materially affecting the rights, obligations or performance of any of the parties with respect to, the transactions contemplated by this Agreement. Section 7.2. CONDITIONS TO OBLIGATIONS OF THE PBGC. The obligations of the PBGC under this Agreement are subject to the satisfaction (or waiver by the PBGC) of the following conditions: 27 32 (a) On the date hereof, (i) there shall exist no Default or Event of Default under this Agreement or under the Original Agreement, and (ii) all representations and warranties of LTV and each member of the LTV Controlled Group contained herein shall be true and correct in all material respects; and (b) There shall not exist any judgment, order, injunction or other restraint precluding the consummation of, or materially affecting the rights, obligations or performance of any of the parties with respect to, the transactions contemplated by this Agreement. ARTICLE VIII GENERAL PROVISIONS Section 8.1. ENTIRE AGREEMENT. This Agreement and the Transaction Agreement contain the entire and exclusive agreement and understanding of the parties and supersede all prior agreements, understandings, commitments and proposals, oral or written, between the parties relating to the subject matter hereof, and no other agreement or understanding exists except as expressly set forth herein. The parties agree that should a court be called upon to interpret any provision of this Agreement, previous drafts shall not be used by any party in any manner to support its interpretation of the meaning of this Agreement. Each party and counsel for each party hereto have reviewed this Agreement and have participated in its drafting and, accordingly, no party shall attempt to invoke the normal rule of construction to the effect that ambiguities are to be 28 33 resolved against the drafting party in any interpretation of this Agreement. Section 8.2. GOVERNING LAW AND JURISDICTION. (a) This Agreement shall be interpreted in accordance with and governed by the law of the State of New York, except to the extent preempted by Federal law. (b) Each member of the LTV Controlled Group hereby irrevocably appoints LTV as its agent for service of process in respect of any action or proceeding with respect to any dispute arising under or pertaining to this Agreement. (c) Any lawsuit or claim arising under or relating to this Agreement shall be brought in a United States District Court of competent jurisdiction. Section 8.3. MODIFICATIONS. This Agreement (excluding the Original RPSOs and New RPSOs) may be waived, modified or amended only pursuant to a written agreement entered into by the PBGC and LTV, and such waiver, modification or amendment shall not require the concurrence, approval or consent of any other Person, whether or not such Person has or claims any rights or obligations hereunder, express or implied, by agreement or at law or in equity. Section 8.4. AUTHORITY. Each member of the LTV Controlled Group hereby warrants and represents that (a) it is a duly organized and validly existing corporation or other entity and is in good standing under the laws of the jurisdiction in which it is incorporated or organized, (b) it has all requisite 29 34 power and authority to execute, deliver and perform this Agreement and each other agreement or instrument contemplated hereby to which it is or will be a party or by which it or any of its property is bound, (c) the execution and delivery of this Agreement by it has been duly authorized by all necessary corporate or other action and the performance by it of this Agreement and each other agreement or instrument contemplated hereby have been duly authorized by all requisite action by it and (d) this Agreement has been duly executed and delivered and constitutes a legal, valid and binding obligation of each Person in the LTV Controlled Group in accordance with its terms, and each other agreement or instrument contemplated hereby will constitute, a legal, valid and binding obligation of each Person in the LTV Controlled Group, in each case in accordance with its respective terms. The PBGC hereby warrants and represents that it has authority to sign this Agreement and that all necessary corporate or other appropriate action has been taken to cause it to possess such authority. Section 8.5. NOTICES. Any notice, consent, approval or other communication required or permitted under this Agreement shall be in writing and shall be delivered by hand or overnight courier service, sent by telefacsimile transmission or other wire transmission (with request for assurance of receipt in a manner customary for communications of such respective type), or by certified or registered mail, postage prepaid, and shall be deemed duly given when so delivered or sent by telefacsimile 30 35 transmission or if sent by overnight courier service, on the first Business Day after dispatch by overnight courier, or if sent by certified or registered mail, five Business Days after the date of dispatch to the following respective addressees at the address or telefacsimile number set forth below: To LTV and members of the LTV Controlled Group: The LTV Corporation 200 Public Square Cleveland, Ohio 44114 Attention: General Counsel Telefacsimile No.: (216) 622-5688 To the PBGC: Chief Negotiator Pension Benefit Guaranty Corporation Suite 270 1200 K Street, N.W. Washington, D.C. 20005 Telefacsimile No.: (202) 842-2643 with copies to: General Counsel Pension Benefit Guaranty Corporation 1200 K Street, N.W. Washington, D.C. 20005 Telefacsimile No.: (202) 326-4112 or to such other Persons or addresses as any Person entitled to notice hereunder may from time to time designate by notice in accordance with this Section 8.5 to the other party or parties. If the effective date of notice shall fall upon a day that is not a Business Day, notice shall not be deemed effective until the next Business Day. 31 36 Section 8.6. NO WAIVER. No failure of any party to this Agreement to enforce at any time any of the provisions of this Agreement or to exercise any option under this Agreement and no course of dealing between or among any member of the LTV Controlled Group and the PBGC shall be construed to be a waiver of any such provision or option, or shall in any way affect the validity of this Agreement or the right of any party to enforce each and every one of its provisions or options. Section 8.7. BENEFITS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. This Agreement shall also be binding upon and inure to the benefit of any permitted purchaser of all or substantially all of the assets of LTV or any member of the LTV Controlled Group. Notwithstanding the foregoing, neither LTV nor any member of the LTV Controlled Group shall have the right to assign any of its rights hereunder or interest herein or delegate any obligation hereunder without the prior written consent of the PBGC. Wherever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to refer to and include the permitted successors and assigns of such party, and all covenants, promises and agreements by or on behalf of any party that are contained in this Agreement shall bind and inure to the benefit of their respective permitted successors and assigns. Section 8.8. EXECUTION. This Agreement may be executed in any number of identical counterparts, each of which 32 37 shall be an original as against the party who signed it, and all of which together shall constitute one and the same instrument. No party to this Agreement shall be bound by this Agreement until a counterpart has been executed by or on behalf of each party hereto. Section 8.9. CAPTIONS. The captions to the several Articles and Sections of this Agreement and the table of contents have been inserted for convenience of reference only and shall not in any way affect the meaning or construction of any provision of this Agreement. Section 8.10. SEVERABILITY. Any provision of this Agreement that shall be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 8.11. SURVIVAL. The obligations, agreements, indemnities, representations, and warranties contained in this Agreement shall not be affected by and shall survive and shall continue in effect following the execution and delivery of this Agreement, and shall be and continue in effect notwithstanding any waiver of compliance with any of the terms, provisions, or conditions of this Agreement. Section 8.12. TERMINATION. This Agreement shall terminate on the earlier of the Investment Grade Date or January 16, 2021. 33 38 ARTICLE IX REPRESENTATIONS AND WARRANTIES Section 9.1. GENERAL REPRESENTATIONS AND WARRANTIES. LTV and each of the members of the LTV Controlled Group represents and warrants to the PBGC, and the PBGC represents and warrants to LTV and each of the members of the LTV Controlled Group, that it has full power and authority to enter into this Agreement and that this Agreement constitutes a legal, valid, and binding obligation of LTV and each of the members of the LTV Controlled Group or the PBGC, as the case may be, enforceable against LTV and each of the members of the LTV Controlled Group or the PBGC, as the case may be, in accordance with its terms. Section 9.2. ADDITIONAL LTV REPRESENTATIONS AND WARRANTIES. Each Person in the LTV Controlled Group represents and warrants to the PBGC that: (a) NO VIOLATION. As of the date of this Agreement, none of the execution, delivery or performance by each Person in the LTV Controlled Group of this Agreement or any other agreement or instrument contemplated hereby (i) will violate (A) any provision of Applicable Law, or the certificate of incorporation or bylaws (or similar governing documents) of such Person or (B) any indenture, agreement or other instrument to which any Person in the LTV Controlled Group is a party or by which such Person or any of such Person's property is bound, (ii) will conflict with or result in a breach of any of the terms, 34 39 covenants, conditions or provisions of any such indenture, agreement or instrument, or constitute (with notice or lapse of time or both) a default thereunder, or result in the creation or imposition of (or the obligation to create or impose) any lien upon any property or assets of any member of the LTV Controlled Group pursuant to any such indenture, agreement or other instrument. (b) TRUE AND COMPLETE DISCLOSURE, NO MATERIAL MISSTATEMENTS. All factual information provided herein or heretofore provided in connection with this Agreement was true and accurate in all material respects on the date as of which such information was dated or certified. (c) PERSONS UNDER COMMON CONTROL. The Persons listed on the execution page hereof as the members of the LTV Controlled Group constitute all of the Persons who, as of the date of this Agreement, are under common control with LTV within the meaning of section 4001(b)(1) of ERISA and sections 414(b)-(c) of the IRC. ARTICLE X ADDITIONAL COVENANTS AND AGREEMENTS Section 10.1. FURTHER ASSURANCES. Each of the parties to this Agreement agrees to execute any and all further documents, agreements and instruments, and take all further action, which may be required under Applicable Law, or which another party may reasonably request in order to effectuate the transactions contemplated hereby. 35 40 Section 10.2. INFORMATION COVENANTS. LTV will furnish to the PBGC the following data, which the PBGC will treat in the manner provided in Section 10.5: (a) ANNUAL CERTIFICATE BY PUBLIC ACCOUNTING FIRM. Within 105 days after the close of each fiscal year of LTV, a certificate of an independent certified public accounting firm of recognized national standing stating that in the course of its regular audit of the business of LTV, which audit was conducted in accordance with generally accepted auditing standards, after review of this Agreement, such accounting firm has obtained no knowledge of any Default or Event of Default (including, without limitation, one with respect to the financial covenants contained herein) which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature and period of existence thereof, all of the foregoing to be in form and substance satisfactory to the PBGC. (b) ANNUAL OFFICER'S CERTIFICATE. At the time of the delivery of the certificate provided for in clause (a) above, a certificate of the chief financial officer, controller, chief accounting officer or other Authorized Officer of LTV to the effect that no Default resulting from a failure to comply with any of the provisions of Sections 3.3, 6.1, 6.2, 10.3, 10.4 or to make the due and punctual payment of any contribution required by the Original RPSOs or the New RPSOs, or Event of Default exists or, if any such Default or Event of Default does exist, specifying the nature and extent thereof. 36 41 (c) NOTICE OF DEFAULT, EVENT OF DEFAULT OR LITIGATION. Promptly, and in any event within five days after any member of the LTV Consolidated Group obtains knowledge thereof, notice of (i) the occurrence of any condition or event which constitutes a Default resulting from a failure to comply with any of the provisions of Sections 3.3, 6.1, 6.2, 10.3, or 10.4, or to make the due and punctual payment of any contribution required by the Original RPSOs or the New RPSOs, or an Event of Default, which notice shall, in each case, specify the nature thereof, the period of existence thereof and what action LTV (or such member) proposes to take with respect thereto, and (ii) any litigation or governmental proceeding pending against any member of the LTV Consolidated Group which is likely to have a material adverse effect on the business, properties, assets, condition (financial or otherwise) or prospects of the LTV Consolidated Group taken as a whole or the ability of the LTV Consolidated Group to perform its obligations hereunder. (d) AUDITORS' REPORTS. Promptly upon receipt thereof, a copy of each other report or "management letter" submitted to LTV by their independent accountants in connection with any annual audit made by them of the books of the LTV Consolidated Group. (e) ACTUARIAL VALUATION REPORTS; IRS FORM 5500. (i) As soon as delivered to LTV following completion by the actuary for a Restored Plan, the annual actuarial valuation report required pursuant to IRC section 412(c)(9) and the rules 37 42 and regulations promulgated thereunder for such Restored Plan, (ii) when filed with the IRS, (A) IRS Form 5500 filings (together with all attachments) for the Restored Plans, (B) funding waiver requests with respect to any of the Restored Plans, and (C) notification of any spin-off, merger or change of Plan Sponsor with respect to any of the Restored Plans, (iii) notification ten days prior to the adoption of any amendment to any of the Restored Plans and (iv) as soon as reasonably practicable, a quarterly statement of the assets of each Restored Plan. (e) OTHER INFORMATION. Promptly upon transmission thereof, copies of any filings and registrations with the SEC by any member of the LTV Consolidated Group and copies of all financial statements, proxy statements, notices and reports as LTV shall send to its security holders and, with reasonable promptness, such other information or document (financial or otherwise) as the PBGC may reasonably request from time to time. Section 10.3. SENIOR DEBT NEGATIVE COVENANTS. (a) INCORPORATION OF CERTAIN SENIOR DEBT NEGATIVE COVENANTS. LTV and each Applicable Member (as defined hereinafter) of the LTV Controlled Group covenants and agrees with the PBGC that, on and after the date this Agreement is executed, and so long as this Section 10.3(a) shall remain in effect, LTV and each such Applicable Member shall be bound under this Agreement by the terms of the Senior Debt Negative Covenants (as defined hereinafter) to the same extent as if such covenants 38 43 (along with all definitions pertaining to them) were set out herein in full. For purposes hereof: "Senior Debt Negative Covenants" means the negative covenants set out in Section 4.05 (Limitation on Debt and Restricted Subsidiary Preferred Stock), Section 4.07 (Limitation on Liens), and Section 4.13 (Limitation on Sale and Leaseback Transactions) of the Indenture dated as of September 22, 1997, among LTV, LTV Steel Company, Inc. as Guarantor, and The Chase Manhattan Bank, as Trustee (the "Indenture"), as such negative covenants may be modified, amended, or supplemented from time to time. "Senior Notes" means the 8.20% Senior Notes issued by LTV pursuant to the Indenture. "Applicable Member" means each member of the LTV Controlled Group to whom the Senior Debt Negative Covenants apply. (b) EXPIRATION OF SENIOR DEBT NEGATIVE COVENANTS. The provisions of Section 10.3(a) shall expire upon the repayment in full of the Senior Notes, PROVIDED, HOWEVER, that if the Senior Notes are repaid by the proceeds of new debt incurred by LTV (or "deemed repaid by the proceeds of new debt," as defined below), the limitations (if any) on debt, liens, and sale and leaseback transactions applicable to such new debt (as such limitations may be modified, amended, or supplemented from time to time) shall replace the Senior Debt Negative Covenants for 39 44 purposes of this Agreement from and after the date of such repayment and LTV and each Applicable Member of the LTV Controlled Group shall be bound by such replacement covenants for so long as any portion of such new debt remains outstanding; and PROVIDED, FURTHER, that if such new debt is Credit-Enhanced Debt (as defined below) and if the limitations on debt, liens, and sale and leaseback transactions applicable to such Credit-Enhanced Debt are more favorable to LTV or the Applicable Members of the LTV Controlled Group than the Senior Debt Negative Covenants, the Senior Debt Negative Covenants shall not be replaced by the new covenants but shall instead remain in effect for purposes of this Agreement. For purposes hereof - (1) the Senior Notes shall be "deemed repaid by the proceeds of new debt" if, within 180 days (before or after) repayment of the Senior Notes, LTV or any member of the LTV Controlled Group incurs new debt (other than debt incurred under LTV's Working Capital Facilities, as defined below) whose aggregate principal amount is equal to or greater than the greater of (x) $15 million and (y) 25% of the amount outstanding on the Senior Notes 180 days before such repayment. 40 45 (2) Any repayment (or deemed repayment) of the Senior Notes by the proceeds of new debt incurred by LTV shall be construed to have occurred as of the date that the Senior Notes were actually repaid (not the date of such debt incurrence, if different). (3) the determination of whether the limitations on debt, liens, and sale and leaseback transactions applicable to Credit-Enhanced Debt are more favorable to LTV or the Applicable Members of the LTV Controlled Group than the Senior Debt Negative Covenants shall be made in good faith by LTV and shall be communicated in writing to PBGC at least 14 days before LTV incurs such Credit-Enhanced Debt. (4) "Credit-Enhanced Debt" means debt that is secured or guaranteed by a pledge of collateral (other than accounts receivable, inventory, and insurance proceeds or other property incidental to accounts receivable or inventory), a letter of credit, the guaranty of a person not then a member of the LTV Controlled Group, or similar means. (5) "Working Capital Facilities" means debt facilities secured or guarantied primarily by a pledge of the inventory, accounts receivable, proceeds of inventory or accounts receivable, or any combination thereof, of one or more members of the LTV Controlled Group. 41 46 Expiration or replacement of any replacement covenants shall be governed, MUTATIS MUTANDIS, by the foregoing provisions. Thus, for example, if the Senior Notes are repaid by new debt and the covenants on debt, liens, and sale and leaseback transactions applicable to such new debt replace the Senior Debt Negative Covenants, the replacement covenants will expire upon the repayment in full of the new debt, but if the new debt is later repaid (or deemed repaid) by the proceeds of other new debt, the covenants on debt, liens, and sale and leaseback transactions applicable to that other new debt will replace the former covenants, and so on for any successive iterations. The incurrence of new Credit-Enhanced Debt by LTV to repay the Senior Notes (including any deemed repayment as defined in paragraph (1) above) shall be permissible only if the aggregate amount of such Credit-Enhanced Debt was permitted under the covenants as they existed under this Agreement immediately before repayment of the Senior Notes. For purposes of this paragraph, "Senior Notes" means the Senior Notes or any debt that has replaced the Senior Notes as provided above in this Section 10.3(b). (c) NOTICE OF EXPIRATION OR REPLACEMENT OF SENIOR DEBT NEGATIVE COVENANTS. LTV shall promptly notify the PBGC in writing of any modification of the Senior Debt Negative Covenants, the expiration of the Senior Debt Negative Covenants, any replacement of the Senior Debt Negative Covenants as provided 42 47 in Section 10.3(b) above, and the modification, expiration or replacement of any such replacement covenants, PROVIDED, HOWEVER, the failure of LTV to provide such notice shall not affect the modification, expiration or replacement of the Senior Debt Negative Covenants or any replacements thereof. Section 10.4. ADDITIONAL NEGATIVE COVENANTS. Each member of the LTV Controlled Group covenants and agrees with the PBGC that, on and after the date this Agreement is executed, and so long as this Agreement shall remain in effect, unless the PBGC shall otherwise consent in writing, no member of the LTV Consolidated Group shall: (a) TRANSACTIONS WITH AFFILIATES. Enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any Affiliate which is not a member of the LTV Controlled Group or a direct or indirect wholly-owned Subsidiary of LTV, other than on terms and conditions substantially as favorable to LTV as would be obtainable by LTV at the time in a comparable arm's-length transaction with a Person other than such an Affiliate; PROVIDED, that the foregoing restrictions shall not apply to customary fees paid to members of the Board of Directors of LTV or to transactions with joint ventures with third-party participants either (i) existing on the date of this Agreement or (ii) hereafter entered into on terms no more favorable to the third-party participants therein than the terms applicable to the third-party participants in such joint ventures existing on the 43 48 date of this Agreement; and PROVIDED FURTHER, that this Section 10.4(a) shall not apply to any transaction or series of transactions contemplated by or in accordance with the Supply and Marketing Agreement, the Services Agreement or the Administrative Services Agreement (each as defined in the Trico Transaction Agreement and each as in effect on May 2, 1995). (b) RESTRICTIVE AGREEMENTS. Enter into any indenture, agreement, instrument or other arrangement which, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or by its terms imposes materially adverse conditions upon, the performance by any member of the LTV Consolidated Group of any of the terms or conditions of this Agreement or any other agreement or instrument contemplated hereunder to which such Person is a party or is bound; PROVIDED, that this provision shall not be violated by the execution and delivery of, or performance under, the Trico Transaction Documents (or any amendments, modifications or supplements thereof to the extent permitted under the definition of "Trico Transaction Documents") or the Trico Subordination and Standstill Agreement, which is incorporated in this Agreement by reference as if set forth fully herein, any financing arrangement otherwise permitted by the terms of this Agreement, or the Settlement Agreement dated as of September 10, 1992 with the United Steelworkers of America, AFL-CIO-CLC (the "United Steelworkers"), the Collateral Trust Agreement dated as of May 25, 1993 among LTV, LTV Steel, the United Steelworkers and Bank 44 49 One Ohio Trust Co., N.A., as Collateral Trustee, and the Open-End Mortgage, Security Agreement and Fixture Filing dated June 28, 1993 by LTV Steel, as Mortgagor, and Bank One Ohio Trust Co., N.A., as Mortgagee (in the respective forms theretofore approved by the PBGC). (c) LIMIT ON INVESTMENTS IN TRICO. At any time after May 2, 1995 make any capital contribution to or equity investment in (each such capital contribution or equity investment being a "Trico Equity Investment"), or loan or advance to (each such loan or advance, a "Trico Loan"; a Trico Loan or a Trico Equity Investment being referred to herein as a "Trico Investment"), the Trico Joint Venture or Trico Sales Co. if, after giving effect to such Trico Investment, (i) the aggregate amount of such Trico Investments then outstanding (net of equity distributions) would exceed $300 million, (ii) the aggregate amount of such Trico Equity Investments then outstanding (net of equity distributions) would exceed $250 million, or (iii) the aggregate amount of such Trico Equity Investments then outstanding (net of equity distributions) would exceed $200 million and the Trico Equity Investment in question would not, to the extent of such excess amount, be applied by the Trico Joint Venture in respect of capital expenditures. Section 10.5. CONFIDENTIALITY. The PBGC will use reasonable efforts to hold, and to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial 45 50 or administrative process or by other requirements of law, all confidential documents and information concerning LTV, the LTV Consolidated Group and the LTV Controlled Group furnished to it as contemplated by this Agreement and marked as confidential, proprietary or trade secret, except to the extent that such information was (i) previously known on a nonconfidential basis by the PBGC (or other Person covered by this provision), (ii) in the public domain through no fault of the PBGC (or such other Person) or (iii) later lawfully acquired by the PBGC (or such other Person) from sources other than LTV, the LTV Consolidated Group or the LTV Controlled Group; PROVIDED, that the PBGC may disclose such information to its officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with the operation of this Agreement so long as such Persons are informed by the PBGC of the confidential nature of such information and are directed by the PBGC to treat such information confidentially. The PBGC's obligation to hold any such information in confidence or cause such information to be held in confidence shall be satisfied if it exercises the same care with respect to such information as it would take to preserve the confidentiality of its own similar information. All information which, in LTV's judgment, constitutes confidential information which is received by the PBGC pursuant to the provisions of this Agreement and marked as confidential, proprietary or trade secret shall be treated by the PBGC as exempt from disclosure under the Freedom of Information Act, 5 46 51 U.S.C. section 552 ("FOIA"), pursuant to the exemptions thereto, including, without limitation, the exemptions contained in 5 U.S.C. section 552(b)(4) for confidential commercial and financial information and information received pursuant to an agreement of confidentiality to the extent that such exemptions apply to such information at the time a request under FOIA for disclosure of such information is received by the PBGC. ARTICLE XI EVENTS OF DEFAULT The following events shall, if occurring after the date hereof or if occurring prior to the date hereof and continuing after the date hereof, constitute events of default ("Events of Default") whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body: (a) CONTRIBUTIONS AND PAYMENTS. There shall be a default in the due and punctual payment of any contribution required by Section 3.3, the Original RPSs or the New RPSs; or (b) REPRESENTATIONS, ETC. Any representation, warranty, or statement of any member of the Initial LTV Group or the LTV Controlled Group made in this Agreement shall prove to have been false or misleading in any material respect when so made or furnished and such misrepresentation shall be material at the time of discovery thereof and shall remain uncured; or any 47 52 representation, warranty, statement or information of any member of the LTV Controlled Group contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to this Agreement shall prove to have been knowingly false or misleading in any material respect when so made or furnished; or (c) SPECIAL AGREEMENTS. Any member of the LTV Controlled Group shall fail to perform or observe any term, covenant, condition or agreement to be performed or observed by it under Section 6.1 or 6.2, and such failure shall continue unremedied for a period of ten days after written notice thereof from the PBGC to LTV; or (d) COVENANTS. Any member of the LTV Controlled Group shall fail to perform or observe any other term, covenant, condition or agreement to be performed or observed by it hereunder, and such failure shall continue unremedied for a period of thirty days after written notice thereof from the PBGC to LTV; or (e) DEFAULT UNDER OTHER AGREEMENTS. Any member of the LTV Controlled Group shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $100,000,000, when and as the same shall become due and payable (as scheduled or by acceleration, mandatory prepayment or otherwise), beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (ii) fail 48 53 to observe or perform any other term, covenant, condition or agreement relating to any such Indebtedness or contained in (or any default or event of default shall occur under) any instrument or agreement evidencing, securing or relating thereto, if the effect of any such failure referred to in this clause (ii) is to cause any such Indebtedness to become due or mandatorily required to be prepaid prior to its stated maturity; or (f) INVOLUNTARY BANKRUPTCY, ETC. An involuntary case or other proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of LTV or LTV Steel, or of a substantial part of the property or assets of LTV or LTV Steel, under the Bankruptcy Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, whether now or hereafter in effect, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for LTV or LTV Steel or for a substantial part of the property or assets of LTV or LTV Steel or (iii) the winding-up or liquidation of LTV or LTV Steel; and such proceeding or petition is not controverted within fifteen days or shall continue undismissed for ninety days, after commencement of the case; or an order or decree approving or ordering any of the foregoing shall be entered; or (g) VOLUNTARY BANKRUPTCY, ETC. LTV or LTV Steel shall (i) voluntarily commence any proceeding or file any petition seeking relief under the Bankruptcy Code, as now 49 54 constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, whether now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner in the sole opinion of the PBGC, any proceeding or the filing of any petition described in paragraph (f) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for LTV or LTV Steel or for a substantial part of the property or assets of LTV or LTV Steel, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors (vi) become unable, admit in writing its inability, or fail generally to pay its debts as they become due or (vii) take any action for the purposes of effecting any of the foregoing; or (h) JUDGMENTS. One or more judgments, orders or decrees for the payment of money in excess of $100,000,000 in the aggregate (to the extent not paid or fully covered by insurance provided by a carrier that has acknowledged coverage) shall be rendered against any one or more members of the LTV Consolidated Group and the same shall not have been vacated, discharged, stayed or bonded pending appeal for a period of thirty consecutive days from the entry thereof; or (i) VALIDITY OF THIS AGREEMENT. Any member of the LTV Controlled Group or the LTV Consolidated Group shall assert for any reason that this Agreement is not a legal, valid 50 55 and binding obligation of the respective parties hereto, enforceable in accordance with its terms. ARTICLE XII REMEDIES Section 12.1. ACKNOWLEDGMENT. To the fullest extent permitted by Applicable Law, the PBGC shall have the right to enforce the provisions of this Agreement through any and all of the remedies provided in Section 12.2 or otherwise available at law or in equity. Section 12.2. REMEDIES OF THE PBGC. Upon the occurrence of any Event of Default, and at any time thereafter so long as the same shall be continuing, the PBGC may, at its option, take any or all of the following actions as the PBGC in its sole discretion shall determine: (a) The PBGC may apply for an order requiring performance, whether for the specific performance of any term or agreement hereof or for an injunction against the violation of any of the terms or provisions hereof or for an appropriate show cause order, it being agreed that a remedy of money damages shall be inadequate because the failure of LTV to comply strictly with the terms hereof would cause irreparable injury to the PBGC and the Restored Plans; (b) The PBGC may proceed to enforce its rights by any other action, suit, remedy or proceeding authorized or permitted by this Agreement or by law or by equity; (c) In addition to all amounts unpaid which are 51 56 due hereunder, the Plan Sponsor shall, upon written demand of the PBGC, pay to the applicable Restored Plan, as liquidated damages for the PBGC's loss of a bargain and not as a penalty, in the case of an Event of Default under paragraph (a) of Article XI, an amount equal to the sum of (A) interest on the unpaid amount (at the rate specified in 29 C.F.R. section 4062.7 or its successor rate), PLUS (B) the greater of (x) interest on the unpaid amount (at the rate specified in 29 C.F.R. section 4062.7 or its successor rate), or (y) an amount equal to 20% of the unpaid amount (it being understood that any liquidated damages payable under this subsection (c) shall constitute pension contributions for all purposes of this Agreement); (d) The PBGC may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have its claims or claims of the Restored Plans asserted or upheld in any bankruptcy, receivership or other judicial proceedings; (e) The PBGC may proceed by appropriate court action to recover damages to itself or to the Restored Plans, as applicable, for the breach hereof; (f) The PBGC may, subject to the provisions of Applicable Law, modify the Original RPSOs or the New RPSOs to protect the Restored Plans from such Event of Default and the consequences or potential consequences thereof and to prevent future liability of the PBGC resulting from the failure of any member of the LTV Controlled Group to make such payments or 52 57 contributions to the Restored Plans; (g) The PBGC may, by notice to LTV, rescind or terminate this Agreement and exercise its rights under Applicable Law; and/or (g) The PBGC may exercise any other right or remedy that may be available to it under Applicable Law. Section 12.3. FEES AND EXPENSES. LTV shall pay to the PBGC all reasonable fees and expenses (including, without limitation, fees of its attorneys and financial experts or advisors) incurred by the PBGC in connection with the exercise of any of the remedies hereunder following the occurrences of (i) an Event of Default under paragraph (a) of Article XI or (ii) an Event of Default under paragraph (c) or (d) of Article XI resulting from a failure to comply with Section 6.1, 6.2, 10.3 or 10.4 hereof, unless, with respect to the period with respect to which such failure to comply occurred, the accounting firm has delivered the statement as to the absence of knowledge of any Event of Default at the time specified in and otherwise in accordance with the provisions of Section 10.2(a). Section 12.4. SURVIVAL OF LTV'S OBLIGATIONS. No exercise of any remedy under this Article XII shall, except as specifically provided herein, relieve LTV or any member of the LTV Controlled Group of any of its liabilities and obligations hereunder, all of which shall survive any such exercise of remedy. Section 12.5. REMEDIES CUMULATIVE. To the extent 53 58 permitted by, and subject to the mandatory requirements of, Applicable Law, each and every right, power and remedy herein specifically given to the PBGC in this Agreement shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, ordinance or regulation, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by the PBGC, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any right, power or remedy. No delay or omission by the PBGC in the exercise of any right, power or remedy or in the pursuit of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of LTV, members of the LTV Controlled Group or members of the LTV Consolidated Group or to be an acquiescence therein. No express or implied waiver by the PBGC of any Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. To the fullest extent permitted by Applicable Law, LTV, the members of the LTV Consolidated Group and the members of the LTV Controlled Group hereby waive any rights now or hereafter conferred by statute or otherwise that may limit or modify any of the rights or remedies of the PBGC under this Article. IN WITNESS WHEREOF, the parties to this Agreement 54 59 have caused this Agreement to be duly executed and delivered by their respective duly authorized officers or representatives as of the day and year first written above. PENSION BENEFIT GUARANTY CORPORATION By: /s/ Joseph H. Grant ----------------------------------- Title: Deputy Executive Director & COO ------------------------------- Date: 12/2/98 -------------------------------- THE LTV CORPORATION, on behalf of itself and the LTV Controlled Group listed below By: /s/ ----------------------------------- Title: Executive VP & CFO ------------------------------- Date: 12/2/98 -------------------------------- MEMBERS OF LTV CONTROLLED GROUP: Georgia Tubing Corporation Investment Bankers, Inc. Inmobiliaria Nueva Icacos, S.A. de C.V. Jalcite I, Inc. Jones & Laughlin Steel Incorporated Kingsley International Insurance Ltd. LTV Blanking Corporation LTV Corporation, The (Wyoming) LTV/EGL Holding Company LTV Electro-Galvanizing, Inc. LTVGT, Inc. (f/k/a Varco-Pruden, Inc.) 55 60 LTVGT International, Inc. (f/k/a LTV Holdings,Inc.) Reomar, Inc. Chateaugay Corporation Republic Buildings Corporation LTV International N.V. LTV Properties, Inc. LTV Sales Finance Company LTV Steel Company, Inc. Aliquippa and Southern Railroad Company Cayman Mineracao do Brasil Ltda Chicago Short Line Railway Company Crystalane, Inc. Cuyahoga Valley Railway Company, The Mahoning Valley Railway Company, The Dearborn Leasing Company Erie B Corporation Erie I Corporation Fox Trail, Inc. J&L Empire, Inc. Jalcite II, Inc. Jalore Mining Company, Ltd. LTV Pickle, Inc. LTV Steel Products, L.L.C. Monongahela Connecting Railroad Company, The Nemacolin Mines Corporation Republic Technology Corporation River Terminal Railway Company, The Youngstown Erie Corporation YST Erie Corporation LTV Steel de Mexico, Ltd. LTV-Trico, Inc. RepSteel Overseas Finance N.V. Trico Steel Company, Inc. VP Buildings, Inc. (f/k/a VP Acquisition Company) Varco Pruden International de Chile Limitada Varco-Pruden Exports, Ltd. Varco Pruden International, Inc. (f/k/a Buildings International Company) VP Buildings-Wisconsin, Inc. Bethel Real Estate Co., Inc. United Panel, Inc. 56 EX-10.51 3 EXHIBIT 10.51 1 EXHIBIT 10.51 EMPLOYMENT, RETIREMENT AND NON-COMPETITION AGREEMENT ---------------------------------------------------- THIS EMPLOYMENT, RETIREMENT AND NON-COMPETITION AGREEMENT (this "Agreement") is made and entered into this 28th day of December, 1998, by and between THE LTV CORPORATION, a Delaware corporation (the "Company," a term which in this Agreement shall include its predecessors, parents, subsidiaries, divisions, related or affiliated companies, officers, directors, stockholders, members, employees, heirs, successors, assigns, representatives, agents and counsel, unless the context otherwise clearly requires), and DAVID H. HOAG, ("Executive"), WITNESSETH: ----------- WHEREAS, Executive is an employee and director of the Company and currently serves as Chairman of the Board of Directors of the Company; WHEREAS, Executive voluntarily relinquished his position as Chief Executive Officer of the Company on September 1, 1998, remains as Chairman, and the Company and Executive have determined that Executive shall resign as a director of the Company effective January 31, 1999, and shall retire as an employee of the Company effective February 1, 1999: WHEREAS, the Company wants to ensure that Executive will protect Confidential Information (as hereinafter defined) and will not use his knowledge and experience during the Non-Compete Period (as hereinafter defined) to assist a competitor of the Company's business (as set forth on Exhibit B); and WHEREAS, the Company and Executive desire to make provision for the payments and benefits that Executive will be entitled to receive from the Company in consideration for Executive's obligations and actions under this Agreement and in connection with such retirement; NOW, THEREFORE, in consideration of the premises and the promises and agreements contained herein and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, and intending to be legally bound, the Company and Executive agree as follows: 1. EFFECTIVE DATE OF AGREEMENT. This Agreement is effective on December 28, 1998 (the "Effective Date") and shall continue in effect as provided herein. 2. EMPLOYMENT. Commencing on the date hereof, Executive's employment shall continue through January 31, 1999 (the "Employment Term"), subject to the provisions hereof. 2 3. DUTIES DURING EMPLOYMENT TERM. Executive's principal duties and authority after the date hereof during the Employment Term will be to serve as Chairman of the Board of Directors of the Company and as an advisor to the Chief Executive Officer of the Company. 4. COMPENSATION DURING EMPLOYMENT TERM. During the Employment Term, the Company shall (a) continue to pay Executive an annualized base salary at the level thereof on the Effective Date in accordance with the Company's regular payroll practices; (b) continue Executive's eligibility for a 1998 bonus under the Company's Annual Incentive Program ("AIP"), to be determined by the Compensation and Organization Committee of the Board of Directors of the Company in accordance with prior practice; and (c) continue to permit Executive to participate in the Company's medical and life insurance programs, and other plans, programs and perquisites appropriate for his position and status as if he remained chief executive officer of the Company, on the same basis that Executive has participated in such plans, programs and perquisites, until the end of the Employment Term. 5. RESIGNATION AND RETIREMENT. (a) Executive hereby (i) effective February 1, 1999 (the "Retirement Date") resigns and retires as an employee of the Company, and, (ii) to the extent not previously accomplished, (A) resigns from all boards and offices of any entity that is a subsidiary of or is otherwise related to or affiliated with the Company, (B) resigns from all administrative, fiduciary or other positions he may hold or have held with respect to arrangements or plans for, of or relating to the Company, and (C) agrees to resign from any nonprofit positions related to his services to the Company as the Company may request. The Company hereby consents to and accepts said resignations, and the Company records shall so reflect. (b) The Company and Executive agree that Executive shall resign as a member of the Company's Board of Directors on January 31, 1999. (c) Upon his retirement, Executive shall be entitled to retirement benefits under plans of the Company in accordance with their terms. 6. CERTAIN BENEFITS. In consideration of the promises of Executive in this Agreement, including without limitation Paragraph 9 hereof: -2- 3 (a) LONG-TERM INCENTIVE PLAN. If Executive remains in the continuous employ of the Company through January 31, 1999, then, as of such date, or, if earlier, upon his death or termination by the Company without Cause, (i) the restrictions on the 8,600 shares of Restricted Stock awarded to Executive on October 27, 1994 pursuant to the terms of the Company's Management Incentive Plan (such plan, as originally adopted, and as amended and restated and approved by the stockholders of the Company on April 24, 1997, shall be referred to as the "MIP"), shall lapse; (ii) all options to acquire Common Stock of the Company ("Options") granted pursuant to the MIP to Executive on or before January 31, 1999, shall become exercisable to the extent not previously exercisable; (iii) for purposes of the 28,000 Performance Shares awarded to Executive pursuant to the MIP on April 25, 1997, and the 28,000 Performance Shares awarded to Executive pursuant to the MIP on February 26, 1998, Executive shall be treated as having voluntarily terminated employment with the Company after attaining age 62; provided, however, that payment with respect to such Performance Shares will be made following the end of the respective performance periods specified in such awards and will reflect actual performance of the Company during the respective performance periods set forth therein; (iv) the restrictions on the 1,500 shares of Restricted Stock awarded under the Management Stock Acquisition Program ("MSAP") portion of the MIP plus any reinvested dividends shall lapse; (v) the restrictions on the 4,097 matching shares awarded under the MSAP plus any reinvested dividends shall lapse; (vi) the restrictions on matching shares (if any) resulting from Executive's deferral of a portion of his bonus for 1998 under the Annual Incentive Program ("AIP") portion of the MIP plus any reinvested dividends shall lapse; and (vii) Executive's retirement shall be an early retirement approved by the Compensation and Organization Committee of the Board of Directors of the Company for purposes of the MIP. This Section 6(a) shall, without additional actions by the Company and Executive, be deemed to amend each agreement granting options or awarding restricted stock or performance shares under -3- 4 the MIP and referred to in this Section 6(a) to Executive to the extent necessary to implement the foregoing. (b) For purposes of this Section 4, (i) "Cause" shall mean (A) the willful and continued failure by Executive to perform substantially the duties of his position as Chairman and (B) the willful engaging by Executive in conduct which is demonstrably injurious to the Company or an Affiliate; and (ii) "Affiliate" shall mean a corporation, partnership, joint venture, unincorporated association or other entity in which the Company has a direct or indirect ownership or other equity interest. (c) ESTATE ENHANCEMENT PROGRAM. At the election of Executive on or before January 31, 1999, the Company will enter into agreements mutually agreeable to Executive and the Company that implement an "estate enhancement program" for Executive. Under such program, Executive shall relinquish some or all of the payments which may become due to him pursuant to Paragraph 9(f) of this Agreement in exchange for (i) the payment by the Company of premiums on a split-dollar life insurance policy to be owned by a trust created by Executive and assigned as collateral to the Company, and (ii) upon the death of the later to die of Executive and his spouse, a charitable contribution by the Company honoring the name of Executive; provided, however, that nothing in this Paragraph 6(c) shall obligate the Company to pay any such premiums unless the Company would be obligated to make payments pursuant to Paragraph 9(f) absent such election. The economic terms of such exchange are set forth on Exhibit C. 7. RELEASES BY EXECUTIVE. (a) In consideration of the payments made and to be made and the benefits to be received by Executive pursuant to Paragraphs 6 and 9 of this Agreement, Executive, for himself and his dependents, successors, assigns, heirs, executors and administrators (and his and their legal representatives of every kind), hereby releases, dismisses, remises and forever discharges the Company from any and all arbitrations, claims, including claims for attorney's fees, demands, damages, suits, proceedings, actions and/or causes of action of any kind and every description, whether known or unknown ("claims"), which Executive now has or may have had for, upon, or by reason of: (i) Executive's employment by or service with the Company to the Effective Date; (ii) discrimination, including but not limited to claims of discrimination on the basis of sex, race, age, national origin, marital status, religion or -4- 5 handicap, including, specifically, but without limiting the generality of the foregoing, any claims under the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, Ohio Revised Code Section 4101.17 and Ohio Revised Code Chapter 4112, including Sections 4112.02 and 4112.99 thereof; and (iii) breach of any contract or promise, express or implied, on or prior to the Effective Date; PROVIDED, HOWEVER, that the foregoing shall not apply to claims to enforce rights that Executive may have as of the Effective Date under any of the Company's health, welfare, retirement, pension or incentive plans (including the MIP), under any indemnification agreement between Executive and the Company, under the Company's indemnification by-laws, under the directors' and officers' liability coverage maintained by the Company, under Section 145 of the Delaware Corporation Law, or under this Agreement. (b) Executive further agrees and acknowledges that: (i) He has been advised by the Company to consult with legal counsel prior to executing and delivering this Agreement and the release provided for in this Paragraph 8, has had an opportunity to consult with and to be advised by legal counsel of his choice, fully understands the terms of this Agreement, and enters into this Agreement freely, voluntarily and intending to be bound; (ii) He has been given a period of twenty-one (21) days to review and consider the terms of this Agreement, and the release contained herein, prior to its execution and that he may use as much of the twenty-one (21) day period as he desires; and (iii) He may, within seven (7) days after execution and delivery, revoke this Agreement. Revocation shall be made by delivering a written notice of revocation to the Senior Vice President and General Counsel at the Company. For such revocation to be effective, written notice must be received by the Senior Vice President and General Counsel at the Company no later than the close of business on the seventh (7th) day after Executive executes this Agreement. If Executive does exercise his right to revoke this Agreement, all of the terms and conditions of the Agreement shall be of no force and effect and the Company shall not have any obligation to make payments or provide benefits to Executive as set forth in Paragraphs 6 and 9 of this Agreement, except as may be required under the Consolidated Omnibus Reconciliation Act of 1986 and except to the extent -5- 6 Executive is entitled to such benefits by reason of agreements and plans other than this Agreement. (c) As a condition of the Company's obligation to make payments or provide benefits to Executive as set forth in Paragraphs 6 and 9 of this Agreement, Executive shall, if requested by the Company, at the time of his retirement as an employee of the Company pursuant to Paragraph 5 of this Agreement, execute and deliver a release substantially similar in form and substance to this Paragraph 7, but effective as of the Retirement Date. 8. CONFIDENTIAL INFORMATION. (a) Executive acknowledges and agrees that, in the performance of his duties as an officer and employee of the Company, he was and may be brought into frequent contact with, had or may have had access to, and/or became or may become informed of confidential and proprietary information of the Company and/or information which is a trade secret of the Company (collectively, "Confidential Information"), as more fully described in subparagraph (b) of this Paragraph 8. Executive acknowledges and agrees that the Confidential Information of the Company gained by Executive during his association with the Company was or will be developed by and/or for the Company through substantial expenditure of time, effort and money and constitutes valuable and unique property of the Company. (b) Executive agrees that commencing on the Effective Date he will keep in strict confidence, and will not, directly or indirectly, at any time, disclose, furnish, disseminate, make available, use or suffer to be used in any manner any Confidential Information of the Company without limitation as to when or how Executive may have acquired such Confidential Information. Executive specifically acknowledges that Confidential Information includes any and all information, whether reduced to writing (or in a form from which information can be obtained, translated, or derived into reasonably usable form), or maintained in the mind or memory of Executive and whether compiled or created by the Company, which derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from the disclosure or use of such information, that reasonable efforts have been put forth by the Company to maintain the secrecy of Confidential Information, that such Confidential Information is and will remain the sole property of the Company, and that any retention or use by Executive of Confidential Information after the termination of Executive's services for the Company shall constitute a misappropriation of the Company's Confidential Information. (c) Executive further acknowledges and agrees that his obligation of confidentiality shall survive, regardless of any other breach of this Agreement or any other agreement, by any party hereto, until and unless such Confidential Information of -6- 7 the Company shall have become, through no fault of Executive, generally known to the public or Executive is required by law (after providing the Company with notice and opportunity to contest such requirement) to make disclosure. Executive's obligations under this Paragraph 8 are in addition to, and not in limitation or preemption of, all other obligations of confidentiality which Executive may have to the Company under the Company's policies, general legal or equitable principles or statutes and which shall remain in full force and effect following the Retirement Date. 9. NONCOMPETITION; CERTAIN ACTIONS. (a) Executive agrees that for a period commencing on the Retirement Date through January 31, 2002 (the "Non-Compete Period"), within the Territory (as described in subparagraph (b) (i) of this Paragraph 9), he shall not, directly or indirectly, do or suffer any of the following: (i) Own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor, director or otherwise with, any other corporation, partnership, proprietorship, firm, association, or other business entity (collectively, an "Enterprise"), or otherwise engage in any business, which is in competition with the Company's business (as described in subparagraph (b) (ii) of this Paragraph 9); PROVIDED, HOWEVER, that the ownership of not more than five percent (5%) of any class of publicly-traded securities of any Enterprise shall not be deemed a Violation of this Agreement. (ii) Employ, assist in employing, or otherwise associate in business with any person who presently or at the Retirement Date is an employee, officer or agent of the Company, or any of its affiliated, related or subsidiary entities. (b) For purposes of this Agreement: (i) "Territory" shall have the meaning set forth on Exhibit A hereto. (ii) The Company's business shall have the meaning set forth on Exhibit B hereto. (c) Executive agrees that for a period commencing on the Retirement Date through the end of the Non-Compete Period, except within the terms of a specific request from the Company, Executive shall not as a principal, or agent of another person, propose or publicly announce or otherwise disclose an intent to propose, or enter into or agree to enter into, singly or with any other person or directly or indirectly, (i) any form of business combination, acquisition, or other transaction relating to the -7- 8 Company or any majority-owned affiliate thereof, (ii) any form of restructuring, recapitalization or similar transaction with respect to the Company or any such affiliate, or (iii) any demand, request or proposal to amend, waive or terminate any provision of this subparagraph 9(c) of this Agreement, nor except as aforesaid during such period will Executive, as a principal, or agent of another person, (1) make, or in any way participate in, any solicitation of proxies with respect to any securities entitled to vote generally in the election of directors of the Company (together with direct or indirect options or other rights to acquire any such securities, "Voting Securities"), (including by the execution of action by written consent), become a participant in any election contest with respect to the Company, seek to influence any person with respect to any Voting Securities or demand a copy of the Company's list of its shareholders or other books and records, (2) participate in or encourage the formation of any partnership, syndicate, or other group which owns or seeks or offers to acquire beneficial ownership of any Voting Securities or which seeks to affect control of the Company or for the purpose of circumventing any provision of this Agreement, or (3) otherwise act, alone or in concert with others (including by providing financing for another person), to seek or to offer to control or influence, in any manner, the management, Board of Directors, or policies of the Company. Provided Executive acts in a manner consistent with the foregoing provisions of this Paragraph 9(c), Executive may sell or otherwise dispose of Voting Securities so long as he complies with the Company's policies regarding trading by insiders. (d) Executive agrees that he shall not, directly or indirectly, induce any person who is an employee, officer or agent of the Company, or any of its affiliated, related, or subsidiary entities, to terminate such relationship. (e) Without the prior consent of the Board of Directors of the Company, during the Non-Compete Period (i) Executive shall not serve as a member of the board of directors of any supplier to or customer of the Company, and (ii) Executive shall not own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor, director or otherwise with any joint venture partner of the Company or other business entity which with the Company shares ownership in any other partnership, limited liability company, corporation or entity (including, but not limited to Cleveland-Cliffs Inc, British Steel plc. and Sumitomo Metals Industries, Limited). (f) In consideration of the promises of Executive in this Agreement, including without limitation this Paragraph 9, the Company shall pay Executive a non-compete fee of TWENTY-FIVE THOUSAND DOLLARS ($25,000) per month during the Non-Compete Period, if Executive shall then be alive, in each case payable on the last day of the month. In the event any provision of this Agreement shall be held unenforceable by a court in a manner that -8- 9 is materially adverse to the Company, the Company may cease payments of the non-compete fee to Executive. (g) In the event Executive shall violate any provision of this Paragraph 9 as to which there is a specific time period during which he is prohibited from taking certain actions or from engaging in certain activities, as set forth in such provision, then, in such event, such violation shall toll the running of such time period from the date of such violation until such violation shall cease. (h) Executive has carefully considered the nature and extent of the restrictions upon him and the rights and remedies conferred upon the Company under this Paragraph 9 and this Agreement, and hereby acknowledges and agrees that the same are reasonable in time and territory, are designed to eliminate competition which otherwise would be unfair to the Company, do not stifle the inherent skill and experience of Executive, would not operate as a bar to Executive's sole means of support, are fully required to protect the legitimate interests of the Company and do not confer a benefit upon the Company disproportionate to the detriment to Executive. 10. DISCLOSURE. Executive, for a period commencing on the date of this Agreement through the end of the Non-Compete Period, agrees to communicate the contents of Paragraphs 8, 9, 11(b) and 13 of this Agreement to any Enterprise which he intends to be employed by, associated in business with, or represent. 11. BREACH. (a) If Executive is in breach of this Agreement, then the Company may, at its sole option, (i) in the case of a breach of any provision of this Agreement, immediately terminate all remaining payments described in Paragraph 9 of this Agreement, and (ii) in the case of a breach of either Paragraph 8 or Paragraph 9 of this Agreement, obtain reimbursement from Executive of all payments by the Company already provided pursuant to Paragraph 9 of this Agreement, plus any expenses, fees and damages incurred as a result of the breach, with the remainder of this Agreement, and all promises and covenants herein, remaining in full force and effect. (b) Executive acknowledges and agrees that the remedy at law available to the Company for breach by Executive of any of his obligations under Paragraphs 8 and 9 of this Agreement would be inadequate and that damages flowing from such a breach would not readily be susceptible to being measured in monetary terms. Accordingly, Executive acknowledges, consents and agrees that, in addition to any other rights or remedies which the Company may have at law, in equity or under this Agreement, upon adequate proof of Executive's violation of any provision of paragraph 8 or 9 of this Agreement, the Company shall be entitled to immediate injunctive relief and may obtain a temporary order restraining -9- 10 any threatened or further breach, without the necessity of proof of actual damage. (c) The Company shall give Executive notice within 30 days following the date that it concludes that Executive is in breach of this Agreement. Prior to taking or commencing any action under Paragraph 11(a) and (b), the Company will provide Executive with the opportunity to address the Board of Directors of the Company at its next regular meeting or, at the option of the Company, a special meeting held for such purpose. Nothing in this Section 11 shall be construed to limit or restrict Executive's right to seek judicial redress for any actions taken by the Company in connection with this Section 11 which Executive reasonably believes to be contrary to the provisions of this Agreement. 12. CONTINUED AVAILABILITY AND COOPERATION. (a) Executive shall cooperate fully with the Company and with the Company's counsel in connection with any present and future actual or threatened litigation or administrative proceeding involving the Company that relates to events, occurrences or conduct occurring (or claimed to have occurred) during the period of Executive's employment by the Company. This cooperation by Executive shall include, but not be limited to: (i) making himself reasonably available for interviews and discussions with the Company's counsel as well as for depositions and trial testimony; (ii) if depositions or trial testimony are to occur, making himself reasonably available and cooperating in the preparation therefor as and to the extent that the Company or the Company's counsel reasonably requests; (iii) refraining from impeding in any way the Company's prosecution or defense of such litigation or administrative proceeding; and (iv) cooperating fully in the development and presentation of the Company's prosecution or defense of such litigation or administrative proceeding. (b) In addition to Executive's obligations under Paragraph 12(a), during the Non-Compete Period, at the request of the Board of Directors of the Company, Executive shall make himself available for consultation with and advice to the Board at times and for periods of time which are mutually agreeable to the Board and Executive. (c) Executive shall be reimbursed by the Company for reasonable travel, lodging, telephone and similar expenses, as well as reasonable attorneys' fees (if independent legal counsel is necessary), incurred in connection with such cooperation, consultation and advice. Executive shall not unreasonably -10- 11 withhold his availability for such cooperation, consultation and advice. 13. SUCCESSORS AND BINDING AGREEMENT. (a) This Agreement shall be binding upon and inure to the benefit of the Company and any successor of or to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed included in the definition of "the Company" for purposes of this Agreement), but shall not otherwise be assignable or delegable by the Company. (b) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes and/or legatees. The death or disability (temporary or permanent) of Executive following the execution and delivery of this Agreement shall not affect or revoke this Agreement or excuse any of the obligations of the parties hereto. (c) This Agreement is personal in nature and none of the parties hereto shall, without the consent of the other parties, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in subparagraphs (a) and (b) of this Paragraph 13. (d) This Agreement is intended to be for the exclusive benefit of the parties hereto, and except as provided in subparagraphs (a) and (b) of this Paragraph 13, no third party shall have any rights hereunder. (e) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, operation of law or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform this Agreement. 14. NON-DISCLOSURE. Except to the extent that this Agreement or the terms hereof become publicly known or available because of legally mandated disclosure and filing requirements of the Securities and Exchange Commission, or because of any other legal requirement that this Agreement or the terms hereof be disclosed, all provisions of this Agreement and the circumstances giving rise hereto are and shall remain confidential and shall not be disclosed to any person not a party hereto (other than (i) Executive's spouse, (ii) each party's attorney, financial advisor and/or tax advisor to the extent necessary for such advisor to render appropriate legal, financial and tax advice, and (iii) persons or entities that fall within the scope of Paragraph 11 of this Agreement, but only to the extent required thereby). -11- 12 15. NOTICES. For all purposes of this Agreement, all communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered, addressed to the Company (to the attention of the Senior Vice President and General Counsel) at its principal executive offices and to Executive at his principal residence, 30 Winterberry Lane, Moreland Hills, Ohio 44022, or to such other address as any party may have furnished to the other in writing and in accordance herewith. Notices of change of address shall be effective only upon receipt. 16. PROFESSIONAL FEES. (a) The Company and Executive acknowledge and agree that each shall be responsible for the payment of their respective professional fees and costs (and related disbursements) incurred in connection with Executive's termination and resignation and all matters relating to the negotiation and execution of this Agreement. (b) It is the intent of the Company and Executive that, following a "Change in Control," Executive not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of his rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to Executive hereunder. For purposes of this Section 16(b), "Change in Control" shall have the meaning given such term under The LTV Corporation Executive Change in Control Severance Pay Plan I as in effect on the Effective Date. Accordingly, following a Change in Control, if it should appear to Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement or any provision hereof void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Executive the benefits provided or intended to be provided to Executive hereunder, the Company irrevocably authorizes Executive from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to advise and represent Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and Executive agree that a confidential relationship will exist between Executive and such counsel. Without respect to whether Executive prevails in whole or in part, in connection with any of the foregoing, the Company shall pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by Executive in connection with any of the foregoing. Notwithstanding the preceding provisions of this Section 16(b), legal fees and -12- 13 related expenses shall not be reimbursed pursuant to this Section 16(b) if an independent party reasonably satisfactory to the Company and Executive determines that the underlying claim by Executive (i) is not likely to exceed $5,000.00, (ii) is not eligible for reimbursement pursuant to this Section 16(b), (iii) has no reasonable basis in law or in fact, or (iv) is not being pursued in a manner consistent with the nature and magnitude of such claim. 17. TAXES, PAYMENTS. ETC. (a) Executive acknowledges and agrees that he shall be responsible for his share of any and all Federal, State and/or local taxes applicable to the payments made, and benefits provided or made available, to Executive pursuant to this Agreement and further agrees to indemnify the Company against any liability as a result of those taxes. (b) The payments to Executive pursuant to Paragraphs 6 and 9 of this Agreement shall be made by check or direct deposit to an account designated by Executive, and shall be reduced by any applicable Federal, State and local tax or other required withholding. 18. AMENDMENT AND WAIVER. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 19. ENTIRE AGREEMENT; CONTINUING INDEMNIFICATION RIGHTS. This Agreement shall constitute the entire agreement among the parties hereto with respect to the subject matters covered by this Agreement and shall supersede all prior verbal or written agreements, covenants, communications, understandings, commitments, representations or warranties, whether oral or written, by any party hereto or any of its representatives pertaining to such subject matter, provided, however, that this Agreement is not intended to amend, supersede or terminate the provisions of any existing stock option agreement, restricted stock agreement, and any employee benefit plan, except to the extent specifically provided in one or more provisions of this Agreement. This Agreement shall not affect any indemnification or other rights under any indemnification agreement between Executive and the Company or the Company's regulations. The Company shall continue Executive's coverage under the directors' and officers' liability coverage maintained by Company, as in effect from time to time, to the same extent as other current and former senior executive officers and directors of the Company. -13- 14 20. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the substantive laws of the State of Ohio, without giving effect to the principles of conflict of laws of such State. 21. SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall nevertheless remain in full force and effect. 22. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same Agreement. 23. CAPTIONS AND PARAGRAPH HEADINGS. Captions and paragraph headings used herein are for convenience and are not part of this Agreement and shall not be used in construing it. 24. AUTHORIZATION BY THE COMPANY. The Company represents that Executive's retirement has been approved by resolution of the Organization and Compensation Committee of the Board of Directors of the Company, and that this Agreement and the actions required of the Company herein have been authorized and approved by a resolution of the Board of Directors of the Company. 25. FURTHER ASSURANCES. Each party hereto shall execute such additional documents, and do such additional things, as may reasonably be requested by the other party to effectuate the purposes and provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement on the date set forth above. THE LTV CORPORATION Witness: /s/ Christine Faile By: /s/ Glenn J. Moran -------------------------- -------------------------------- Glenn J. Moran Its: Senior Vice President, General Counsel and Secretary /s/ David H. Hoag -------------------------------- David H. Hoag -14- 15 EXHIBIT A --------- All countries, possessions and territories within North America. 16 EXHIBIT B --------- Mining, production, sale and supply, purchase or acquisition of iron units or other ferrous metallics for the production of steel; production, sale and supply of coated sheet and cold rolled and hot rolled sheet and strip, as well as tubular and tin mill products and metal building systems, and integrated steel making and sales thereof; sale and supply of aluminum for the automotive industry. 17 EXHIBIT C --------- Economic Terms of Estate Enhancement Program Exchange ----------------------------------------------------- 1. Executive will relinquish a portion or all of the non-compete payments that may be due him under Section 9(f) of the Agreement. 2. In exchange for Executive's relinquishment pursuant to 1, the Company will make monthly payments of premiums on a second-to-die split dollar life insurance policy (the "Policy") insuring the lives of Executive and his spouse, to be owned by a trust (the "Trust") created by Executive, and assigned as collateral to the Company (the "Assignment"). The premiums will be equal to the elected non-compete payments that would otherwise be paid. 3. Under the Policy and the Assignment, upon the death of the later to die of Executive and his spouse, the Policy will first provide a death benefit to the Company in an amount equal to the greater of the premiums paid by the Company or the Policy's then cash value; any remaining death benefits will be paid to the Trust. 4. The Company will, in honor of Executive, contribute amounts received, if any, pursuant to 3 in excess of the premiums paid by the Company to one or more public charities. For purposes hereof, a public charity is an organization exempt from tax under Section 501(c) (3) of the Internal Revenue Code of 1986, as amended, or any successor provision thereto. 5. The risk of any adverse investment experience and adverse tax treatment shall be borne by the Trust and Executive. EX-11 4 EXHIBIT 11 1 Page 1 of 2 Exhibit (11) THE LTV CORPORATION Calculation of Basic Earnings Per Share (EPS) (Dollar amounts in millions except for EPS) (Share data in thousands)
Year Ended Year Ended December 31, 1998 December 31, 1997 --------------------------------- --------------------------------- Shares Amount EPS Shares Amount EPS ---------- --------- --------- ----------- --------- --------- Income (loss) from continuing operations $ (27) $ 30 Preferred stock dividend requirements (2) (2) --------- --------- (29) 28 Weighted average share base: Shares issued 105,361 105,361 Shares repurchased pursuant to share repurchase program (5,512) (1,923) ---------- --------- ----------- --------- 99,849 (29) 103,438 $ 28 ========== ========= =========== ========= BASIC EARNINGS (LOSS) PER SHARE $ (0.29) $ 0.27 ========= =========
Year Ended December 31, 1996 -------------------------------- Shares Amount EPS ---------- --------- -------- Income (loss) from continuing operations $ 109 Preferred stock dividend requirements (2) --------- 107 Weighted average share base: Shares issued 105,360 Shares repurchased pursuant to share repurchase program - ---------- --------- $ 105,360 $ 107 ========== ========= BASIC EARNINGS (LOSS) PER SHARE $ 1.01 ========
2 Page 2 of 2 Exhibit (11) THE LTV CORPORATION Calculation of Diluted Earnings Per Share (EPS) (Dollar amounts in millions except for EPS) (Share data in thousands)
Year Ended Year Ended December 31, 1998 December 31, 1997 -------------------------------- -------------------------------- Shares Amount EPS Shares Amount EPS ---------- -------- -------- ---------- --------- -------- Income (loss) from continuing operations $ (27) $ 30 Preferred stock dividend requirements (2) (2) -------- --------- (29) 28 Weighted average share base: Shares issued 105,361 105,361 Shares repurchased pursuant to share repurchase program (5,512) (1,923) Common Stock equivalent shares resulting from outstanding Series A Warrants, Stock Options and Restricted Stock (A) 141 Common Stock issuable upon conversion of Series B Preferred Stock (A) (A) (A) (A) Common Stock issuable upon conversion of Senior Secured Convertible Notes - - - - ---------- -------- ---------- --------- 99,849 (29) 103,579 $ 28 ========== ======== ========== ========= DILUTED EARNINGS (LOSS) PER SHARE $ (0.29) $ 0.27 ======== ========
Year Ended December 31, 1996 -------------------------------- Shares Amount EPS ---------- --------- --------- Income (loss) from continuing operations $ 109 Preferred stock dividend requirements (2) --------- 107 Weighted average share base: Shares issued 105,360 Shares repurchased pursuant to share repurchase program - Common Stock equivalent shares resulting from outstanding Series A Warrants, Stock Options and Restricted Stock 66 Common Stock issuable upon conversion of Series B Preferred Stock 2,926 2 Common Stock issuable upon conversion of Senior Secured Convertible Notes (B) - ---------- --------- $ 108,352 $ 109 ========== ========= DILUTED EARNINGS (LOSS) PER SHARE $ 1.01 =========
(A) Shares are antidilutive. (B) Senior Secured Convertible Notes are antidilutive in 1996. These Notes were redeemed in 1997 and are not outstanding thereafter. EX-13 5 EXHIBIT 13 1 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS The LTV Corporation ("LTV" or the "Company") operates in three reportable segments: Integrated Steel, Metal Fabrication and Corporate and Other. Integrated Steel manufactures and sells a diversified line of carbon steel products consisting of hot rolled and cold rolled sheet, galvanized and tin mill products. Sales are made primarily to the domestic transportation, appliance, container and electrical equipment markets. Metal Fabrication produces pipe, conduit and tubular products for use in transportation, agriculture, oil and gas, and construction industries. The segment also engineers and manufactures pre-engineered, low-rise steel buildings systems for manufacturing, warehousing and commercial applications. Corporate and Other consists of steel-related joint ventures, primarily Trico Steel Company, L.L.C. ("Trico Steel") and Cliffs and Associates Limited ("CAL"), which are accounted for using the equity method and corporate investments and related income and expenses. ================================================================================ RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------- (IN MILLIONS, EXCEPT PER SHARE DATA) 1998 1997 1996 ============================================================================================ Sales $ 4,273 $ 4,446 $ 4,135 Costs and expenses 4,242 4,227 3,962 Special charges 55 150 -- - -------------------------------------------------------------------------------------------- Total 4,297 4,377 3,962 - -------------------------------------------------------------------------------------------- Income (loss) before income taxes (24) 69 173 Income tax provision (primarily noncash taxes) 3 28 64 - -------------------------------------------------------------------------------------------- Income (loss) before items below (27) 41 109 Extraordinary charge on early extinguishment of debt -- (4) -- Cumulative effect of change in accounting for start-up costs -- (7) -- - -------------------------------------------------------------------------------------------- Net income (loss) $ (27) $ 30 $ 109 - -------------------------------------------------------------------------------------------- Diluted earnings (loss) per share $ (0.29) $ 0.37 $ 1.01 - -------------------------------------------------------------------------------------------- Dividends paid per common share $ 0.12 $ 0.12 $ 0.09 - --------------------------------------------------------------------------------------------
Summary results for each segment are listed below ($ in millions):
INTEGRATED STEEL METAL FABRICATION -------------------------- ------------------------ 1998 1997 1996 1998 1997 1996 ================================================================================================================= Sales $3,684 $4,006 $3,910 $ 683 $ 541 $ 322 Cost of products sold 3,308 3,445 3,417 560 456 286 Selling, general and administrative 120 120 117 52 32 16 Results of affiliates' operations -- -- -- 5 4 -- Net interest and other income 1 3 4 -- -- -- Income (loss) before income taxes and special charges 11 186 125 63 51 20 Special charges 52 150 -- 3 -- -- - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Tons in thousands Steel shipments Trade 7,238 7,655 7,605 452 518 475 Intersegment 287 285 282 Raw steel production 8,136 8,904 8,784 Operating rate 95% 106% 105% - -----------------------------------------------------------------------------------------------------------------
CORPORATE AND OTHER ------------------------ 1998 1997 1996 ================================================================================== Sales $ -- $ -- $ -- Cost of products sold -- -- -- Selling, general and administrative 12 12 10 Results of affiliates' operations (54) (45) -- Net interest and other income 22 39 39 Income (loss) before income taxes and special charges (43) (18) 28 Special charges -- -- -- - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Tons in thousands Steel shipments Trade Intersegment Raw steel production Operating rate - ----------------------------------------------------------------------------------
4 2 INTEGRATED STEEL Sales in 1998 decreased due to a significant increase in unfairly traded imports that resulted in lower average steel selling prices of 3% and lower steel product shipments. In 1997, sales increased from 1996, primarily due to slightly higher average steel selling prices over the prior year and increased steel product shipments. Cost of products sold as a percentage of sales increased in 1998 primarily as a result of lower average selling prices and the H-4 blast furnace reline completed in June at the Company's Indiana Harbor Works. Cost of products sold as a percentage of sales decreased in 1997 from 1996 as a result of an improved mix of steel products shipped and slightly higher average selling prices. Raw steel production at the Company's steelmaking facilities decreased in 1998, primarily due to the H-4 blast furnace reline and reduced operating levels in the fourth quarter due to the impact of imports. The average operating rate was 95% in 1998 compared to 106% in the prior year. The Company follows American Iron and Steel Institute ("AISI") standards in calculating its maximum operating rate based on 95% of blast furnace capacity, which recognizes the average effect of blast furnace relines. Steel production may be supplemented with purchases of semifinished steel when demand for the Company's products exceeds production capability. LTV re-rated its AISI capacity in 1998 which resulted in a 2.3% increase in rated capacity. Selling, general and administrative expenses in 1998 were equal to the 1997 expenses. Selling, general and administrative expenses increased in 1997 primarily due to higher costs associated with the redesign of business processes. In the fourth quarter of 1998, Integrated Steel recorded special charges of $52 million that included the closure of a finishing facility at the Cleveland Works, recognition of an asset impairment of an electrogalvanizing joint venture in which LTV has a 50% interest and a salaried force reduction. In the third quarter of 1997 LTV recorded a special charge of $150 million for the closure of the Pittsburgh coke facility. METAL FABRICATION Sales in 1998 increased primarily due to the inclusion of metal buildings sales for the full year. In 1997, sales increased from 1996, primarily due to the inclusion of $177 million of metal buildings sales since the acquisition of VP Buildings on July 2, 1997, partially offset by lower average selling prices of 1% and decreased shipments of tubular steel products. Cost of products sold as a percentage of sales decreased in 1998 as a result of improved margins from metal buildings sales partially offset by lower average tubular product selling prices. Cost of products sold as a percentage of sales decreased in 1997 from 1996 with the inclusion of metal buildings sales and slightly higher average tubular product selling prices. Selling, general and administrative expenses increased due to the inclusion of the metal buildings expenses since the acquisition of VP Buildings in July 1997. In the fourth quarter of 1998, a special charge of $3 million was recorded for the shutdown of a production line for electric-weld pipe. CORPORATE AND OTHER Results of affiliates' operations includes steel-related joint ventures such as Trico Steel and CAL. In April 1997, Trico Steel, a joint venture operating a flat rolled steel minimill in which LTV has a 50% interest, commenced commercial operations. Trico Steel has experienced equipment problems that have prevented achievement of its rated capacity of 2.2 million tons. Such equipment problems continue although efforts to correct such problems are ongoing. The recent surge in steel imports has also negatively affected production levels at Trico Steel. LTV's share of Trico Steel losses was $50 million and $44 million in 1998 and 1997, respectively. Also included in this segment are the pre start-up costs of CAL, a direct reduced iron joint venture in which LTV has a 46.5% interest. Construction has been completed and commissioning activities are currently in progress. Full production volume of 500,000 tons will depend on market demand. Lower interest and other income resulted from decreased interest income on lower levels of investments and higher interest expense related to the Senior Notes and were partially offset by higher capitalized interest. INCOME TAXES In 1998 the Company recorded $3 million of cash taxes and a full valuation allowance to offset the tax benefit from the current year loss. The 1998 cash taxes provided consist of state and federal taxes including a less than 80% owned subsidiary. In 1997 and 1996, the Company recorded a tax provision of $28 million and $64 million, respectively. Of these provisions, $18 million and $64 million in 1997 and 1996 did not result in cash payments because of pre-reorganization net deductible temporary differences. Under fresh-start financial statement reporting rules, tax benefits associated with pre-reorganization net deductible temporary differences and net operating loss carryforwards cannot be recognized as a reduction to the tax provision but increase additional paid-in capital. The Company's cash payments for income taxes in 1997 and 1996 were significantly less than the income tax expense amounts in the financial statement provision because of these pre-reorganization deferred tax assets. The Company's effective tax rate for financial statement reporting purposes was 40% in 1997 and 37% in 1996. Taxes payable in 1997 consist primarily of state and federal taxes including a less than 80% owned subsidiary. The Company's ability to reduce its future income tax payments through the use of net operating loss carryforwards could be significantly limited on an annual basis if the Company were to undergo an "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986. For the purpose of preserving LTV's ability to utilize its net operating loss carryforwards, Article Ninth of LTV's Restated Certificate of Incorporation prohibits, with certain limited exceptions, any unapproved acquisition of common stock that would cause the ownership interest percentage of the acquirer or any other person to increase to 4.5% or above. 5 3 ================================================================================ LIQUIDITY AND FINANCIAL RESOURCES The Company's sources of liquidity include cash and cash equivalents, marketable securities, cash from operations, long-term borrowings, amounts available under credit facilities and other external sources of funds. In 1998, total cash, cash equivalents and marketable securities decreased by $209 million to $311 million as of December 31, 1998. During 1998, cash provided by operating activities amounted to $312 million. Major uses of cash during 1998 included $362 million in capital expenditures, $80 million for investments in steel-related businesses and the repayment of the Notes due 2020. The Company's long-term financial obligations consist of the following (in millions):
1998 1997 ========================================================== Long-term debt Senior Notes due 2007 $ 298 $ 298 Notes due 2020 -- 57 Mortgage payable 4 -- - ---------------------------------------------------------- Total debt 302 355 Pensions 565 548 Other postemployment obligations 1,552 1,570 - ---------------------------------------------------------- Total obligations $2,419 $ 2,473 - ----------------------------------------------------------
The Company has three credit facilities with banks, a "Receivables Facility," "Inventory Facility," and a "Secured Demand Facility," which provide the Company with up to $590 million of financing resources at prevailing market rates. Substantially all of the Company's receivables and inventories are pledged as collateral under these credit facilities agreements. Management believes that cash provided by operations, along with its credit facilities, are sufficient to fund the current requirements of working capital, capital expenditures, investments in businesses and joint ventures and other postemployment benefits. Due to the low production levels experienced by Trico Steel, LTV and its other two partners have entered into a credit commitment to lend to Trico Steel on a junior subordinated basis up to an additional $50 million. LTV's portion of such commitment is $25 million. The $50 million commitment is in addition to a $30 million loan commitment (LTV share $15 million) made in 1998. Actual loans advanced in 1998 to Trico Steel were $24 million (LTV share $12 million) of the $30 million loan commitment. The Company's Inventory Facility Agreement and Senior Notes contain various covenants that require the Company to maintain certain financial ratios and amounts. These agreements place restrictions on payments of dividends, share repurchases, capital expenditures, investments in subsidiaries and borrowings. Under the terms of the most restrictive covenant, $97 million of retained earnings are available for common stock dividend payments and stock repurchases at December 31, 1998. The Company does not believe that the restrictions contained in these covenants will cause significant limitations on its financial flexibility. In 1998 the Company signed a new agreement with the Pension Benefit Guaranty Corporation ("PBGC"). Under the new agreement, LTV will fund its major defined benefit pension plans based on Employee Retirement Income Security Act of 1974 minimum funding standards and additional amounts as appropriate. The new agreement eliminates certain required annual fixed contributions and contributions which were based on exceeding certain cash flow levels. Upon entering into the new agreement, the Company repaid the $62 million balance of 8.5% PBGC Notes due in 2020 on December 2, 1998. LTV does not anticipate any significant pension contributions in the near term. Since the second quarter of 1996, the Company has paid quarterly common stock dividends of $0.03 per share. ================================================================================ CAPITAL EXPENDITURES LTV's capital expenditures are directed toward market-driven requirements, customer service, productivity improvements, cost-reduction programs, new information technology, replacement projects and environmental requirements. Capital expenditures for the Company are as follows (in millions):
1998 1997 1996 ========================================================== Integrated Steel $ 310 $ 310 $ 240 Metal Fabrication 52 16 3 - ---------------------------------------------------------- Total $ 362 $ 326 $ 243 - ----------------------------------------------------------
The Integrated Steel segment has primarily invested in equipment upgrades, including the major reline of the H-4 blast furnace at the Indiana Harbor Works completed in 1998, and new technologies to keep its facilities cost competitive, improve productivity and enhance customer service. Construction of a new tubing manufacturing facility in Marion, Ohio was substantially completed in 1998 at a total project cost of $66 million and was the largest capital expenditure in the Metal Fabrication segment. The plant will begin commercial operations in 1999 and has an annual processing capacity of 146,000 tons. The facility will manufacture high-quality tubing for the automotive mechanical tubing market, including for the manufacture of hydroformed parts. The Company anticipates that total capital expenditures will approximate $300 million during 1999. 6 4 ================================================================================ INVESTMENTS IN STEEL-RELATED BUSINESSES Investments totaled $80 million in 1998, $101 million in 1997 and $79 million in 1996. The Company's strategy is to invest in growth industries and steel-related businesses that complement its core steelmaking business. Recent investments implementing this strategy resulted in acquiring interests in companies engaged in metal fabrication and in companies with technologies providing new techniques and processes in the steelmaking process and products. Over the past three years, LTV has invested approximately $154 million in Trico Steel, a joint venture steel minimill located in Decatur, Alabama, of which LTV owns a 50% interest. Trico Steel began commercial operations in April 1997. In 1996, LTV entered into a joint venture, CAL, to produce and market high purity reduced iron briquettes as a scrap steel substitute for use in electric furnace steelmaking operations. LTV invested $76 million, representing a 46.5% investment in a facility which has a designed production level of 500,000 tons per year. The plant will operate on a planned start-up curve and full year production will depend on market demand. The Company also has metal fabrication joint ventures which include a tailor-welded blanking operation, an automotive steel processing and blanking operation in Puebla, Mexico and international joint ventures in metal buildings operations that are located in Argentina, Brazil, Chile and Mexico. ================================================================================ COMPETITION AND PRICES Domestic steel producers face significant competition from foreign producers affecting both prices and volume. Based on preliminary reports by the AISI, 1998 imports of flat rolled product from all foreign countries increased 43% from 1997 levels to approximately 20 million tons, or 25% of domestic steel consumption. A significant amount of the 1998 increase occurred after July 1998. The intensity of foreign competition is substantially affected by the relative strength of foreign economies and fluctuations in the value of the U.S. dollar against foreign currencies. Decisions by some foreign producers with respect to production and sales may be influenced to a greater degree by political and economic policy considerations of their governments than by prevailing market conditions. Currency fluctuations and reduced consumption by Asian markets resulted in a significant increase in imports in 1998. On September 30, 1998, LTV along with other domestic integrated producers and the United Steelworkers of America ("USWA") filed flat rolled trade cases against dumped and subsidized imports from Japan, Russia and Brazil. In February 1999, the Department of Commerce ("DOC") issued preliminary determinations setting substantial dumping margins on hot rolled steel products from the three countries and requiring importers from these countries to file bonds to cover potential liability for the preliminary dumping margins. Preliminary countervailing duty margins were also set against Brazil. Under a "critical circumstances" finding made by the DOC, in November 1998, any liability for dumping margins for products from Japan and Russia is retroactive to mid-November 1998. Liability will ultimately depend on affirmative final determination of injury and dumping by the International Trade Commission and the DOC. Final rulings are anticipated later this year. On February 22, 1999, the DOC announced tentative agreements between the U.S. Government and the Russian Federation which, if finalized, would preclude the imposition of dumping duties in the pending trade cases against Russia, significantly reduce Russian imports of steel, impose a six month moratorium on the import of hot rolled steel and set minimum prices for imported product. The Company is opposed to the suspension agreement and will likely prosecute to conclusion the trade cases pending against Russia. LTV also competes with other domestic integrated producers, some of which have greater resources than the Company, and with minimills, which are relatively efficient, low-cost producers that generally produce steel from scrap in electric furnaces, have lower employment and environmental costs and generally target regional markets. Recently developed thin slab casting technologies have allowed some minimill producers to enter certain sectors of the flat rolled market that have traditionally been supplied by integrated producers, and other producers have announced their intention to do the same. Industry experts estimate that current domestic raw steel production capacity will be increased by at least 5% by the end of 2000 as new minimills now under construction engage in start-up operations or begin operation. Many steel products face substantial competition from manufacturers of other products, including plastics, aluminum, ceramics, glass, wood and concrete. LTV's Integrated Steel segment's results of operations are substantially affected by small variations in the realized prices of its steel products, which are significantly influenced by prevailing prices for steel and demand for particular products. Shipments of 7.5 million tons of Integrated Steel products resulted in sales of $3.7 billion during 1998. A 1% increase or decrease in the average realized price during 1998 would, on a proforma basis, result in an increase or decrease in pretax income of approximately $32 million. In 1998, the steel industry experienced price declines from the price levels of 1997. Price increases were obtained in 1997 from 1996 levels but average steel selling prices in 1998 were below 1996 levels. Competitive pressures, including increased domestic steelmaking capacity and rising import levels, limit the Company's ability to maintain or increase current prices. The Metal Fabrication segment's products are competitive with respect to market prices and have been less sensitive to pricing pressures. 7 5 ================================================================================ ENVIRONMENTAL LIABILITIES AND RELATED COSTS LTV is subject to changing and increasingly stringent environmental laws and regulations concerning air emissions, water discharges and waste disposal, as well as remediation activities that involve the clean-up of environmental media such as soils and groundwater ("remediation liabilities"). As a consequence, the Company has incurred, and will continue to incur, substantial capital expenditures and operating and maintenance expenses in order to comply with such requirements. Additionally, if any of the Company's facilities are unable to meet required environmental standards or laws, those operations could be temporarily or permanently closed. If, in the future, the Company were required to implement corrective actions, the Company could be required to record additional liabilities that cannot be estimated at this time, but would be substantial. During 1998, the Company spent approximately $24 million for environmental clean-up and related matters at operating and idled facilities, and at December 31, 1998, has a recorded liability of $136 million for known and identifiable environmental and related matters. As the Company becomes aware of additional matters or obtains more information, it may be required to record additional liabilities for environmental remediation. The Company also spent approximately $14 million in 1998 for environmental compliance-related capital expenditures and expects it will be required to spend an average of approximately $30 million annually in capital expenditures during the next five years to meet environmental standards. ================================================================================ QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk, including changes in interest rates and commodity prices. The Company uses futures, primarily in zinc, nickel, tin and natural gas, to manage the volatility related to certain of these exposures. Gains and losses relating to qualifying hedges are included in the basis of the underlying transactions. Sensitivity analysis of the incremental effect on annual pretax income of a hypothetical 10% decrease in commodity prices for open futures at December 31, 1998 would be $4 million. Gains and losses on futures are generally offset by price changes in the underlying contract. The sensitivity analysis does not reflect the effects of these offsets. The Company is also subject to interest rate risk. LTV's debt consists of $300 million, 8.2% Senior Notes. The estimated fair value of these notes at year end 1998 would be $28 million less than the recorded value based on current borrowing rates available for financings with similar terms and maturities. The Company has marketable securities that are classified as available for sale and are recorded at fair value which approximates cost. See also the Financial Instruments note in the Notes to Consolidated Financial Statements. ================================================================================ YEAR 2000 READINESS Although LTV does not currently manufacture any products containing embedded chips or any computerized products, LTV (like most companies) has been faced with the task of addressing the Year 2000 issue, which is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or any hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. Since the commencement of its Year 2000 readiness effort in late 1996, LTV has been engaged in a company-wide effort to achieve Year 2000 readiness for both information technology (IT) and non-information technology (Non-IT) systems. The Company expects to achieve company-wide Year 2000 readiness mid 1999. LTV has formed a Steering Committee for Year 2000 issues, which meets regularly and is comprised of high-level executives and other management personnel and Year 2000 consultants. LTV is primarily using its own employees to achieve readiness in most of its manufacturing and operations systems, augmented by outside expertise related to specific systems. LTV has contracted with its principal Year 2000 outside contractor (the "Outside Contractor") to achieve Year 2000 readiness with respect to its business and related information technology infrastructure systems ("Business Systems"). In addition to the Company's Year 2000 program described above, LTV is continuing to implement a business reengineering project, which began in 1994 and which includes, among other activities, replacing certain information systems with systems that are Year 2000 ready. As a result, those systems scheduled for replacement during 1999 under the business reengineering project have been excluded from the Year 2000 readiness program and costs which are disclosed below. LTV's Year 2000 readiness program involves several stages, including (1) an inventory stage to locate programs and devices that may have date sensitivities, (2) a risk assessment and prioritization stage to determine the degree of noncompliance and the potential impact on LTV's business, (3) a remediation stage for affected systems and devices, (4) a test stage to determine if the repaired program or device is ready, and (5) an implementation stage to return the program or device back into operation. Management believes that the Company has made, and continues to make, significant progress toward Year 2000 readiness; such progress and the appropriateness of the Company's approach have both been confirmed by a major automotive customer and an outside professional firm. Currently, the Company's systems are at various stages of readiness. The inventory stage has been completed for manufacturing and operations systems, which include Non-IT systems such as smart sensors, logic controllers, distributed control systems and embedded microprocessors. Remediation, testing and implemen- 8 6 tation for these systems is approximately 90% complete with the remainder scheduled to be completed by the end of the first quarter of 1999. The Outside Contractor has completed remediation, testing and implementation of mission critical Business Systems. In the event the Company and material third parties such as critical suppliers and/or customers fail to become Year 2000 compliant, a most reasonably likely worst case scenario could result in a system failure or miscalculations causing disruptions of operations, including, among other things, production difficulties, a temporary inability to process transactions, send invoices, or engage in similar normal business activities which could result in a material adverse effect on the Company's business and results of operations. The Company is also in the process of developing a strategy to address the additional potential consequences that may result from unresolved Year 2000 issues, which will include the development of one or more contingency plans by mid 1999. LTV has been querying material third parties, including suppliers, utility and other resource providers and customers to assess their Year 2000 readiness efforts. Positive statements of readiness have been received from 70% of the Company's suppliers. The Company has assumed that any nonresponsive third party will be noncompliant for the purpose of risk assessment. The Company is implementing a supply chain plan for most sole source and mission critical suppliers and customers. This plan includes telephone interviews and on-site visits. The Company has budgeted approximately $55 million for its Year 2000 readiness efforts, with $8 million designated for remediation of manufacturing and operations systems and $47 million allocated for Business Systems. These expenses include replacing some outdated, noncompliant hardware and noncompliant software as well as identifying and remediating known Year 2000 problems. LTV expensed $8 million of Year 2000 costs in 1997 and $35 million in 1998. The funds expensed for Year 2000 are outside of the normal information technology budget. Because LTV's readiness program is not yet fully implemented and is subject to certain risks and uncertainties, including the readiness efforts of material third parties, there can be no assurance that LTV will not incur material costs beyond the anticipated costs described above. The cost of the Year 2000 project and the dates by which LTV believes it will be Year 2000 ready are based on management's current best estimates, which were derived based on numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. There can be no guarantee, however, that these estimates will be achieved; and actual results could differ materially from those anticipated. Specific factors that might cause such differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and imbedded computer technology in a timely manner and the ability of LTV's suppliers and customers to become Year 2000 compliant in a timely manner. ================================================================================ OUTLOOK Unprecedented levels of imports, sold at prices below cost, have weakened the Company's order entry and shipping rates and depressed selling prices to the lowest levels in ten years. Without a significant improvement in the import situation, prices will remain at depressed levels and lower order rates will curtail production levels and operating losses could occur in early 1999. The Company has a labor agreement with the USWA for approximately 9,500 active employees, primarily hourly workers, on terms consistent with those negotiated with other major integrated steel producers that expires August 1, 1999. A new contract could result in increased labor costs in 1999 and subsequent years over the duration of the new contract. Also, the possibility of a work stoppage exists prior to reaching a contract settlement, which could have a material adverse effect on the results of operations. The Metal Fabrication segment shows continued strong sales of metal buildings systems in a robust construction market, while pipe products are being negatively impacted by reduced demand in the energy market and by the import problem. The Corporate and Other segment will be affected by the reduced work schedule at Trico Steel as a result of lower order-entry rates, continued start-up difficulties and the start-up costs associated with CAL. The lower cash levels will generate reduced interest income compared to prior years. Trico Steel is operating at reduced levels due to the electric transformer failure that occurred in late January 1999 and is expected to continue to operate at these reduced levels into the second quarter. Trico Steel is currently investigating both the cause of the failure and the opportunities for improved operations prior to replacement of the failed transformer. Without significant improvement in the operating levels at Trico Steel, expenses will continue to exceed revenues in 1999. The depressed prices for direct reduced iron produced by CAL could also reduce the prospects for achieving profitable production levels and increase the anticipated start-up costs. This report includes forward-looking statements. Our use of the words "outlook," "anticipate," "believes," "estimate," "expect" and similar words are intended to identify these statements as forward-looking. These statements represent our current judgment on what the future holds. While the Company believes them to be reasonable, a number of important factors could cause actual results to differ materially from those projected. These factors include relatively small changes in market price or market demand; changes in domestic capacity; changes in raw material costs; increased operating costs; loss of business from major customers, especially for high value-added product; unanticipated expenses; substantial changes in financial markets; labor unrest; unfair foreign competition; major equipment failure; unanticipated results in pending legal proceedings; or difficulties in implementing information technology, including Year 2000 compliant systems. In this regard, we also direct your attention to factors discussed above in the Management's Discussion and Analysis. 9 7 CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------- (IN MILLIONS, EXCEPT PER SHARE DATA) 1998 1997 1996 ============================================================================================ Sales $ 4,273 $ 4,446 $ 4,135 Costs and expenses Cost of products sold 3,773 3,801 3,596 Depreciation and amortization 259 263 266 Selling, general and administrative 184 164 143 Results of affiliates' operations 49 41 -- Net interest and other income (23) (42) (43) Special charges 55 150 -- - -------------------------------------------------------------------------------------------- Total 4,297 4,377 3,962 - -------------------------------------------------------------------------------------------- Income (loss) before income taxes (24) 69 173 Income tax provision Taxes payable 3 10 -- Taxes not payable in cash -- 18 64 - -------------------------------------------------------------------------------------------- Total 3 28 64 - -------------------------------------------------------------------------------------------- Income (loss) before items below (27) 41 109 Extraordinary loss on early extinguishment of debt -- (4) -- Cumulative effect of change in accounting for start-up costs -- (7) -- - -------------------------------------------------------------------------------------------- Net income (loss) $ (27) $ 30 $ 109 - -------------------------------------------------------------------------------------------- Earnings (loss) per share Basic and diluted Operations $ (0.29) $ 0.37 $ 1.01 Extraordinary (loss) -- (0.04) -- Cumulative effect of change in accounting -- (0.06) -- - -------------------------------------------------------------------------------------------- Net income (loss) $ (0.29) $ 0.27 $ 1.01 - -------------------------------------------------------------------------------------------- Net income (loss) available to common shareholders $ (29) $ 28 $ 107 - -------------------------------------------------------------------------------------------- Dividends paid per common share $ 0.12 $ 0.12 $ 0.09 - --------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 10 8 CONSOLIDATED BALANCE SHEET
DECEMBER 31, ------------------ (IN MILLIONS, EXCEPT SHARE DATA) 1998 1997 ========================================================================================================================== Assets Current assets Cash and cash equivalents $ 101 $ 160 Marketable securities 210 360 - -------------------------------------------------------------------------------------------------------------------------- 311 520 Receivables, less allowances of $17 in 1998 and $18 in 1997 375 470 Inventories Products 571 656 Materials, purchased parts and supplies 283 246 - -------------------------------------------------------------------------------------------------------------------------- Total inventories 854 902 Prepaid expenses, deposits and other 15 12 - -------------------------------------------------------------------------------------------------------------------------- Total current assets 1,555 1,904 - -------------------------------------------------------------------------------------------------------------------------- Investments in affiliates 314 312 Other noncurrent assets 190 169 Property, plant and equipment Land and land improvements 65 68 Buildings 157 150 Machinery and equipment 3,749 3,526 Construction in progress 354 352 - -------------------------------------------------------------------------------------------------------------------------- 4,325 4,096 Less allowance for depreciation (1,060) (935) - -------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 3,265 3,161 - -------------------------------------------------------------------------------------------------------------------------- $ 5,324 $ 5,546 - --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, ------------------ 1998 1997 ========================================================================================================================== Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 321 $ 354 Accrued employee compensation and benefits 328 365 Other accrued liabilities 190 219 - -------------------------------------------------------------------------------------------------------------------------- Total current liabilities 839 938 - -------------------------------------------------------------------------------------------------------------------------- Noncurrent liabilities Long-term debt 302 355 Postemployment health care and other insurance benefits 1,552 1,570 Pension benefits 565 548 Other 438 459 - -------------------------------------------------------------------------------------------------------------------------- Total noncurrent liabilities 2,857 2,932 - -------------------------------------------------------------------------------------------------------------------------- Shareholders' equity Convertible preferred stock-- aggregate liquidation value $50; par value $1.00 per share 1 1 Common stock-- par value $0.50 per share; authorized 150 million shares; issued 105 million shares; 100 million shares outstanding in 1998 and 1997 53 53 Additional paid-in capital 1,032 1,032 Retained earnings 621 661 Treasury stock at cost (5 million shares) (68) (68) Accumulated other comprehensive loss and other (11) (3) - -------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,628 1,676 - -------------------------------------------------------------------------------------------------------------------------- $ 5,324 $ 5,546 - --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 11 9 CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------- (IN MILLIONS) 1998 1997 1996 =============================================================================================================== Operating activities Income (loss) before extraordinary loss and cumulative change in accounting $ (27) $ 41 $ 109 Adjustments to reconcile income (loss) to net cash provided by operating activities Noncash losses of affiliates 49 41 -- Special charges 55 150 -- Depreciation and amortization 259 263 266 Income tax provision not payable in cash -- 18 64 Defined benefit pension expense 3 28 64 Postemployment benefit payments (more) less than related expense (19) (27) 5 VEBA Trust contributions (10) (10) (11) Changes in assets, liabilities and other 2 (107) (2) - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 312 397 495 - --------------------------------------------------------------------------------------------------------------- Investing activities Capital expenditures (362) (326) (243) VP Buildings acquisition -- (188) -- Investments in steel-related businesses (80) (101) (79) Net sales (purchases) of marketable securities 150 207 (109) Other (5) 24 (6) - --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (297) (384) (437) - --------------------------------------------------------------------------------------------------------------- Financing activities Net proceeds from debt offering 4 290 -- Payments on long-term debt (62) (106) -- Pension funding to restored plans (2) (61) (205) Repurchases of common stock -- (68) -- Dividends paid and other (14) (15) (12) - --------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (74) 40 (217) - --------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (59) 53 (159) Cash and cash equivalents at beginning of year 160 107 266 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 101 $ 160 $ 107 - ---------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 12 10 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
YEAR ENDED DECEMBER 31, 1998 ----------------------------------------------------------------------------------- COMMON STOCK CONVERTIBLE ------------------- ADDITIONAL OTHER COMPRE- PREFERRED NUMBER PAID-IN RETAINED TREASURY HENSIVE INCOME (IN MILLIONS) STOCK OF SHARES AMOUNT CAPITAL EARNINGS STOCK AND OTHER TOTAL ============================================================================================================================= January 1, 1996 $ 1 105 $ 53 $ 957 $ 549 $ -- $ (185) $ 1,375 Comprehensive income Net income -- -- -- -- 109 -- -- 109 Other comprehensive income, net of tax -- -- -- -- -- -- 174 174 ------- Total comprehensive income 283 Dividends paid -- -- -- -- (12) -- -- (12) Taxes not payable in cash -- -- -- 64 -- -- -- 64 - ----------------------------------------------------------------------------------------------------------------------------- December 31, 1996 1 105 53 1,021 646 -- (11) 1,710 Comprehensive income Net income -- -- -- -- 30 -- -- 30 Other comprehensive income, net of tax -- -- -- -- -- -- 6 6 ------- Total comprehensive income 36 Dividends paid -- -- -- -- (15) -- -- (15) Treasury stock purchases -- (5) -- -- -- (68) -- (68) Other -- -- -- -- -- -- 2 2 Taxes not payable in cash -- -- -- 11 -- -- -- 11 - ----------------------------------------------------------------------------------------------------------------------------- December 31, 1997 1 100 53 1,032 661 (68) (3) 1,676 Comprehensive loss Net loss -- -- -- -- (27) -- -- (27) Other comprehensive loss, net of tax -- -- -- -- -- -- (8) (8) ------- Total comprehensive loss (35) Dividends paid -- -- -- -- (14) -- -- (14) Other -- -- -- -- 1 -- -- 1 - ----------------------------------------------------------------------------------------------------------------------------- December 31, 1998 $ 1 100 $ 53 $ 1,032 $ 621 $ (68) $ (11) $ 1,628 - -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 13 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 ================================================================================ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The LTV Corporation ("LTV" or the "Company") operates in three reportable segments: Integrated Steel, Metal Fabrication and Corporate and Other. Refer to the Segment Reporting footnote for further discussion. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include LTV and its majority-owned subsidiaries. Investments in joint ventures and companies owned 20% to 50% are accounted for by the equity method. The Company's interest in the cumulative undistributed earnings of its unconsolidated affiliates was $10 million at December 31, 1998, all of which was available for dividend or other distribution to the Company. Equity in earnings of raw material affiliates, recorded as a reduction of cost of products sold, was $12 million, $17 million and $16 million for 1998, 1997 and 1996, respectively. The equity in earnings of metal fabrication and steel technology affiliates is recorded in the results of affiliates' operations. Certain prior period amounts have been reclassified to conform with the current period presentation. MARKETABLE SECURITIES The Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. Marketable securities have been classified as available-for-sale and are carried at fair value, with unrealized holding gains and losses included in other comprehensive income. Interest income, amortization of premiums and accretion of discounts to maturity, realized gains and losses and declines in value judged to be other than temporary are included in net interest and other income. The cost of securities sold is based on specific identification. INVENTORIES Inventories are valued at the lower of cost or market, with cost determined primarily by the "last-in, first-out" ("LIFO") method for approximately 94% and 95% of the inventories at December 31, 1998 and 1997, respectively. The amount by which inventory is reduced to state inventory at LIFO value is $17 million at December 31, 1998 and $22 million at December 31, 1997. Liquidation of LIFO inventory quantities, carried at costs that prevailed in earlier years, reduced cost of products sold by $2 million, $3 million and $2 million in 1998, 1997 and 1996, respectively. The current replacement value of inventories is $845 million and $898 million at December 31, 1998 and 1997, respectively. PROPERTY COSTS, DEPRECIATION AND AMORTIZATION Fixed assets are recorded on the cost basis and include land, buildings, machinery and equipment, and software and associated costs. Depreciation is computed principally using a modified straight-line method based upon estimated economic lives of assets and the levels of production providing depreciation within a range of 80% to 120% of the straight-line amount on individual major production facilities with decreased depreciation at lower and increased depreciation at higher operating levels. In addition, a units-of-production method is used for blast furnaces. In 1998, the modified straight-line depreciation method was less than the straight-line amount by $8 million. During 1997 and 1996, depreciation expense under this method approximated the computed straight-line amounts. The cost of buildings is depreciated over 45 years, and machinery and equipment is depreciated over an average life of approximately 17 years. Goodwill and other intangible assets are amortized on a straight-line basis over periods ranging from 5 to 35 years. When properties are retired or sold, their carrying value and the related allowance for depreciation are eliminated from the property and allowance for depreciation accounts, respectively. Generally, for normal retirements, gains or losses are credited or charged to allowance for depreciation accounts; for abnormal retirements, gains or losses are included in income in the year of disposal. The Company reviews long-lived assets used in operations and goodwill when indicators of impairment are present. Impairment losses are recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. ENVIRONMENTAL REMEDIATION LIABILITIES The Company's policy is to accrue environmental remediation liabilities when it is probable a liability exists and the costs can be reasonably estimated. The Company's estimates of these undiscounted costs are based on existing technology, current enacted laws and regulations, its current legal obligations regarding remediation and site-specific costs. The liabilities are adjusted when the effect of new facts or changes in law or technology is determinable. Insurance recoveries, if any, are recorded as a reduction of environmental costs. The Company's liability for environmental remediation, including costs related to the demolition, closure and clean-up of idled facilities, totaled $136 million and $154 million, at December 31, 1998 and 1997, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities," which requires all derivatives to be recognized as either assets or liabilities in the balance sheet and be measured at fair value. Changes in the fair value of derivatives will be recognized in net income unless specific hedge accounting criteria are met. LTV intends to adopt this statement in 2000 and it is not expected to have a material impact on the Company's financial statements. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" that requires the expensing of start-up activities as incurred. In 1997, LTV recognized a cumulative effect change in accounting principle adjustment of $7 million, net of income taxes of $4 million, expensing previously deferred start-up costs. The proforma effect on 1996 would have reduced net income by $5 million ($0.04 per share). 14 12 ================================================================================ UNCONSOLIDATED JOINT VENTURE The Company has a 50% interest in an unconsolidated joint venture, Trico Steel, which is accounted for under the equity method. Commercial operations of this flat rolled minimill located in Decatur, Alabama began in April 1997. LTV and its other two partners have entered into a credit commitment to lend to Trico Steel on a junior subordinated basis up to an additional $50 million. LTV's portion of such commitment is $25 million. The following is a summary of the financial information related to Trico Steel (in millions):
1998 1997 ================================================== Results of operations Net sales $ 258 $ 98 Costs and expenses 330 167 Depreciation and amortization 28 18 Cumulative effect of change in accounting for start-up costs -- 15 - -------------------------------------------------- Pretax loss $(100) $(102) ================================================== Financial position at December 31 Current assets $ 54 $ 76 Noncurrent assets 531 526 Current liabilities (27) (38) Noncurrent liabilities (296) (273) - -------------------------------------------------- Net assets $ 262 $ 291 ================================================== Capital expenditures $ 33 $ 86 ==================================================
================================================================================ OTHER LIABILITIES Current accrued employee compensation and benefits included the following at December 31 (in millions):
1998 1997 ============================================ Pension benefits $ 20 $ 17 Postemployment health care and other insurance benefits 124 129 Accrued wages and compensated absences 80 82 Other 104 137 - -------------------------------------------- $328 $365 ============================================
Current other accrued liabilities included the following at December 31 (in millions):
1998 1997 ===================================================== Accrued taxes other than income $ 92 $ 96 Accrued income taxes 11 15 Environmental and plant rationalization 36 53 Other 51 55 - ----------------------------------------------------- $190 $219 =====================================================
Noncurrent other liabilities included the following at December 31 (in millions):
1998 1997 ================================================== Benefits under the Coal Industry Retiree Health Benefit Act of 1992 $128 $135 Other employee benefits 108 119 Environmental and plant rationalization 149 159 Other 53 46 - -------------------------------------------------- $438 $459 ==================================================
15 13 ================================================================================ DEBT AND CREDIT FACILITIES Long-term debt consisted of the following at December 31 (in millions):
1998 1997 ===================================== Senior Notes due 2007 $298 $298 Notes due December 2020 -- 57 Mortgage payable 4 -- - ------------------------------------- $302 $355 =====================================
The Company has no required long-term debt maturities occurring within the next five years. In September 1997, LTV issued $298 million Senior Notes ($300 million face value) due September 2007 at 8.2% interest payable semiannually and guaranteed by LTV's wholly owned subsidiary, LTV Steel Company, Inc. The unamortized original issue discount results in an effective interest rate of 8.25%. The notes are redeemable at the option of the Company in whole or in part, at any time after September 2002. At any time prior to September 2000, the Company may redeem in the aggregate up to 35% of the original principal amount with proceeds from any public equity offerings. Proceeds of the offering were used in 1997 to finance the acquisition of VP Buildings, Inc. ("VP Buildings") and to redeem $100 million principal amount of Senior Secured Convertible Notes due June 2003 at a premium that resulted in an extraordinary charge of $4 million, net of taxes of $2 million. The 8.5% Notes due December 2020 payable to the Pension Benefit Guaranty Corporation ("PBGC") with a balance of $62 million were repaid in December 1998. The Company has three credit facilities with banks (the "Receivables Facility" expiring in 2003, the "Inventory Facility" expiring in 2003 and a "Secured Demand Facility" expiring in March 1999) that provide the Company with up to $590 million of financing resources at prevailing market rates. Substantially all of the Company's receivables and inventories are pledged as collateral under these credit facilities agreements. The Receivables Facility permits borrowings of up to $320 million for working capital requirements and general corporate purposes, $100 million of which may be used to issue letters of credit. At December 31, 1998, $218 million was permitted to be borrowed; however, no borrowings were outstanding and letters of credit outstanding amounted to $17 million under this facility. The borrower under the Receivables Facility is LTV Sales Finance Company, a structured finance special purpose entity wholly owned by LTV, which on a daily basis purchases and pledges essentially all of the receivables generated by LTV. The creditors of LTV Sales Finance Company have a claim on the assets of that company prior to those assets becoming available to other creditors of LTV or its affiliates. LTV Steel Company, Inc. effective as of March 1, 1998, entered into a $250 million five-year Inventory Facility. The Inventory Facility, secured by essentially all of LTV Steel's inventory through a special purpose entity, permits borrowings of up to $250 million for working capital and general corporate purposes, $150 million of which may be used to issue letters of credit. Interest will accrue at the Company's option of either the lender bank's base rate or 1% above LIBOR rates. At December 31, 1998, there were no outstanding borrowings against the Inventory Facility; and letters of credit totaling $68 million were outstanding under this facility. The borrower under the Inventory Facility is LTV Steel Products, LLC, a consolidated structured finance special purpose entity wholly owned by LTV Steel, which purchases and pledges essentially all of the inventory produced by LTV Steel. The creditors of LTV Steel Products, LLC, have a claim on the assets of that company prior to those assets becoming available to other creditors of LTV or its affiliates. The Company's wholly owned subsidiary, VP Buildings, has a Secured Demand Facility that expires in March 1999 and is secured by the accounts receivable of VP Buildings. The facility permits borrowings of up to $20 million for working capital and general corporate purposes and for letters of credit. At December 31, 1998, $20 million was permitted to be borrowed; no letters of credit or borrowings were outstanding under this facility. The Senior Notes contain various covenants that require the Company to maintain certain financial ratios and amounts, place certain restrictions on payments of dividends, stock repurchases, capital expenditures, investments in subsidiaries and borrowings. Under the terms of the most restrictive covenant, $97 million of retained earnings are available for common stock dividend payments and stock repurchases at December 31, 1998. ================================================================================ OPERATING LEASES The Company leases certain manufacturing facilities and equipment, office space and computer equipment under cancelable and noncancelable leases that expire at various dates. Rental expense on operating leases was $79 million, $71 million and $62 million in 1998, 1997 and 1996, respectively. Minimum future operating lease obligations in effect at December 31, 1998 are as follows (in millions): ========================================================== 1999 $ 43 2000 27 2001 22 2002 14 2003 13 Later years 71 - ---------------------------------------------------------- Total obligations $ 190 ==========================================================
16 14 ================================================================================ PENSIONS AND POSTEMPLOYMENT HEALTH CARE AND OTHER INSURANCE BENEFITS The Company's pension plans provide current benefits for most employees through defined contribution plans with benefits based on age and compensation levels whose costs are accrued and funded on a current basis. The Company also has defined benefit plans, the benefits of which are primarily for past service only, based on years of service and on average compensation for certain years. The majority of these defined benefit plans are subject to Employee Retirement Income Security Act of 1974 funding standards. The Company provides other postemployment benefits ("OPEB") primarily for health care, life insurance and other insurance benefits for substantially all active, inactive and retired employees. The health care plans are contributory and contain other cost-sharing features such as deductibles, lifetime maximums and copayment requirements. As part of the 1994 United Steelworkers of America ("USWA") labor agreement, the Company is required to contribute to a Voluntary Employee Beneficiary Association ("VEBA") Trust to prefund postemployment health care and other insurance benefits for covered employees and retirees in addition to making cash payments for such benefits on a current basis. The Company is required to contribute to the VEBA Trust a minimum of $5 million annually ($10 million in years when common stock dividends are declared) and additional amounts based on defined cash flow as set forth in the labor agreement. The required contribution for 1998 was $10 million. The components of pensions and other postemployment benefit obligations and related assets are as follows (in millions):
PENSION BENEFITS OPEB ------------------- ------------------- 1998 1997 1998 1997 ============================================================================================================ Change in benefit obligation Benefit obligation at beginning of year $ 3,327 $ 3,395 $ 1,520 $ 1,687 Service cost 2 1 13 14 Interest cost 228 237 102 106 Actuarial (gains) losses 108 (10) (1) (163) Shutdowns/acquisitions 18 41 7 5 Benefits paid (329) (337) (115) (129) - ------------------------------------------------------------------------------------------------------------ Benefit obligation at end of year $ 3,354 $ 3,327 $ 1,526 $ 1,520 - ------------------------------------------------------------------------------------------------------------ ============================================================================================================ Change in plan assets Fair value of plan assets at beginning of year $ 3,080 $ 2,836 $ 62 $ 36 Actual return on plan assets 349 503 36 11 Shutdowns/acquisitions -- 10 -- -- Company contributions 9 68 10 17 Benefits paid (329) (337) (5) (2) - ------------------------------------------------------------------------------------------------------------ Fair value of plan assets at end of year $ 3,109 $ 3,080 $ 103 $ 62 - ------------------------------------------------------------------------------------------------------------ Funded status of the plan (underfunded) $ (245) $ (247) $(1,423) $(1,458) Unrecognized net actuarial gains (394) (402) (254) (241) Unrecognized prior service cost 98 119 1 -- - ------------------------------------------------------------------------------------------------------------ Accrued benefit cost $ (541) $ (530) $(1,676) $(1,699) - ------------------------------------------------------------------------------------------------------------
Pension plan assets consist substantially of equity securities listed on national exchanges, fixed income securities and cash equivalents. VEBA assets for OPEB obligations are invested primarily in equity securities listed on national exchanges.
PENSION BENEFITS OPEB ------------------- ------------------- Amounts recognized in the balance sheet consist of (in millions): 1998 1997 1998 1997 ============================================================================================================ Prepaid benefit cost $ 22 $ 21 $ -- $ -- Accrued benefit liability (585) (565) (1,676) (1,699) Intangible asset 1 1 -- -- Accumulated other comprehensive income 11 3 -- -- - ------------------------------------------------------------------------------------------------------------ Net amount recognized (551) (540) $(1,676) $(1,699) ------------------- Defined contribution plans 10 10 - --------------------------------------------------------------------------------------- Total $ (541) $ (530) - ---------------------------------------------------------------------------------------
17 15 Amounts applicable to the Company's underfunded pension plans at December 31 are as follows (in millions):
1998 1997 ======================================================================== Projected benefit obligation $3,066 $3,056 Accumulated benefit obligation 3,049 3,039 Fair value of plan assets 2,773 2,778 Amounts recognized as accrued benefit liabilities 575 555 Amounts recognized as intangible asset 1 1 Amounts recognized as accumulated comprehensive income 11 3 - ------------------------------------------------------------------------
PENSION BENEFITS OPEB ------------------------- -------------------------- 1998 1997 1996 1998 1997 1996 ========================================================================================================== Weighted-average assumptions as of December 31 Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50% Expected return on plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% Projected health care cost trend rate 6.20% 6.70% 7.50% Ultimate trend rate 4.25% 4.50% 4.50% Year ultimate trend rate is achieved 2003 2003 2003 - --------------------------------------------------------------------------------------------------------- ========================================================================================================== Components of net periodic benefit cost Service cost $ 2 $ 1 $ 6 $ 13 $ 14 $ 18 Interest cost 228 237 247 101 105 120 Expected return on plan assets (240) (223) (209) (5) (4) (3) Amortization of prior service cost 17 18 18 -- -- -- Recognized net actuarial loss (gain) (4) (5) 2 (14) (13) 1 - --------------------------------------------------------------------------------------------------------- Benefit cost 3 28 64 95 102 136 Defined contribution plans 48 49 48 - -------------------------------------------------------------------------- Total included in operations 51 77 112 Curtailment cost included in special charges 19 16 -- 7 5 -- - --------------------------------------------------------------------------------------------------------- $ 70 $ 93 $ 112 $ 102 $ 107 $ 136 - ---------------------------------------------------------------------------------------------------------
During 1998 and 1997, the Company's actuary computed the benefit obligations for both the pension plans and other postemployment benefit obligations using refined assumptions with more recent experience data. This computation reduced 1998 and 1997 expense by approximately $1 million and $17 million, respectively for pension plans and approximately $13 million and $34 million, respectively for other postemployment benefit obligations. The following shows the 1998 effect of a 1% increase or decrease in the weighted-average health care cost trend rate (in millions):
1-PERCENTAGE- 1-PERCENTAGE- POINT INCREASE POINT DECREASE ============================================================================================== Effect on total of service and interest cost components $ 12 $ (11) Effect on postretirement benefit obligation $ 142 $ (121) - ---------------------------------------------------------------------------------------------
18 16 ================================================================================ TAXES The provision for income taxes is as follows (in millions):
1998 1997 1996 ================================================ Current: Federal $ (1) $ 7 $-- State 4 3 -- Amount not payable in cash -- 18 64 - ------------------------------------------------ Tax provision $ 3 $ 28 $ 64 - ------------------------------------------------
In 1998 the Company recorded $3 million of cash taxes and a full valuation allowance to offset the tax benefit from the current year loss. In 1997 and 1996, the Company recorded a tax provision of $28 million and $64 million, respectively. Of these provisions, $18 million and $64 million did not result in cash payments because of pre-reorganization net deductible temporary differences. The Company's effective tax rate for financial statement reporting purposes was 40% in 1997 and 37% in 1996. Taxes payable in 1997 consist primarily of state and federal taxes including a less than 80% owned subsidiary. The Company reports federal income tax expense before consideration of pre-reorganization net deferred tax assets totaling $1.3 billion at December 31, 1998. The Company's actual income tax cash payments were significantly less than the total financial statement expense amounts as the tax provision required by fresh-start financial statement reporting was in excess of the Company's actual tax payments. As LTV realizes the benefits of reduced cash tax payments from pre-reorganization net deferred tax assets, such benefits increase additional paid-in capital and are represented by the "Amount not payable in cash" in the above table. The income tax effects of the factors accounting for the differences between federal income tax computed at the statutory rate and the recorded provision are as follows (in millions):
1998 1997 1996 ================================================================= Tax provision (benefit) at statutory rates $ (8) $ 24 $ 61 Increases (decreases) resulting from: Valuation allowance 14 -- -- Percentage depletion deduction (4) (7) (5) Federal alternative minimum tax (1) 7 -- State taxes 2 5 8 Other -- (1) -- - ----------------------------------------------------------------- Tax provision $ 3 $ 28 $ 64 - -----------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are as follows at December 31 (in millions):
1998 1997 ============================================================================ Deferred tax assets: Postemployment health care liability $ 669 $ 678 Net operating loss carryforwards 945 880 Pension liability 228 218 Other employee benefits liability 142 159 Plant rationalization and environmental liabilities 91 104 Safe harbor tax leases 96 107 Other 129 129 - ---------------------------------------------------------------------------- Subtotal 2,300 2,275 Deferred tax liabilities: Tax over book depreciation (827) (833) Inventory and other (123) (117) - ---------------------------------------------------------------------------- Subtotal (950) (950) Valuation allowance (1,350) (1,325) - ---------------------------------------------------------------------------- Total deferred taxes--net $ -- $ -- - ----------------------------------------------------------------------------
19 17 The evaluation of the realizability of the Company's net deferred tax assets in future periods is made based upon historical and projected operating performance and other factors for generating future taxable income, such as intent and ability to sell assets. At this time, the Company has established a valuation reserve for all of its net deferred tax assets. For income tax reporting purposes, LTV has a regular tax net operating loss carryforward of $2.7 billion and a federal alternative minimum tax net operating loss carryforward of $1.5 billion that are not restricted as to use and will expire in the years 2000 through 2018. The Company's ability to reduce future income tax payments through the use of net operating loss carryforwards could be significantly limited on an annual basis if the Company were to undergo an "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986. Alternative minimum taxes paid through 1998 of approximately $46 million are available as a credit carryforward, and the period is not limited. Investment tax credit carryforwards of approximately $8 million at December 31, 1998 are recognized using the "flow through" method and expire in 1999 through 2003. ================================================================================ SHAREHOLDERS' EQUITY LTV has authorized for issuance 20 million shares of preferred stock with a $1.00 par value. At December 31, 1998, the Company has 500,000 outstanding shares of Series B Convertible Preferred Stock ("Series B"). This issue has a stated liquidation preference value of $50 million, is senior to all common stock and has weighted voting rights equal to that number of shares of common stock into which it can be converted. Dividends on the Series B are payable quarterly in either cash or common stock, at the election of LTV, at the rate of 4.5% per annum on the stated value. Holders of the Series B have the right to convert the stated value of their shares, in whole or in part, into common stock at a conversion price of $17.09 per share (potentially 2.9 million shares). LTV has the right to redeem the Series B for $51 million at December 31, 1998, declining to $50 million at June 28, 2000. In 1997, the Company completed a stock repurchase program by purchasing 5.5 million shares in the open market for $68 million and by redeeming the $100 million Senior Secured Convertible Notes, which eliminated an additional 5.1 million of potentially dilutive shares. The Company has a nonleveraged Employee Stock Ownership Plan ("ESOP") for employees covered by the USWA labor agreement that effectively holds 3.2 million shares of the Company's common stock at December 31, 1998. The Company has common stock reserved for potential future issuance in accordance with an agreement with the U.S. Environmental Protection Agency ("EPA") that certain (if any) future environmental claims can be settled in cash or common stock. The Company has also reserved for future issuance 9.7 million shares of LTV common stock under incentive programs authorizing the granting of stock options and restricted stock awards to directors, officers and other key employees. The stock incentive programs are designed to encourage a personal investment in LTV common stock from participating individuals. The options to purchase common stock are primarily outstanding for terms of ten years from date of grant and are granted at prices not lower than market price at date of grant. The market value of restricted stock awarded has been recorded as unearned compensation and is included in "Other" in shareholders' equity. Unearned compensation is primarily being amortized to expense over a five-year vesting period. Transactions under these programs are summarized as follows:
1998 1997 1996 ------------------------ ----------------------- ------------------------- Shares Price Shares Price Shares Price ================================================================================================================================= Stock options (shares in thousands): Options outstanding at beginning of year 3,354 $11.19 - $19.33 1,691 $12.21 -$19.33 1,420 $14.17 - $19.33 Granted 1,182 5.56 - 13.38 1,828 11.19 - 14.38 322 12.21 - 14.31 Exercised -- -- - -- -- -- - -- -- -- - -- Canceled (174) 11.94 - 19.33 (165) 12.21 - 19.33 (51) 14.78 - 19.33 - --------------------------------------------------------------------------------------------------------------------------------- Options outstanding at end of year 4,362 $ 5.56 - $19.33 3,354 $11.19 -$19.33 1,691 $12.21 - $19.33 - --------------------------------------------------------------------------------------------------------------------------------- Options exercisable at end of year 1,725 $12.21 - $19.33 1,295 $12.21 -$19.33 1,093 $14.74 - $19.33 - --------------------------------------------------------------------------------------------------------------------------------- Restricted stock (shares in thousands): Shares outstanding at beginning of year 185 $ 9.88 - $18.88 184 $14.00 -$18.88 186 $14.00 - $18.88 Granted 41 5.25 - 13.13 6 9.88 - 14.25 2 -- - 14.13 Unrestricted (5) 12.68 - 18.88 (1) -- - 18.88 (4) -- - 18.88 Canceled (3) 9.88 - 18.88 (4) -- - 18.88 -- -- - -- - --------------------------------------------------------------------------------------------------------------------------------- Shares outstanding at end of year 218 $ 5.25 - $18.88 185 $14.00 -$18.88 184 $14.00 - $18.88 - ---------------------------------------------------------------------------------------------------------------------------------
20 18 In 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation," which permits companies to recognize expense for stock-based awards based on their fair value on the date of grant or to continue to follow Accounting Principles Board ("APB") Opinion No. 25 with proforma disclosures. The Company continues recognition of stock option programs in accordance with APB Opinion No. 25. As required by Statement No. 123, the Company has determined the proforma information under the fair value method using the Black-Scholes option pricing module with the following weighted-average assumptions used in 1998, 1997 and 1996: risk-free rate of return of 5.8%; dividend yield of 1%; volatility of 28%; and 7 years as the expected life for all years presented. The proforma effect of these options would increase the loss by $3 million ($0.03 per share) in 1998, decrease net income by $3 million ($0.02 per share) in 1997 and have no effect in 1996. ================================================================================ COMPREHENSIVE INCOME The following table reflects the accumulated balances of other comprehensive income (in millions):
GAINS ACCUMULATED (LOSSES) ON MINIMUM OTHER MARKETABLE PENSION COMPREHENSIVE SECURITIES LIABILITY INCOME (LOSS) ===================================================================================== Balance at January 1, 1996 $ 2 $ (185) $ (183) 1996 change (2) 176 174 - ------------------------------------------------------------------------------------ Balance at December 31, 1996 -- (9) (9) 1997 change -- 6 6 - ------------------------------------------------------------------------------------ Balance at December 31, 1997 -- (3) (3) 1998 change -- (8) (8) - ------------------------------------------------------------------------------------ Balance at December 31, 1998 $ -- $ (11) $ (11) - ------------------------------------------------------------------------------------
================================================================================ EARNINGS PER SHARE Basic earnings per share calculations for the years ended December 31, 1998, 1997 and 1996 are based on the weighted-average common shares outstanding of 100 million, 103 million and 105 million, respectively. Diluted earnings per share calculations for the years ended December 31, 1998, 1997 and 1996 are based on the weighted-average common shares outstanding of 100 million, 104 million and 108 million, respectively. Diluted shares were determined by increasing basic shares outstanding to reflect common stock equivalents and in 1996 the stock issuable upon conversion of the convertible notes and preferred shares. The preferred shares were antidilutive in 1998 and 1997. 21 19 ================================================================================ COMMITMENTS AND CONTINGENCIES The Company is the subject of various threatened or pending legal actions, contingencies and commitments in the normal course of conducting its business. The Company provides for costs related to these matters when a loss is probable and the amount is reasonably estimable. The effect of the outcome of these matters on the Company's future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing of the resolution of such matters. While it is not possible to predict with certainty, management believes that the ultimate resolution of such matters will not have a material adverse effect on the consolidated financial position of the Company. LTV is subject to changing and increasingly stringent environmental laws and regulations concerning air emissions, water discharges, and waste disposal, as well as remediation activities that involve the clean-up of environmental media such as soils and groundwater ("remediation liabilities"). As a consequence, the Company has incurred, and will continue to incur, substantial capital expenditures and operating and maintenance expenses in order to comply with such requirements. Additionally, if any of the Company's facilities are unable to meet required environmental standards or laws, those operations could be temporarily or permanently closed. Important examples of laws referred to above are the 1990 Clean Air Act Amendments ("CAA Amendments"), the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), and related state and local laws. The CAA Amendments and its state and local counterparts require progressively more stringent air emission quality standards in the future. RCRA and related state laws include so-called "corrective action" provisions that grant the environmental agencies authority to require the Company to clean up environmental media, such as soils and groundwater, under certain prescribed conditions. These corrective action provisions, in most instances, are not self-implementing and, in the Company's view, create no current legal obligation. If, in the future, the Company were required to implement corrective actions, the Company could be required to record additional liabilities which cannot be estimated at this time, but could be substantial. A 1993 agreement with the USWA provided that a portion of the requirements with respect to certain postemployment benefits would be secured by a junior lien of $250 million on collateral with an unencumbered fair market value of at least $500 million. The initial security was provided by the grant of a mortgage on facilities having a carrying value of approximately $500 million. The Company has a labor agreement that expires August 1, 1999 with the USWA covering approximately 9,500 active hourly workers. A significant amount of the Company's sales are to the transportation market and several of the Company's domestic automobile customers also have labor contracts that expire during 1999. The Company has commitments to purchase approximately $230 million of its coke and coal requirements for each of the years 1999 and 2000. ================================================================================ FINANCIAL INSTRUMENTS Cash equivalents are investments in highly liquid, low-risk money market funds and commercial paper with maturities of three months or less and are classified as held-to-maturity. The carrying amount of these assets approximates fair value. The Company carries marketable securities at fair value. The estimated fair value of the Company's long-term debt at December 31, 1998 would be $28 million less than the recorded value based on current market interest rates available for financings with similar terms and maturities. The Company has entered into futures contracts to reduce its exposure to fluctuations in costs caused by the price volatility of certain metal commodities and natural gas supplies. The Company does not engage in speculation and the results of these hedging transactions become part of the cost of the commodity or supply being hedged. At December 31, 1998 and 1997, the notional value of these contracts totaled $233 million and $6 million, respectively. The contracts extend for periods of up to five years. At December 31, 1998 and 1997, the fair value of the contracts, which is based on quoted market prices, approximated the carrying value of zero. Outstanding letters of credit totaled $86 million and $101 million at December 31, 1998 and 1997, respectively. The letters of credit guarantee performance to third parties of various trade activities and tax benefit transfer agreements. The Company does not believe it is practicable to estimate the fair value of the guarantees and does not believe exposure to loss is likely. The cost of marketable securities approximated fair value at December 31, 1998 and 1997. The cost and fair value of marketable securities by contractual maturity at December 31, 1998 are as follows (in millions): ========================================================== Due in one year or less $ 53 Due after one year through two years 61 Due after two years 96 - ---------------------------------------------------------- $ 210 - ----------------------------------------------------------
22 20 ================================================================================ VP BUILDINGS ACQUISITION On July 2, 1997, the Company, through its new wholly owned subsidiary VP Buildings, purchased substantially all of the assets and certain liabilities of Varco-Pruden Building Products Division of United Dominion Industries, Inc. for cash of approximately $188 million. This transaction was accounted for under the purchase method of accounting; and accordingly, the results of operations of the acquired company are included in the consolidated financial statements from the date of acquisition. The unaudited proforma financial information for the Company is presented as if the acquisition of VP Buildings had occurred on January 1, 1996. The proforma results for 1997 and 1996, respectively (in millions except per share data) are: net sales $4,590 and $4,440, income before extraordinary charges $44 and $124, net income $33 and $124 and diluted earnings per share $0.30 and $1.14. These proforma results have been prepared for comparative purposes only and are not necessarily representative of the results of operations that would have resulted if the acquisition occurred at the beginning of the year or that may result in the future. ================================================================================ SPECIAL CHARGES In the fourth quarter of 1998, the Company recorded $55 million of special charges for the closure of cold roll finishing operations in the Number 2 finishing department at the Cleveland Works, recognition of an asset impairment of an electrogalvanizing joint venture, the shutdown of an electric-weld pipe line and salaried force reduction. The charges include $38 million of employee costs covering approximately 460 hourly and salaried employees, $15 million for the impairment of the joint venture and $2 million for other costs. The impairment is due to a change in the utilization of the joint venture facility. The amount of the asset impairment was determined based on a third party valuation. There have been no cash expenditures in 1998. In the third quarter of 1997, LTV recorded a special charge of $150 million for the closure of the Pittsburgh coke plant. On February 28, 1998, the Company ceased operations and began the closure process. The special charge included $51 million for facilities write-down, $34 million for employee costs and $65 million for demolition, environmental matters and other costs. Through December 31, 1998, spending of $28 million has been charged against this reserve. Retirement related costs have been recorded as plan curtailments. ================================================================================ OTHER FINANCIAL DATA Net interest and other income included the following (in millions):
1998 1997 1996 ================================================ Interest and other income $ 26 $ 45 $ 44 Interest expense (3) (3) (1) - ------------------------------------------------ Total $ 23 $ 42 $ 43 - ------------------------------------------------
The Company has incurred research and development expense of $14 million in 1998 and 1997 and $15 million in 1996. Supplemental cash flow information is presented as follows (in millions):
1998 1997 1996 ===================================================================================================== Changes in assets and liabilities which provided (used) net cash: Receivables $ 96 $ (26) $ (7) Inventories 47 (89) (60) Other assets (6) 34 13 Accounts payable (33) (19) 96 Other liabilities (103) (6) (31) Other 1 (1) (13) - ----------------------------------------------------------------------------------------------------- Total $ 2 $ (107) $ (2) - ----------------------------------------------------------------------------------------------------- Interest payments $ 27 $ 11 $ 13 Income tax payments 7 8 2 Capitalized interest 31 19 15 Purchases of marketable securities 2,258 10,443 4,684 Sales of marketable securities 2,408 10,650 4,575 - -----------------------------------------------------------------------------------------------------
23 21 ================================================================================ SEGMENT REPORTING The Company operates in three reportable segments consisting of Integrated Steel, Metal Fabrication and Corporate and Other. Integrated Steel manufactures and sells a diversified line of carbon steel products consisting of hot rolled and cold rolled sheet, galvanized and tin mill products for the domestic transportation, appliance, container and electrical equipment markets. Metal Fabrication produces pipe, conduit and tubular products for use in transportation, agriculture, oil and gas and construction industries. The segment also engineers and manufactures pre-engineered, low-rise steel building systems for manufacturing, warehousing and commercial applications. Corporate and Other consists of steel-related joint ventures, primarily Trico Steel and CAL which are accounted for using the equity method and corporate investments and related income and expense. LTV's reportable segments are strategic business units grouped by similar products, technologies and manufacturing processes. Segments are managed separately because each serves a different market and group of customers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Segment performance is measured on pretax profit or loss from operations before special items. Integrated Steel accounts for intersegment sales at current market prices as if transactions had taken place with third parties. The Company's sales to the transportation market approximated 30% of sales in each of the last three years. The Company also sells to the steel service center and converter markets that, in turn, sell to the transportation and other industries. Management does not believe significant credit risk exists at December 31, 1998. Sales for the years 1998, 1997 and 1996 to the Company's largest customer, General Motors Corporation, represented approximately 9%, 11% and 11%, respectively, of total sales.
YEAR ENDED DECEMBER 31, 1998 ---------------------------------------------------------------- INTEGRATED METAL CORPORATE (IN MILLIONS) STEEL FABRICATION & OTHER TOTAL ================================================================================================================================ Trade sales $ 3,590 $ 683 $ -- $ 4,273 Intersegment sales 94 -- -- 94 - -------------------------------------------------------------------------------------------------------------------------------- Interest and other income 3 -- 23 26 Net interest expense (2) -- (1) (3) Results of affiliates' operations -- 5 (54) (49) Segment income (loss) before income taxes and special charges 11 63 (43) 31 Special charges (52) (3) -- (55) Segment assets 4,378 466 1,961 6,805 Capital expenditures 310 52 -- 362 Depreciation and amortization 247 12 -- 259 Investments in equity affiliates 67 21 226 314 Assets Total assets for reportable segments $ 6,805 Intersegment eliminations (1,481) - -------------------------------------------------------------------------------------------------------------------------------- Consolidated total $ 5,324 - --------------------------------------------------------------------------------------------------------------------------------
24 22
YEAR ENDED DECEMBER 31, 1997 --------------------------------------------------------------- INTEGRATED METAL CORPORATE (IN MILLIONS) STEEL FABRICATION & OTHER TOTAL ============================================================================================================================== Trade sales $ 3,905 $ 541 $ -- $ 4,446 Intersegment sales 101 -- -- 101 - ------------------------------------------------------------------------------------------------------------------------------ Interest and other income 3 -- 42 45 Net interest expense -- -- (3) (3) Results of affiliates' operations -- 4 (45) (41) Segment income (loss) before income taxes and special charge 186 51 (18) 219 Special charge (150) -- -- (150) Segment assets 4,590 399 1,958 6,947 Capital expenditures 310 16 -- 326 Depreciation and amortization 255 8 -- 263 Investments in equity affiliates 84 21 207 312 Assets Total assets for reportable segments $ 6,947 Intersegment eliminations (1,401) - ------------------------------------------------------------------------------------------------------------------------------ Consolidated total $ 5,546 - ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 --------------------------------------------------------------- INTEGRATED METAL CORPORATE STEEL FABRICATION & OTHER TOTAL ============================================================================================================================== Trade sales $ 3,813 $ 322 $ -- $ 4,135 Intersegment sales 97 -- -- 97 - ------------------------------------------------------------------------------------------------------------------------------ Interest and other income 4 -- 40 44 Net interest expense -- -- (1) (1) Results of affiliates' operations -- -- -- -- Segment income (loss) before income taxes 125 20 28 173 Segment assets 4,621 79 1,718 6,418 Capital expenditures 240 3 -- 243 Depreciation and amortization 263 3 -- 266 Investments in equity affiliates 87 -- 169 256 Assets Total assets for reportable segments $ 6,418 Intersegment eliminations (1,008) - ------------------------------------------------------------------------------------------------------------------------------ Consolidated total $ 5,410 - ------------------------------------------------------------------------------------------------------------------------------
25 23 SUPPLEMENTAL GUARANTOR INFORMATION LTV's wholly owned subsidiary, LTV Steel Company, Inc., has fully and unconditionally guaranteed the Company's obligation to pay principal, premium, if any, and interest with respect to the Senior Notes. The following supplemental condensed consolidating financial statements of The LTV Corporation present (in millions): balance sheets as of December 31, 1998 and 1997; statements of operations and cash flows for the years ended December 31, 1998, 1997 and 1996. The LTV Corporation (Parent), LTV Steel Company, Inc. (Guarantor) and the combined Non-Guarantor Subsidiaries' investments in subsidiaries are accounted for using the equity method. Necessary elimination entries have been made to consolidate the Parent and all of its subsidiaries. Management does not believe that separate financial statements of the Guarantor are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor are not presented. ================================================================================ CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1998 ------------------------------------------------------------------ NON-GUARANTOR (IN MILLIONS) PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ============================================================================================================================= Cash, cash equivalents and marketable securities $ 276 $ (22) $ 57 $ -- $ 311 Receivables 3 -- 372 -- 375 Notes receivable/(payable) -- 887 (887) -- -- Inventories -- -- 854 -- 854 Other current assets 3 8 4 -- 15 - ---------------------------------------------------------------------------------------------------------------------------- Total current assets 282 873 400 -- 1,555 Intercompany, net 282 126 (408) -- -- Investments and other noncurrent assets 1,405 215 446 (1,562) 504 Property, plant and equipment, net -- 3,038 227 -- 3,265 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,969 $ 4,252 $ 665 $ (1,562) $ 5,324 - ---------------------------------------------------------------------------------------------------------------------------- Total current liabilities $ 25 $ 700 $ 114 $ -- $ 839 Long-term debt 298 -- 4 -- 302 Postemployment health care and other insurance benefits -- 1,432 120 -- 1,552 Pension benefits -- 560 5 -- 565 Other 18 400 20 -- 438 Shareholders' equity 1,628 1,160 402 (1,562) 1,628 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,969 $ 4,252 $ 665 $ (1,562) $ 5,324 - ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 ------------------------------------------------------------------ NON-GUARANTOR PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ============================================================================================================================ Cash, cash equivalents and marketable securities $ 467 $ (15) $ 68 $ -- $ 520 Receivables 4 -- 466 -- 470 Notes receivable/(payable) -- 303 (303) -- -- Inventories -- 859 43 -- 902 Other current assets 4 7 1 -- 12 - ---------------------------------------------------------------------------------------------------------------------------- Total current assets 475 1,154 275 -- 1,904 Intercompany, net 83 172 (255) -- -- Investments and other noncurrent assets 1,470 186 432 (1,607) 481 Property, plant and equipment, net -- 2,939 222 -- 3,161 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 2,028 $ 4,451 $ 674 $ (1,607) $ 5,546 - ---------------------------------------------------------------------------------------------------------------------------- Total current liabilities $ 37 $ 799 $ 102 $ -- $ 938 Long-term debt 298 57 -- -- 355 Postemployment health care and other insurance benefits -- 1,458 112 -- 1,570 Pension benefits -- 538 10 -- 548 Other 17 419 23 -- 459 Shareholders' equity 1,676 1,180 427 (1,607) 1,676 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 2,028 $ 4,451 $ 674 $ (1,607) $ 5,546 - ----------------------------------------------------------------------------------------------------------------------------
26 24 ================================================================================ CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 -------------------------------------------------------------------- NON-GUARANTOR (IN MILLIONS) PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED =========================================================================================================== Net sales $ -- $ 3,718 $ 4,199 $ (3,644) $ 4,273 Costs and expenses: Cost of products sold -- 3,376 4,041 (3,644) 3,773 Depreciation and amortization -- 231 28 -- 259 Selling, general and administrative 12 132 40 -- 184 Results of affiliates' operations 32 30 49 (62) 49 Net interest and other (20) (63) 60 -- (23) Special charges -- 40 15 -- 55 - ----------------------------------------------------------------------------------------------------------- Total 24 3,746 4,233 (3,706) 4,297 - ----------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (24) (28) (34) 62 (24) Income tax provision (10) (12) (13) 38 3 - ----------------------------------------------------------------------------------------------------------- Net loss $ (14) $ (16) $ (21) $ 24 $ (27) - -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 -------------------------------------------------------------------- NON-GUARANTOR PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ================================================================================================================ Net sales $ -- $ 3,965 $ 1,179 $ (698) $ 4,446 Costs and expenses: Cost of products sold -- 3,460 1,039 (698) 3,801 Depreciation and amortization -- 241 22 -- 263 Selling, general and administrative 11 120 33 -- 164 Results of affiliates' operations (41) (40) 41 81 41 Net interest and other (39) 8 (11) -- (42) Special charge -- 148 2 -- 150 - --------------------------------------------------------------------------------------------------------------- Total (69) 3,937 1,126 (617) 4,377 - --------------------------------------------------------------------------------------------------------------- Income before income taxes 69 28 53 (81) 69 Income tax provision 28 11 21 (32) 28 - --------------------------------------------------------------------------------------------------------------- Income before items below 41 17 32 (49) 41 Extraordinary loss (4) -- -- -- (4) Cumulative effect of accounting change (7) -- -- -- (7) - --------------------------------------------------------------------------------------------------------------- Net income $ 30 $ 17 $ 32 $ (49) $ 30 - ---------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 -------------------------------------------------------------------- NON-GUARANTOR PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ============================================================================================================== Net sales $ -- $ 3,872 $ 947 $ (684) $ 4,135 Costs and expenses: Cost of products sold -- 3,404 876 (684) 3,596 Depreciation and amortization -- 250 16 -- 266 Selling, general and administrative 10 117 16 -- 143 Results of affiliates' operations (138) (7) -- 145 -- Net interest and other (45) 5 (3) -- (43) - -------------------------------------------------------------------------------------------------------------- Total (173) 3,769 905 (539) 3,962 - -------------------------------------------------------------------------------------------------------------- Income before income taxes 173 103 42 (145) 173 Income tax provision 64 38 15 (53) 64 - -------------------------------------------------------------------------------------------------------------- Net income $ 109 $ 65 $ 27 $ (92) $ 109 - --------------------------------------------------------------------------------------------------------------
27 25 ================================================================================ CONDENSED CONSOLIDATING CASH FLOWS STATEMENT
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------- NON-GUARANTOR (IN MILLIONS) PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED ================================================================================================================================ Cash provided by (used in) operating activities $ (178) $ 401 $ 89 $ -- $ 312 - -------------------------------------------------------------------------------------------------------------------------------- Investing activities: Capital expenditures -- (348) (14) -- (362) Investments in steel-related businesses -- -- (80) -- (80) Net sales of marketable securities 150 -- -- -- 150 Other -- 5 (10) -- (5) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 150 (343) (104) -- (297) - -------------------------------------------------------------------------------------------------------------------------------- Financing activities: Borrowings -- -- 4 -- 4 Payments on long-term debt -- (62) -- -- (62) Pension funding to restored plans -- (2) -- -- (2) Dividends paid and other (14) -- -- -- (14) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (14) (64) 4 -- (74) - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (42) (6) (11) -- (59) Cash and cash equivalents at beginning of year 108 (16) 68 -- 160 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 66 $ (22) $ 57 $ -- $ 101 - --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------------------ NON-GUARANTOR PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED =============================================================================================================================== Cash provided by (used in) operating activities $ (74) $ 376 $ 95 $ -- $ 397 - ------------------------------------------------------------------------------------------------------------------------------- Investing activities: Capital expenditures -- (319) (7) -- (326) VP Buildings acquisition (188) -- -- -- (188) Investments in steel-related businesses -- -- (101) -- (101) Net sales of marketable securities 207 -- -- -- 207 Other -- 1 23 -- 24 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 19 (318) (85) -- (384) - ------------------------------------------------------------------------------------------------------------------------------- Financing activities: Borrowings 290 -- -- -- 290 Payments on long-term debt (106) -- -- -- (106) Pension funding to restored plans -- (59) (2) -- (61) Repurchases of common stock (68) -- -- -- (68) Dividends paid and other (15) -- -- -- (15) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 101 (59) (2) -- 40 - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 46 (1) 8 -- 53 Cash and cash equivalents at beginning of year 62 (15) 60 -- 107 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 108 $ (16) $ 68 $ -- $ 160 - -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------------------- NON-GUARANTOR PARENT GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED =============================================================================================================================== Cash provided by (used in) operating activities $ (92) $ 494 $ 93 $ -- $ 495 - ------------------------------------------------------------------------------------------------------------------------------- Investing activities: Capital expenditures -- (222) (21) -- (243) Investments in steel-related businesses -- -- (79) -- (79) Net purchases of marketable securities (109) -- -- -- (109) Other (2) 2 (6) -- (6) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (111) (220) (106) -- (437) - ------------------------------------------------------------------------------------------------------------------------------- Financing activities: Pension funding to restored plans -- (199) (6) -- (205) Dividends paid and other (12) -- -- -- (12) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (12) (199) (6) -- (217) - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (215) 75 (19) -- (159) Cash and cash equivalents at beginning of year 277 (90) 79 -- 266 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 62 $ (15) $ 60 $ -- $ 107 - -------------------------------------------------------------------------------------------------------------------------------
28 26 REPORT OF MANAGEMENT The management of The LTV Corporation is responsible for the preparation of the accompanying consolidated financial statements in conformity with generally accepted accounting principles appropriate in the circumstances. Management is also responsible for the determination of estimates and judgments used in the financial statements and the preparation of other financial information included in this annual report to shareholders. The financial statements have been audited by Ernst & Young LLP, independent auditors. The management of the Company is responsible for and maintains an accounting system and related internal controls that it believes are sufficient to provide reasonable assurance that assets are safeguarded against unauthorized acquisition, use or disposition, that transactions are executed and recorded in accordance with management's authorization and that the financial records are reliable for preparing financial statements. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefits derived and that the balancing of those factors requires estimates and judgments. The system is tested and evaluated regularly by the Company's internal auditors as well as by the independent auditors in connection with their annual audit. Management responds to all significant recommendations of the internal and independent auditors and makes changes to the systems when appropriate. The Board of Directors has an Audit Committee of Directors who are not members of management. The Committee meets with management, the internal auditors and the independent auditors in connection with its review of matters relating to the Company's annual financial statements; the Company's internal audit program; the Company's system of internal accounting controls; and the services of the independent auditors. The Committee also periodically meets with internal auditors as well as the independent auditors, without management present, to discuss appropriate matters. In addition, the internal auditors and the independent auditors have full and free access to meet with the Committee, with or without management representatives present, to discuss the results of their audits, the adequacy of internal accounting controls and the quality of financial reporting. /s/ J. Peter Kelly J. Peter Kelly Chairman of the Board, President and Chief Executive Officer /s/ Arthur W. Huge Arthur W. Huge Executive Vice President and Chief Financial Officer February 24, 1999 ================================================================================ REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS THE LTV CORPORATION We have audited the accompanying consolidated balance sheet of The LTV Corporation (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in equity and cash flows for each of the three years in the period ended December 31, 1998. 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 referred to above present fairly, in all material respects, the consolidated financial position of The LTV Corporation at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in the "Summary of Significant Accounting Policies" note to the financial statements, in 1997, the Company changed its method of accounting for start-up costs. Cleveland, Ohio January 28, 1999 /s/ Ernst & Young LLP 29 27 FIVE-YEAR FINANCIAL SUMMARY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994 ================================================================================================================================== Summary of Operations for the Year Sales $ 4,273 $ 4,446 $ 4,135 $ 4,283 $ 4,233 Income from continuing operations before special charges 31 219 173 311 203 Special charges 55 150 -- -- -- Income tax provision Taxes payable (refundable) 3 10 -- 2 (2) Taxes not payable in cash -- 18 64 115 75 - ---------------------------------------------------------------------------------------------------------------------------------- Total 3 28 64 117 73 - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations (27) 41 109 194 130 Discontinued operations -- -- -- (9) (3) Extraordinary charge -- (4) -- -- -- Cumulative effect of a change in accounting for start-up costs -- (7) -- -- -- Net income (loss) $ (27) $ 30 $ 109 $ 185 $ 127 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share (diluted) Continuing operations $ (0.29) $ 0.37 $ 1.01 $ 1.76 $ 1.30 Net income (loss) (0.29) 0.27 1.01 1.68 1.27 Dividends paid per common share $ 0.12 $ 0.12 $ 0.09 $ -- $ -- Financial Position at Year End Working capital $ 716 $ 966 $ 989 $ 1,024 $ 1,190 Total assets 5,324 5,546 5,410 5,380 5,525 Property, net 3,265 3,161 3,117 3,140 3,189 Long-term debt 302 355 153 150 183 Other noncurrent obligations 2,555 2,577 2,648 3,008 3,222 Shareholders' equity 1,628 1,676 1,710 1,375 1,283 Other Financial Information Property additions $ 362 $ 326 $ 243 $ 205 $ 234 Depreciation and amortization 259 263 266 252 242 Other Operating Data Raw steel production (millions of tons) 8.2 8.9 8.8 8.5 8.3 Steel product shipments (millions of tons) 7.7 8.2 8.1 8.0 8.0 Operating rate 95% 106% 105% 102% 99% Employees 14,800 15,500 14,000 14,400 15,300 - ----------------------------------------------------------------------------------------------------------------------------------
30 28 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table presents quarterly financial information (in millions, except per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ========================================================================================== Net sales 1998 $ 1,127 $ 1,093 $ 1,064 $ 989 1997 1,072 1,092 1,135 1,147 Gross margin 1998 142 116 137 105 1997 141 153 177 174 Income (loss) from operations 1998 32 6 15 (76) 1997 45 45 (86) 65 Other charges (1) 1997 -- -- (4) (7) Net income (loss) 1998 19 4 11 (61) 1997 27 27 (56) 32 Market price per share 1998 High $ 14.56 $ 13.50 $ 10.44 $ 6.94 Low 9.50 9.38 5.25 5.00 1997 High 13.63 14.56 14.38 13.13 Low 11.63 12.50 11.94 9.38 Market price per Series A Warrant (2) 1998 High $ 0.28 $ 0.14 $ -- $ -- Low 0.03 0.02 -- -- 1997 High 0.94 0.81 0.63 0.38 Low 0.56 0.50 0.25 0.03 Earnings per share (3) 1998 Basic and diluted $ 0.19 $ 0.03 $ 0.11 $ (0.62) 1997 Basic and diluted 0.25 0.25 (0.54) 0.31 Dividends paid per common share 1998 $ 0.03 $ 0.03 $ 0.03 $ 0.03 1997 0.03 0.03 0.03 0.03 ==========================================================================================
(1) Other charges consist of $4 million of an extraordinary charge on the early extinguishment of debt and $7 million of a cumulative effect of a change in accounting for start-up costs. (2) Series A Warrants expired at June 28, 1998. (3) Earnings per share are computed independently for each of the quarters based on the weighted-average number of shares outstanding for each period, and the sum of the quarters may not necessarily be equal to the full year earnings per share amount. 31 EX-21 6 EXHIBIT 21 1 Exhibit 21 LIST OF SUBSIDIARIES -------------------- (AS OF DECEMBER 31, 1998)
NAME OF COMPANY PERCENTAGE OWNED - --------------- ---------------- THE LTV CORPORATION Parent Georgia Tubing Corporation 100% Vought Arabia 49% Investment Bankers, Inc. 100% Inmobiliaria Nueva Icacos, S.A. de C.V. 100% Jalcite I, Inc. 100% Black River Lime Company 25% Cliffs and Associates Limited 46.5% Jones & Laughlin Steel Incorporated 100% Kingsley International Insurance Ltd. 100% LTV Blanking Corporation 100% TWB Company, L.L.C. 11.1% LTV Corporation, The (Wyoming) 100% LTV/EGL Holding Company 100% L-S Electro-Galvanizing Company 60% LTV Electro-Galvanizing, Inc. 100% LTV International N.V. 100% LTV Properties, Inc. 100% LTV Sales Finance Company 100%
2
NAME OF COMPANY PERCENTAGE OWNED - --------------- ---------------- THE LTV CORPORATION (Continued) Parent LTV Steel Company, Inc. 100% Aliquippa and Southern Railroad Company 100% Cayman Mineracao do Brasil Ltda 97.5% Chicago Short Line Railway Company 100% Crystalane, Inc. 100% Cuyahoga Valley Railway Company, The 100% Mahoning Valley Railway Company, The 100% Dearborn Leasing Company 100% L-S II Electro-Galvanizing Company 50% Erie B Corporation 100% LTV Steel Mining Company 45% Erie I Corporation 100% LTV Steel Mining Company 10% Fox Trail, Inc. 100% Cayman Mineracao do Brasil Ltda 2.5% J&L Empire, Inc. 100% Empire Iron Mining Partnership 25% Marquette Range Coal Service Company 48.5% Jalcite II, Inc. 100% Black River Lime Company 12.5% Jalore Mining Company, Ltd. 100% L.A.S. Resources, Inc. 53% LTV Pickle, Inc. 100% Monongahela Connecting Railroad Company, The 100% Nemacolin Mines Corporation 100% Northern Land Company 50% O'Hare Group, Inc., The 10% Presque Isle Corporation 53.5% Processing Technology, Inc. 47.6% Republic Technology Corporation 100% Reserve Mining Company 50% River Terminal Railway Company, The 100% Youngstown Erie Corporation 100% LTV Steel Mining Company 45% YST Erie Corporation 100% LTV Steel de Mexico, Ltd. 100% Lagermex S.A. de C.V. 25%
3
NAME OF COMPANY PERCENTAGE OWNED - --------------- ---------------- THE LTV CORPORATION (Continued) Parent LTV-Trico, Inc. 100% Trico Steel Company, L.L.C. 50% RepSteel Overseas Finance N.V. 100% Trico Steel Company, Inc. 100% VP Buildings, Inc. (f/k/a VP Acquisition Company) 100% Varco-Pruden Exports, Ltd. 100% Varco Pruden International, Inc. (f/k/a Buildings International Company) 100% Varco Pruden International de Chile Limitada 100% IPAC-Varco Pruden, S.A. 49% IMSA-Varco Pruden, S.A. de C.V. 49% Medabil Varco-Pruden S.A. 30% Miller Varco-Pruden S.A. 40% VP Buildings - Wisconsin, Inc. 100% The Bethel Real Estate Co., Inc. 100% United Panel, Inc. 100%
EX-23 7 EXHIBIT 23 1 Exhibit (23) Consent of Ernst & Young LLP We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-52543, Form S-8 No. 33-52545, Form S-8 No. 33-54229, Form S-8 No. 33-56857, Form S-8 No. 33-56861, Form S-8 No. 33-61399, Form S-8 No. 33-20431 and Form S-8 No. 333-25865) pertaining to the Non-Employee Director Stock Option Plan, Management Incentive Program, LTV Steel Group Employee Stock Ownership Plan, Non-Employee Directors' Equity Compensation Plan, The Hourly Employee Stock Payment Alternative Plan, Non-Qualified Stock Option Plan for Certain Key Executives of Continental Emsco Company, Salaried Employee Stock Option Plan and The LTV Corporation Amended and Restated Management Incentive Program, respectively, of The LTV Corporation of our report dated January 28, 1999, with respect to the consolidated financial statements of The LTV Corporation incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1998 and of our report dated January 22, 1999 with respect to the financial statements of Trico Steel Company, L.L.C. included in the Form 10-K of The LTV Corporation for the year ended December 31, 1998. /s/ Ernst & Young LLP Cleveland, Ohio February 26, 1999 EX-27 8 EXHIBIT 27
5 1,000,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 101 210 392 17 854 1,555 4,325 1,060 5,324 839 302 0 1 53 1,574 5,324 4,273 4,273 3,773 4,320 (26) 0 3 (24) 3 (27) 0 0 0 (27) (0.29) (0.29)
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