-----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, QG70al1OV0KoQPmDerm0ueHbITK2DsLnptiIoKgKOVVy+u1LKFC466mC+DrZquha PcOnIO/tXoYVIqj0+pn23w== 0000950131-98-000451.txt : 19980130 0000950131-98-000451.hdr.sgml : 19980130 ACCESSION NUMBER: 0000950131-98-000451 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19980129 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL STEEL CORP CENTRAL INDEX KEY: 0000070578 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 250687210 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-00983 FILM NUMBER: 98516887 BUSINESS ADDRESS: STREET 1: 4100 EDISON LAKES PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 46545-3440 BUSINESS PHONE: 2192737000 MAIL ADDRESS: STREET 1: 4100 EDISON LAKE PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 46545-3440 10-K/A 1 AMENDMENT NO. 3 TO FORM 10-K 1996 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 3 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number 1-983 NATIONAL STEEL CORPORATION (Exact name of registrant as specified in its charter) Incorporated under the Laws of the State of Delaware 25-0687210 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 219-273-7000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered ------------------- ----------------------------------------- Class B Common Stock New York Stock Exchange First Mortgage Bonds, 8-3/8% New York Stock Exchange Series due 2006 Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At March 3, 1997, there were 43,288,240 shares of the registrant's common stock outstanding. Aggregate market value of voting stock held by non-affiliates: $177,348,615. The amount shown is based on the closing price of National Steel Corporation's Common Stock on the New York Stock Exchange on March 3, 1997. Voting stock held by officers and directors is not included in the computation. However, National Steel Corporation has made no determination that such individuals are "affiliates" within the meaning of Rule 405 under the Securities Act of 1933. Documents Incorporated By Reference: Selected portions of the Annual Report to Stockholders for the year ended December 31, 1996 are incorporated by reference into Part II and IV of the Report on Form 10-K. Selected portions of the 1997 Proxy Statement of National Steel Corporation are incorporated by reference into Part III of this Report on Form 10-K. 1 Exhibit 13 to Registrant's Form 10-K for the Fiscal Year Ended December 31, 1996 is hereby amended as follows: This amendment reflects restated financial statements (See Note B to Consolidated Financial Statements contained in amended Exhibit 13 filed herewith). The amended items are set forth below: Items 6, 7, and 8 are incorporated by reference to amended Exhibit 13 filed herewith. Schedule II is filed herewith. Exhibit 13 is filed herewith. This Amendment No. 3 supersedes Amendment No. 2 which contained an error in the Report of Ernst & Young LLP Independent Auditors. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL STEEL CORPORATION By: /s/ John A. Maczuzak -------------------------------------------- John A. Maczuzak President and Chief Operating Officer By: /s/ Michael D. Gibbons -------------------------------------------- Michael D. Gibbons Acting Chief Financial Officer NATIONAL STEEL CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Thousands of Dollars)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ----------- ---------------------------------- ----------- ------------- ADDITIONS ---------------------------------- Balance at Charged to Beginning Charged to Other Accounts - Deductions - Balance at Description of Period Costs and Expense Describe Describe End of Period ----------- ----------- ----------------- -------------- ----------- ------------- Year Ended December 31, 1996 - ---------------------------- RESERVES DEDUCTED FROM ASSETS Allowances and discounts on trade notes and accounts receivable $ 19,986 $21,560 (1) $ ---- $22,226 (3) $ 19,320 Valuation allowance on deferred tax assets 135,600 ---- (37,200) (2) ---- 98,400 Year Ended December 31, 1995 - ---------------------------- RESERVES DEDUCTED FROM ASSETS Allowances and discounts on trade notes and accounts receivable $ 15,185 $21,046 (1) $ ---- $16,245 (3) $ 19,986 Valuation allowance on deferred tax assets 189,500 ---- (53,900) (2) ---- 135,600 Year Ended December 31, 1994 - ---------------------------- RESERVES DEDUCTED FROM ASSETS Allowances and discounts on trade notes and accounts receivable $ 21,380 $28,504 (1) $ ---- $34,699 (3) $ 15,185 Valuation allowance on deferred tax assets 252,100 ---- (62,600) (2) ---- 189,500
NOTE 1 - Provision for doubtful accounts of $748, $4,854 and $(3,155) for 1996, 1995 and 1994, respectively and other charges consisting primarily of claims for pricing adjustments and discounts allowed. NOTE 2 - Represents the increase or (decrease) in the net deferred tax asset. NOTE 3 - Doubtful accounts charged off, net of recoveries, claims and discounts allowed and reclassification to other assets. 34 EX-13 2 SELECTED PAGES FROM THE 1996 ANNUAL REPORT EXHIBIT 13 (Amended)
National Steel Corporation Financial Report - -------------------------------------------------------------------------------- Five Year Selected Financial and Operating Information............................ 16 Management's Discussion and Analysis.............. 17 Statements of Consolidated Income................. 23 Consolidated Balance Sheets....................... 24 Statements of Consolidated Cash Flows............. 25 Statements of Changes in Consolidated Stockholders' Equity and Redeemable Preferred Stock--Series B............. 26 Notes to Consolidated Financial Statements........ 27 Report of Ernst & Young LLP Independent Auditors.. 46
- -------------------------------------------------------------------------------- FIVE YEAR SELECTED FINANCIAL AND OPERATING INFORMATION Dollars in Millions, Except Per Share Data
- ---------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 1995 1994 1993 1992 (Restated) (Restated) (Restated) (Restated) (Restated) - ---------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Net sales $ 2,954 $ 2,954 $ 2,700 $ 2,419 $ 2,373 Cost of products sold 2,618 2,529 2,337 2,255 2,106 Depreciation, depletion and amortization 144 145 142 137 115 - ---------------------------------------------------------------------------------------------------------------------- Gross profit 192 280 221 27 152 Selling, general and administrative 137 154 138 137 133 Unusual charges (credits) -- 5 (25) 111 37 Income (loss) from operations 65 129 113 (219) (12) Financing costs (net) 36 39 56 62 62 Income (loss) before income taxes, extraordinary items and cumulative effect of accounting changes 32 90 169 (281) (74) Extraordinary items -- 5 -- -- (50) Cumulative effect of accounting changes 11 -- -- (16) 76 Net income (loss) applicable to common stock 43 97 174 (273) (65) Per share data applicable to common stock: Income (loss) before extraordinary items and cumulative effect of accounting changes .74 2.13 4.79 (7.58) (3.59) Net income (loss) .99 2.26 4.79 (8.07) (2.56) Cash dividends -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Cash and cash equivalents 109 128 162 5 55 Working capital 281 250 252 51 100 Net property, plant and equipment 1,456 1,469 1,394 1,399 1,395 Total assets 2,556 2,669 2,500 2,305 2,189 Current maturities of long term obligations 38 36 36 28 33 Long term obligations 470 502 671 674 662 Redeemable Preferred Stock--Series B 64 65 67 68 138 Stockholders' equity 645 600 401 220 358 - ---------------------------------------------------------------------------------------------------------------------- OTHER DATA Shipments (net tons, in thousands) 5,895 5,564 5,208 5,005 4,974 Raw steel production (net tons, in thousands) 6,557 6,081 5,763 5,551 5,380 Effective capacity utilization 93.7% 96.5% 96.1% 100.0% 100.5% Number of employees (year end) 9,579 9,474 9,711 10,069 10,299 Capital investments $ 129 $ 215 $ 138 $ 161 $ 284 Total debt and redeemable preferred stock as a percent of total capitalization 47.0% 50.1% 65.9% 77.8% 69.9% Common shares outstanding at year end (in thousands) 43,288 43,288 36,376 36,361 25,500 - ----------------------------------------------------------------------------------------------------------------------
16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Audit Committee Inquiry and Restatement of Prior Periods Pursuant to an Audit Committee inquiry, the Company has determined that certain prior period financial statements must be restated. The financial statements for each of the quarters of and the years ended 1996, 1995 and 1994 have been restated to correct accounting errors. The effect of the restatement on items previously presented in the Management's Discussion and Analysis of Financial Condition and Results of Operations is as follows:
Year ended Year ended Year ended December 31, 1996 December 31, 1995 December 31, 1994 -------------------------- -------------------------- -------------------------- As Reported As Restated As Reported As Restated As Reported As Restated ----------- ----------- ----------- ----------- ----------- ----------- Net sales $2,954,033 $2,954,033 $2,954,218 $2,954,218 $2,700,273 $2,700,273 Cost of products sold 2,619,469 2,618,151 2,527,521 2,529,323 2,353,970 2,337,154 Selling, general and administrative expense 138,568 136,731 153,690 153,690 138,223 138,223 Unusual charges (credits) -- -- 5,336 5,336 (24,888) (24,888) Financing costs (net) 36,249 36,249 39,214 39,214 55,699 55,699 Other income 3,732 3,732 -- -- 110,972 110,972 Income tax provision (credit) (15,728) (10,840) (13,651) (12,201) (16,676) (16,546) Extraordinary item -- -- 5,373 5,373 -- -- Cumulative effect of accounting change -- 11,100 -- -- -- -- Net income 44,557 53,924 110,796 107,544 168,512 185,198 % Net income increase (decrease) 21.0% (2.9)% 9.9%
The following Management's Discussion and Analysis has been revised to reflect the restated financial statements as discussed in Note B to the Consolidated Financial Statements. RESULTS OF OPERATIONS--COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Net Sales Net sales for 1996 and 1995 for National Steel Corporation (the "Company") each totaled $ 3.0 billion. Despite an increase in volume in 1996, net sales remained essentially unchanged primarily as a result of a decline in average selling prices sustained earlier in the year, as well as lower outside pellet sales. Steel shipments for 1996 were a record 5,895,000 tons, representing a 5.9% increase compared to the 5,564,000 tons shipped in 1995. Productivity improvements as well as additional capacity provided by the new Triple G coating line at the Granite City Division contributed to this increase. Cost of Products Sold The Company's cost of products sold totaled $2.6 billion in 1996, an increase of $88.8 million, or 3.5%, compared to 1995. Some of the major factors contributing to this increase include the 331,000 net ton increase in steel shipments, unplanned blast furnace and kiln outages at the Granite City Division and National Steel Pellet Company, respectively, as well as a shift in product mix to more costly but higher value-added products. Higher natural gas prices due to extreme cold weather earlier in the year also increased costs. These increases were partially offset by a reduction in costs associated with the decline in outside pellet sales, along with the Company's cost reduction programs. Raw steel production increased to 6,557,000 tons in 1996, a 7.8% increase from the 6,081,000 tons produced in 1995. Selling, General and Administrative Expense Selling, general and administrative expense of $136.8 million in 1996 represents a $16.9 million decrease compared to 1995. This decrease is a result of the favorable settlement of a lawsuit earlier in the year, along with a reduction in the level of spending for professional services. Financing Costs Net financing costs of $36.2 million in 1996 represents a $3.0 million decrease compared to net financing costs of $39.2 million for 1995. This decrease is a result of the prepayment of $133.3 million of debt in August 1995, offset by a reduction in interest income as a result of lower average cash balances. Income Taxes During 1996 and 1995, the Company recognized income tax credits and additional deferred tax assets of $21.6 million and $28.6 million, respectively, based upon future projections of income. In 1996 and 1995, these credits were offset by $10.4 million and $9.5 million of federal income tax expense and $.3 million and $6.9 million of state income tax expense, respectively. The Company's effective tax rate was lower than the combined federal and state statutory rates primarily because of the continued utilization of available federal and state net operating loss carryforwards. As such, the Company's effective alternative minimum tax rate was approximately 24% and 11% for 1996 and 1995, respectively. Settlement of Legal Proceedings During the third quarter of 1996, the Company settled two disputes that resulted in aggregate gains totaling $11.2 million. On September 12, 1996, following the closing of the settlement agreement between the Company and Bakers Port, Inc., the Company sold 213 acres out of a total of 2,338 acres of land received in connection with this settlement. The sale generated a net gain of $3.7 million, which was recorded as other income. On August 15, 1996, the Company finalized the settlement agreement with the Pension Benefit Guaranty Corporation (the "PBGC") relating to the Donner-Hanna Joint Venture pension plans. As a part of the settlement, the Company paid $8.5 million to the PBGC. Since the Company had estimated and accrued $16.0 million for this liability, a gain of $7.5 million was recorded in connection with this settlement. This gain reduced cost of goods sold during the third quarter of 1996. 17 Subsequent Event On January 31, 1997, the Company entered into a definitive agreement with North Limited ("North") and Bethlehem Steel Corporation ("BSC"), pursuant to which the Company and BSC will sell to North their respective minority equity interests in the Iron Ore Company of Canada ("IOC"). The Company, which owns 21.73% of IOC, will receive approximately $85 million in proceeds in exchange for its shares and realize an after-tax gain of approximately $25 million. The Company expects to record the gain during the first quarter of 1997 at the time of the closing of the transaction. Change in Pension Measurement Date and Discount Rate and Increase in Minimum Contributions The Company retroactively reflected in its 1996 income statement the cumulative effect of an accounting change which resulted from a change in the valuation date used to measure liabilities related to pension and OPEB liabilities. The cumulative impact of this change was $11.1 million. The valuation date to measure the liabilities was changed from December 31 to September 30 and was made in order to provide more timely information with respect to pension and OPEB provisions. This adjustment was done in conjunction with certain restatements of prior periods. (See Note B to the Consolidated Financial Statements - Audit Committee Inquiry and Restatement of Prior Periods.) As a result of recent federal legislation, the Company expects minimum pension plan contributions to increase from $38.3 million in 1996 to approximately $93.0 million in 1997. As a result of the increase in long term interest rates in the United States, at September 30, 1996, the Company increased the discount rate used to calculate the actuarial present value of its accumulated benefit obligation for pensions and OPEB by 75 basis points to 8.0%, from the rate used at December 31, 1995. The effect of these changes did not impact 1996 expense. However, the increase in the discount rate used to calculate the pension obligation decreased the minimum pension liability recorded on the Company's balance sheet from $110.6 million to $17.5 million at September 30, 1996, and at the same time resulted in a $1.3 million increase to stockholders' equity. Adoption of New Accounting Pronouncements During the first quarter of 1996, the Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying value. The adoption of SFAS 121 did not have an impact on the Company's financial statements. The Company also adopted Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation" during the first quarter of 1996. SFAS 123 requires the Company to either adopt a fair value based method of expense recognition for all stock compensation based awards, or provide pro forma net income and earnings per share ("EPS") information as if the recognition and measurement provisions of SFAS 123 had been adopted. The Company decided to account for its stock based compensation awards following the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"). APB 25 requires compensation expense to be recognized only if the market price of the underlying stock exceeds the exercise price on the date of grant. The Company's stock based awards consist of stock options with an exercise price equal to market price on the date of grant. As such, the Company has not recorded compensation expense in connection with these awards. In addition, the effect of applying the SFAS 123 fair value method to the Company's stock-based awards results in net income and EPS that are not materially different from amounts reported. Labor Negotiations In 1993, the Company and the United Steelworkers of America ("USWA") negotiated a six year labor agreement continuing through July 1999, with a reopener provision in 1996 for specified payroll items and employee benefits. Pursuant to the terms of the reopener, if the parties could not reach a settlement, they were to submit final offers to an arbitrator who would, after a hearing, consider the information and determine an award. On October 30, 1996, the arbitrator handed down an award regarding the arbitration of the reopener. The arbitrator's award is comparable to the industry pattern for payroll and benefit items under collective bargaining agreements between the USWA and other integrated steel producers. Pursuant to the award, employees represented by the USWA received an immediate wage increase of fifty cents per hour retroactive to August 1, 1996, with increases of twenty five cents per hour on August 1, 1997 and 1998. In addition, $500 lump sum bonuses will be paid to each employee represented by the USWA on May 1, 1998 and 1999. 18 The Company estimates that these items, along with certain other provisions in the agreement, will increase employee related expenses by approximately $7 million, $15 million and $18 million for 1997, 1998 and 1999, respectively. The Company's 1996 labor costs increased by approximately $4 million as a result of the arbitrator's award. RESULTS OF OPERATIONS--COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Net Sales Net sales for 1995 totaled $3.0 billion, a 9.4% increase compared to 1994. This increase was attributable to an increase in volume as well as an increase in realized selling prices. Steel shipments for 1995 were 5,564,000 tons, representing a 6.8% increase compared to the 5,208,000 tons shipped in 1994. Raw steel production increased to 6,081,000 tons, a 5.5% increase from the 5,763,000 tons produced in 1994. Cost of Products Sold Cost of products sold as a percentage of sales declined from 86.6% in 1994 to 85.6% in 1995. This improvement was the result of an increased level of shipments, higher average selling prices and various cost reduction programs, and was achieved despite a major blast furnace reline. Selling, General and Administrative Expense Selling, general and administrative expenses of $153.7 million in 1995 represented an increase of $15.5 million compared to 1994. This increase was largely attributable to nonrecurring outside professional fees associated with various strategic initiatives. Unusual Charges (Credits) Reduction in Workforce--During the fourth quarter of 1994, the Company finalized and implemented a plan that resulted in a workforce reduction of approximately 400 salaried nonrepresented employees, and a restructuring charge of $34.2 million, or $25.6 million net of tax. During the first quarter of 1995, the Company recorded an additional restructuring charge of $5.3 million, or $3.6 million net of tax, as a result of the various elections made by the terminated employees during the first quarter. The aggregate restructuring charge of $39.5 million was comprised of OPEB--$26.5 million; severance--$12.5 million; pensions--($2.6) million and other charges-- $3.1 million. Substantially all of the amounts related to severance and other charges were paid as of December 31, 1995. The remaining balance of $23.9 million related primarily to OPEB and pensions and will require the utilization of cash over the retirement lives of the affected employees. Financing Costs Net financing costs of $39.2 million in 1995 represented a 29.6% decrease compared to net financing costs of $55.7 million for 1994. This decrease was attributable to higher short term investment earnings resulting from the receipt of cash generated by the issuance of 6.9 million shares of Class B Common Stock in February 1995, coupled with a decrease in interest expense as a result of debt reduction. Primary Offering of Class B Common Stock and Extraordinary Item On February 1, 1995, the Company completed a primary offering of 6,900,000 shares of Class B Common Stock, bringing the total number of shares of Class B Common Stock issued and outstanding to 21,176,156 at that time. Subsequent to the offering, NKK Corporation, through its ownership of all 22,100,000 issued and outstanding shares of Class A Common Stock, holds 67.6% of the combined voting power of the Company. The remaining 32.4% of the combined voting power is held by the public. The issuance of the additional shares of Class B Common Stock generated net proceeds of approximately $104.7 million. On August 7, 1995, the Company utilized these proceeds, along with an additional amount of $20.9 million funded from the Company's available cash, to prepay $133.3 million principal amount of the outstanding $323.3 million related party debt associated with the rebuild of the No. 5 Coke Oven Battery serving the Great Lakes Division. This transaction resulted in an extra-ordinary item of $5.4 million, net of related income tax expense of $.5 million, or $.13 per share. 19 LIQUIDITY AND SOURCES OF CAPITAL The Company's liquidity needs arise primarily from capital investments, working capital requirements, pension funding requirements and principal and interest payments on its indebtedness. The Company has satisfied these liquidity needs with funds provided by long term borrowings and cash provided by operations. One source of liquidity consists of a Receivables Purchase Agreement (the "Receivables Purchase Agreement") with commitments of up to $200.0 million. During July 1996, the Company amended the Receivables Purchase Agreement extending the expiration date to May 2001. Also during July 1996, the Company entered into a new $100.0 million credit facility and a new $50.0 million credit facility, which will expire in May 2000 and July 1997, respectively, both of which are secured by the Company's inventories (the "Inventory Facilities"). The Company is currently in compliance with all material covenants of, and obligations under, the Receivables Purchase Agreement, the Inventory Facilities and other debt instruments. On December 31, 1996, there were no cash borrowings outstanding under the Receivables Purchase Agreement or the Inventory Facilities, and outstanding letters of credit under the Receivables Purchase Agreement totaled $89.8 million. For 1996, the maximum availability under the Receivables Purchase Agreement, after reduction for letters of credit outstanding, varied from $59.3 million to $110.4 million and was $88.7 million as of December 31, 1996. At December 31, 1996, total debt and redeemable preferred stock as a percentage of total capitalization decreased to 47.0% as compared to 50.1% at December 31, 1995. Cash and cash equivalents totaled $109.0 million and $127.6 million as of December 31, 1996 and 1995, respectively. At December 31, 1996, obligations guaranteed by the Company approximated $32.2 million, compared to $35.6 million at December 31, 1995. Cash Flows From Operating Activities For 1996, cash provided from operating activities totaled $158.9 million, a decrease of $106.2 million compared to 1995. This decrease is primarily attributable to the $53.6 million decrease in net income as well as a higher usage to fund working capital needs. For 1995, cash provided from operating activities decreased by $51.7 million compared to 1994. However, excluding the after tax effect of the 1994 Bessemer and Lake Erie Railroad litigation gain of $107.9 million, cash provided by operating activities increased by $56.2 million. The increase was primarily attributable to increased sales and improvements in operating results. Cash Flows From Investing Activities Capital investments for the years ended December 31, 1996 and 1995 amounted to $128.6 million and $215.4 million, respectively. The 1996 spending is primarily related to the 72 inch continuous galvanizing line upgrade and construction of the new coating line, both at the Midwest Division, along with the completion of the coating line at the Granite City Division. Capital expenditures during 1995 were primarily for projects related to the Company's Granite City Division. These projects included the construction of the Triple G coating line, the "B" blast furnace reline and the hot strip mill modernization program. Budgeted capital expenditures approximating $297.0 million, of which $99.4 million is committed at December 31, 1996, are expected to be made during 1997 and 1998. These budgeted capital expenditures relate primarily to the completion of the new coating line and the completion of the 72 inch continuous galvanizing line upgrade, both at the Midwest Division, as well as blast furnace repairs scheduled at the Great Lakes Division. Cash Flows From Financing Activities During 1996, the Company utilized $56.7 million for financing activities, which included scheduled repayments of debt, as well as dividend payments on the Company's preferred stock. During the fourth quarter of 1996, a $6.5 million low interest loan was issued to National Steel Pellet Company from the State of Minnesota for the general upgrade of the mine's operations. During the first quarter of 1995, the Company completed a primary offering of 6,900,000 million shares of Class B Common Stock. The issuance of this stock generated net proceeds of $104.7 million, which was used along with cash from operations during the third quarter of 1995 to prepay $133.3 million aggregate principal amount of related party debt. 20 Weirton Liabilities and Preferred Stock In connection with the Company's June 1990 recapitalization, the Company received $146.6 million from FoxMeyer Health Corporation (collectively with its subsidiaries "FOX"), which changed its name to Avatex Corporation in January 1997, in cash and recorded a net present value equivalent liability with respect to certain released Weirton Benefit Liabilities, primarily retiree healthcare and life insurance. As a result of this transaction, the Company's future cash flow will decrease as the released Weirton Benefit Liabilities are paid. During each of 1996 and 1995, such cash payments were $15.4 million. The Series B Redeemable Preferred Stock is presently subject to mandatory redemption by the Company on August 5, 2000 at a redemption price of $58.3 million and may be redeemed beginning January 1, 1998 without the consent of FOX at a redemption price of $62.2 million. Based upon the Company's actuarial analysis, the unreleased Weirton Benefit Liabilities approximate the aggregate remaining dividend and redemption payments with respect to the Series B Redeemable Preferred Stock and, accordingly, such payments are expected to be made in the form of releases of FOX from its obligations to indemnify the Company for corresponding amounts of the remaining unreleased Weirton Benefit Liabilities. Dividend and redemption payments with respect to the Series B Redeemable Preferred Stock reduce the Company's cash flow, even though they are paid in the form of a release of FOX from such obligations, because the Company is obligated, subject to certain limited exceptions, to pay such amounts to the trustee of the pension plan included in the Weirton Benefit Liabilities. If any dividend or redemption payment otherwise required pursuant to the terms of the Series B Redeemable Preferred Stock is less than the amount required to satisfy FOX's then current indemnification obligation, FOX would be required to pay such shortfall in cash to the Company. The Company's ability to fully realize the benefits of FOX's indemnification obligations is necessarily dependent upon FOX's financial condition at the time of any claim with respect to such obligations. On August 20, 1996, FOX filed a Form 10-Q for its quarter ended June 30, 1996 in which it reported a writedown of $238.7 million in its investment in FoxMeyer Drug Company, its principal operating subsidiary. Primarily as a result of this writedown, the consolidated stockholders' equity of FOX was reported in its Form 10-Q for the quarter ended June 30, 1996 as a deficit of $88.4 million. At December 31, 1996, this deficit was $83.0 million. On August 27, 1996, most of FOX's operating subsidiaries (including FoxMeyer Drug Company) filed for relief under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court in Delaware. Although FOX, the parent company, was not included in the Chapter 11 filing, the Chapter 11 filing has caused the Company to have increased concerns about FOX's ability to honor its remaining indemnification obligations to the Company. FOX is subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, files reports and other information with the Securities and Exchange Commission. 21 National Steel Corporation and Subsidiaries Statements of Consolidated Income
- --------------------------------------------------------------------------------------------------------------- Dollars in Thousands, Except Per Share Amounts Years Ended December 31, 1996 1995 1994 (Restated) (Restated) (Restated) - --------------------------------------------------------------------------------------------------------------- Net Sales $2,954,033 $2,954,218 $2,700,273 Cost of products sold 2,618,151 2,529,323 2,337,154 Selling, general and administrative 136,731 153,690 138,223 Depreciation, depletion and amortization 144,413 145,452 141,869 Equity income of affiliates (9,763) (8,767) (5,464) Unusual charges (credits) - 5,336 (24,888) - --------------------------------------------------------------------------------------------------------------- Income from Operations 64,501 129,184 113,379 - --------------------------------------------------------------------------------------------------------------- Other (income) expense Interest and other financial income (7,103) (11,736) (5,542) Interest and other financial costs 43,352 50,950 61,241 Other (3,732) - (110,972) - --------------------------------------------------------------------------------------------------------------- Income before Income Taxes, Extraordinary Item and Cumulative Effect of Accounting Change 31,984 89,970 168,652 - --------------------------------------------------------------------------------------------------------------- Income tax credit (10,840) (12,201) (16,546) - --------------------------------------------------------------------------------------------------------------- Income before Extraordinary Item and Cumulative Effect of Accounting Change 42,824 102,171 185,198 Extraordinary item - 5,373 - Cumulative effect of accounting change 11,100 - - - --------------------------------------------------------------------------------------------------------------- Net Income 53,924 107,544 185,198 Less preferred stock dividends 10,959 10,958 11,038 - --------------------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 42,965 $ 96,586 $ 174,160 =============================================================================================================== Per Share Data Applicable to Common Stock - --------------------------------------------------------------------------------------------------------------- Income before Extraordinary Item and Cumulative Effect of Accounting Change $ .74 $ 2.13 $ 4.79 Extraordinary Item - .13 - Cumulative Effect of Accounting Change .25 - - - --------------------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ .99 $ 2.26 $ 4.79 =============================================================================================================== Weighted average shares outstanding (in thousands) 43,288 42,707 36,367 ===============================================================================================================
See notes to consolidated financial statements. 22
National Steel Corporation and Subsidiaries Consolidated Balance Sheets - --------------------------------------------------------------------------------------------------------------- Dollars in Thousands, Except Per Share Amounts December 31, 1996 1995 (Restated) (Restated) - --------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 109,041 $ 127,616 Receivables, less allowances (1996--$19,320; 1995--$19,986) 281,889 316,662 Inventories 440,567 413,375 - --------------------------------------------------------------------------------------------------------------- Total current assets 831,497 857,653 - --------------------------------------------------------------------------------------------------------------- Investments in affiliated companies 65,399 59,885 Property, plant and equipment Land and land improvements 241,582 232,072 Buildings 271,713 258,207 Machinery and equipment 3,151,302 3,049,935 - --------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 3,664,597 3,540,214 Less accumulated depreciation, depletion and amortization 2,209,079 2,071,511 - --------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 1,455,518 1,468,703 Deferred tax assets 151,500 129,900 Intangible pension asset 17,040 108,822 Other assets 35,338 44,277 - --------------------------------------------------------------------------------------------------------------- Total Assets $ 2,556,292 $ 2,669,240 =============================================================================================================== LIABILITIES, Current liabilities REDEEMABLE Accounts payable $ 234,892 $ 255,574 PREFERRED Salaries and wages 67,964 89,987 STOCK AND Withheld and accrued taxes 69,137 66,005 STOCKHOLDERS' Pension and other employee benefits 79,132 96,218 EQUITY Other accrued liabilities 55,487 60,759 Income taxes 6,427 3,027 Current portion of long term obligations 37,731 35,750 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 550,770 607,320 - --------------------------------------------------------------------------------------------------------------- Long term obligations 323,550 339,613 Long term obligations to related parties 146,744 161,912 Long term pension liabilities 243,237 326,151 Postretirement benefits other than pensions 251,769 225,306 Other long term liabilities 332,130 343,573 Redeemable Preferred Stock--Series B 63,530 65,030 - --------------------------------------------------------------------------------------------------------------- Stockholders' equity Common Stock par value $.01: Class A--authorized 30,000,000 shares; issued and outstanding 22,100,000 shares in 1996 and 1995 221 221 Class B--authorized 65,000,000 shares; issued and outstanding 21,188,240 shares in 1996 and 1995 212 212 Preferred Stock--Series A 36,650 36,650 Additional paid-in capital 465,359 465,359 Retained earnings 142,120 97,893 - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity 644,562 600,335 - --------------------------------------------------------------------------------------------------------------- Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity $ 2,556,292 $ 2,669,240 ===============================================================================================================
See notes to consolidated financial statements. 23 National Steel Corporation and Subsidiaries Statements of Consolidated Cash Flows
- ------------------------------------------------------------------------------------------------ Dollars in Thousands YEARS ENDED DECEMBER 31, 1996 1995 1994 (Restated) (Restated) (Restated) - ------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net Income $ 53,924 $ 107,544 $ 185,198 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 144,413 145,452 141,869 Carrying charges related to facility sales and plant closings 22,385 24,307 24,337 Net gain on disposal of non-core assets (3,732) -- -- Equity income of affiliates (9,763) (8,767) (5,464) Dividends from affiliates 4,375 6,332 6,252 Long term pension liability (net of change in intangible pension asset) 18,430 24,763 36,707 Postretirement benefits 29,459 43,579 23,598 Extraordinary item -- (5,373) -- Cumulative effect of accounting change (11,100) -- -- Deferred income taxes (21,600) (28,600) (20,700) Changes in working capital items: Receivables 34,773 (23,793) (68,160) Inventories (27,192) (44,291) 3,085 Accounts payable (20,682) (17,012) 30,292 Accrued liabilities (38,209) 52,386 (32,025) Other (16,576) (11,431) (8,147) - ----------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 158,905 265,096 316,842 - ----------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Purchases of property, plant and equipment (128,621) (215,442) (137,519) Proceeds from sale of assets 4,118 110 1,694 Net proceeds from sale of non-core assets 3,732 -- -- - ----------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (120,771) (215,332) (135,825) - ----------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Exercise of stock options -- 169 211 Issuance of Class B Common Stock -- 104,734 -- Prepayment of related party debt -- (125,624) -- Debt repayments (35,750) (35,849) (83,845) Borrowings 6,500 -- 87,950 Payment of released Weirton Benefit Liabilities (15,360) (15,429) (16,614) Payment of unreleased Weirton Liabilities and their release in lieu of cash dividends on Redeemable Preferred Stock--Series B (8,066) (7,099) (7,055) Dividend payments on Preferred Stock--Series A (4,033) (4,032) (4,032) Dividend payments on Redeemable Preferred Stock--Series B -- (964) (1,008) - ----------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (56,709) (84,094) (24,393) - ----------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents (18,575) (34,330) 156,624 Cash and cash equivalents at beginning of the year 127,616 161,946 5,322 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at end of the year $ 109,041 $ 127,616 $ 161,946 - ----------------------------------------------------------------------------------------------- Supplemental Cash Payment Information Interest and other financing costs paid $ 42,487 $ 45,627 $ 60,342 Income taxes paid 16,525 22,229 5,338 - -----------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 24 National Steel Corporation and Subsidiaries Statements of Changes in Consolidated Stockholders' Equity and Redeemable Preferred Stock--Series B
- ---------------------------------------------------------------------------------------------------------------------------------- Dollars in Thousands Common Common Preferred Additional Retained Total Redeemable Stock-- Stock-- Stock-- Paid-In Earnings Stockholders' Preferred Class A Class B Series A Capital (Deficit) Equity Stock--Series B - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 as previously reported $221 $143 $36,650 $360,314 $(207,366) $189,962 $68,030 Adjustment to correct prior period accounting errors - - - - 30,344 30,344 - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 221 143 36,650 360,314 (177,022) 220,306 68,030 1994 (Restated) Net Income (Restated) 185,198 185,198 Amortization of excess of book value over redemption value of Redeemable Preferred Stock--Series B 1,500 1,500 (1,500) Cumulative dividends on Preferred Stock-- Series A and B (12,538) (12,538) Exercise of stock options 211 211 Minimum pension liability 5,934 5,934 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 221 143 36,650 360,525 3,072 400,611 66,530 1994 (Restated) Net Income (Restated) 107,544 107,544 Amortization of excess of book value over redemption value of Redeemable Preferred Stock--Series B 1,500 1,500 (1,500) Cumulative dividends on Preferred Stock-- Series A and B (12,458) (12,458) Issuance of Common Stock--Class B 69 104,665 104,734 Exercise of stock options 169 169 Minimum pension liability (1,765) (1,765) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 221 212 36,650 465,359 97,893 600,335 65,030 1995 (Restated) Net Income (Restated) 53,924 53,924 Amortization of excess of book value over redemption value of Redeemable Preferred Stock--Series B 1,500 1,500 (1,500) Cumulative dividends on Preferred Stock-- Series A and B (12,459) (12,459) Minimum pension liability (Restated) 1,262 1,262 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, $221 $212 $36,650 $465,359 $ 142,120 $644,562 $63,530 1996 (Restated) - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 25 National Steel Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 1996 Note A--Significant Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of National Steel Corporation and its majority owned subsidiaries (the "Company"). Intercompany accounts and transactions have been eliminated. Nature of Operations. The Company is a domestic manufacturer engaged in a single line of business, the production and processing of steel. The Company targets high value-added applications of flat rolled carbon steel for sale primarily to the automotive, construction and container markets. The Company also sells hot and cold rolled steel to a wide variety of other users including the pipe and tube industry and independent steel service centers. The Company's principal markets are located throughout the United States. In 1996 and 1995, no single customer accounted for more than 10% of net sales. In 1994, a single customer accounted for approximately 10% of net sales. Sales to the automotive market accounted for approximately 28% of total net sales in 1996 and 1995, and 29% in 1994. Concentration of credit risk related to trade receivables is limited due to the large numbers of customers in differing industries and geographic areas and management's credit practices. Since 1986, the Company has had cooperative labor agreements with the United Steelworkers of America (the "USWA") and other labor organizations, which collectively represent 82.6% of the Company's employees. The Company entered into a six year agreement with these labor organizations effective as of August 1, 1993 (the "1993 Settlement Agreement"). Additionally, the 1993 Settlement Agreement contains a no-strike clause also effective through 1999. Scheduled negotiations reopened in 1996, and were ultimately resolved utilizing the arbitration provisions provided for in the 1993 Settlement Agreement without any disruption to operations. Cash Equivalents. Cash equivalents are short-term liquid investments which consist principally of time deposits and commercial paper at cost which approximates market. These investments have maturities of three months or less at the time of purchase. Inventories. Inventories are stated at the lower of last-in, first-out ("LIFO") cost or market. Based on replacement cost, inventories would have been approximately $168.8 and $146.0 million higher than reported at December 31, 1996 and 1995, respectively. During each of the last three years certain inventory quantity reductions caused liquidations of LIFO inventory values. These liquidations did not have a material effect on net income. The Company's inventory as of December 31 is as follows:
- --------------------------------------------------- Inventories 1996 1995 (Restated) (Restated) Dollars in thousands - --------------------------------------------------- Finished and semi-finished $390,675 $368,623 Raw materials and supplies 184,331 182,118 - --------------------------------------------------- 575,006 550,741 Less LIFO reserve 134,439 137,366 - --------------------------------------------------- $440,567 $413,375 ===================================================
The Company originally recorded a $3.5 million reserve for slow moving inventory at December 31, 1996 which was eliminated as part of the restatement. See Note B--Audit Committee Inquiry and Restatement of Prior Periods. Investments in Affiliated Companies. Investments in affiliated companies (corporate joint ventures and 20% to 50% owned companies) are stated at cost plus equity in undistributed earnings since acquisition. Undistributed earnings of affiliated companies included in retained earnings at December 31, 1996 and 1995 amounted to $14.6 million and $8.9 million, respectively. (See Note N-- Investment in Iron Ore Company of Canada regarding its sale subsequent to year end.) Property, Plant and Equipment. Property, plant and equipment are stated at cost and include certain expenditures for leased facilities. Interest costs applicable to facilities under construction are capitalized. Capitalized interest amounted to $4.0 million in 1996, $6.3 million in 1995 and $3.7 million in 1994. Amortization of capitalized interest amounted to $5.5 million in 1996 and $5.6 million in 1995 and 1994. Depreciation, Depletion and Amortization. Depreciation of production facilities and amortization related to capitalized lease obligations are generally provided by charges to income computed by the straight-line method. Depreciation and depletion of certain raw material facilities and furnace relinings are computed on the basis of tonnage produced in relation to estimated total production to be obtained from such facilities. 26 Research and Development. Research and development costs are expensed when incurred and are charged to cost of products sold. Expenses for 1996, 1995 and 1994 amounted to approximately $11.6 million, $9.8 million and $7.9 million, respectively. Financial Instruments. Financial instruments consist of cash and cash equivalents, long term obligations (excluding capitalized lease obligations), and the Series B Redeemable Preferred Stock. The fair value of these financial instruments approximates their carrying amounts at December 31, 1996. At December 31, 1996 and 1995, the Company had not invested in any derivative financial instruments. Earnings per Share. Earnings per share of common stock ("EPS") is computed by dividing net income applicable to common stock by the sum of the weighted average shares of common stock outstanding during the period plus common stock equivalents, if dilutive. Use of Estimates. Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications. Certain items in prior years have been reclassified to conform with the current year presentation. NOTE B - AUDIT COMMITTEE INQUIRY AND RESTATEMENT OF PRIOR PERIODS The Audit Committee of the Company's Board of Directors in the third quarter of 1997 was informed of allegations about managed earnings, including excess reserves and the accretion of such reserves to income over multiple periods, as well as allegations about deficiencies in the system of internal controls. The Audit Committee engaged legal counsel who, with the assistance of an accounting firm, has inquired into these matters. The Company, based upon the inquiry, has determined the need to restate its financial statements for certain prior periods. In the Form 10-Q filed on November 14, 1997, the Company included the effects of the restatement that increased previously reported retained earnings at December 31, 1996 by $49.7 million and January 1, 1992 by $31.0 million. That Form 10-Q also indicated that the Audit Committee inquiry was continuing. Subsequent to that filing, as a result of further review initiated due to that inquiry, and as part of its 1997 year end closing process, the Company has become aware of certain additional accounting errors which require restatement. These additional adjustments affect the reported results for 1996, and result in reporting a net earnings increase of $3.4 million in 1996. On December 15, 1997, the Board of Directors approved the termination of the Company's Vice President-Finance in connection with the Audit Committee inquiry. During January 1998, legal counsel to the Audit Committee issued its report to the Audit Committee and the Audit Committee approved the report and concluded its inquiry. On January 21, 1998, the Board of Directors accepted the report and approved the recommendations, except for the recommendation to revise the Audit Committee Charter, which will be considered at the next Board of Directors meeting. The report found certain misapplications of generally accepted accounting principles and accounting errors, including excess reserves, which have been corrected by the restatements as discussed below. The report found that the accretion of excess reserves to income during the first, second and third quarters of 1997 as described in the amended Forms 10-Q for those quarters may have had the effect of management of earnings as the result of errors in judgment and misapplications of generally accepted accounting principles. However, these errors do not appear to have involved the intentional misstatement of the Company's accounts. The report also found weaknesses in the internal controls and recommended various improvements in the Company's system of internal controls, a comprehensive review of such controls, a restructuring of its finance and accounting department, and expansion of the role of the internal audit function, as well as corrective measures to be taken related to the specific causes of the accounting errors. The Company has begun to implement these recommendations. The Securities and Exchange Commission (the "Commission") has authorized an investigation pursuant to a formal order of investigation relating to the matters described above. The Company has been cooperating with the Staff of the Commission and intends to continue to do so. The following tables reflect the effects of the restatement on reported net income (loss) and retained earnings (accumulated deficit) (in millions of dollars):
1996 Restatement: - ----------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year ----------- ----------- ----------- ----------- ---- Income (Loss) Before Income Taxes and Accounting Change - --------------------------------- As Originally Reported $ (21.0) $ 5.0 $ 21.2 $ 23.6 $ 28.8 As Restated $ (19.8) $ 12.4 $ 12.1 $ 27.3 $ 32.0 Income (Loss) Before Accounting Change: - -------------------- As Originally Reported $ (15.6) $ 10.4 $ 24.3 $ 25.5 $ 44.6 As Restated $ (14.2) $ 17.9 $ 11.5 $ 27.6 $ 42.8 Net Income (Loss): - ------------------ As Originally Reported $ (15.6) $ 10.4 $ 24.3 $ 25.5 $ 44.6 As Restated $ (14.2) $ 17.9 $ 22.6 $ 27.6 $ 53.9 Earnings (Loss) Per Share: - -------------------------- As Originally Reported $ ( .42) $ .18 .50 * $ .52 $ .78 As Restated $ ( .39) $ .35 $ .46 * $ .57 $ .99
- ------------------- * Third quarter 1996 reported earnings per share before cumulative effect of accounting change was $.50, the restated amount was $.20; full year as reported was $.78 and the restated amount was $.74. - ------------------- Pre-tax loss in the first quarter decreased by $1.2 million as a result of the restatement adjustments. The decrease was the result of an approximately $1.8 million adjustment to correct the accruals for certain employee incentive costs, offset by other adjustments which decreased pre-tax income by approximately $.6 million. Pre-tax income in the second quarter increased by $7.4 million as a result of the restatement adjustments. The correction of a delay in recognition of reduced pension and postretirement benefits increased pre-tax income by $8.7 million. These reduced pension and postretirement expenses, which became known to the Company when the January 1 actuarial valuation information was being completed late in the second quarter, were previously recognized and reported in the third quarter. These expenses were reduced from the original estimates as a result of revised interest rate assumptions and as a result of the use of actual claim information with respect to postretirement benefit obligation computations. In addition, the second quarter included a reduction of pre-tax income of approximately $1.0 million to amortize grant income over the useful lives of the productive assets purchased with the grant rather than to recognize such grant income as received. Other adjustments decreased pretax income by $.3 million. Pre-tax income in the third quarter decreased by $9.1 million as a result of the restatement adjustments. This decrease was caused by the aforementioned $8.7 million pension and postretirement benefit adjustment and other adjustments, which decreased pre-tax income by $.4 million. In addition to the effect of the above adjustments on net income, the restated net income in the third quarter was increased $11.1 million to reflect the change made in the measurement date for the Company's pension and postretirement obligations from December 31st to September 30th. This change is accounted for as a cumulative effect of an accounting change. The $3.7 million increase in the tax provision related to the correction of the effective tax rate used in calculating the previously reported income tax provision. As a result of these adjustments, net income for the quarter decreased by $1.7 million. Fourth quarter pre-tax income increased by an aggregate of $3.7 million as a result of the restatement adjustments. This resulted from reflecting the reversal of a reserve for slow moving inventory of $3.5 million previously recorded in the fourth quarter and reflecting a reduction of the allowance for bad debts by $2.0 million from amounts previously reported. This increase in pre-tax income was partially offset by an increase in postemployment benefits obligations based on corrections to actuarial valuations, which decreased pre- tax income by approximately $2.4 million. Other adjustments increased pre-tax income by approximately $.6 million. The tax provision in the fourth quarter was increased in the restated financial statements by approximately $1.6 million as a result of a correction of the effective tax rate used in calculating the previously reported income tax provision.
Effect on Other Years: - ---------------------- 1995 1994 1993 1992 -------- -------- -------- --------- Income (Loss) Before Income Taxes, Extraordinary Item And Accounting Change - ------------------------------ As Originally Reported $ 91.8 $ 151.8 $ (279.9) $ (74.5) As Restated $ 90.0 $ 168.7 $ (281.1) $ (73.9) Income (Loss) Before Extraordinary Item And Accounting Change - ------------------------ As Originally Reported $ 105.4 $ 168.5 $ (242.4) $ (74.7) As Restated $ 102.2 $ 185.2 $ (243.6) $ (74.0) Net Income (Loss) - ----------------- As Originally Reported $ 110.8 $ 168.5 $ (258.9) $ (48.4) As Restated $ 107.5 $ 185.2 $ (260.1) $ (47.8) Earnings (Loss) Per Share - ------------------------- As Originally Reported $ 2.34* $ 4.33 $ (8.04)* $ (2.58)* As Restated $ 2.26* $ 4.79 $ (8.07)* $ (2.56)*
- -------------------- * Reported earnings per share for 1995 before extraordinary items was $2.21, the restated amount was $2.13. Reported earnings (loss) per share for 1993 before cumulative effect of accounting change was $(7.55); the restated amount was $(7.58). Reported earnings (loss) per share for 1992 before extraordinary items and cumulative effect of accounting change was $(3.61); the restated amount was $(3.59). - -------------------- The most significant of the restatement adjustments displayed in the table above occurred in 1994 and 1995. Restated pre-tax income for 1994 increased by $16.9 million. Approximately $13.1 million of the increase in 1994 pre-tax income related to adjustments to actuarially value certain of the Company's postemployment and postretirement benefit liabilities related to workers compensation and benefits for surviving spouses of certain former employees of the Company or joint ventures in which the Company was involved. The remaining adjustments relate to a reduction of the Company's Michigan Single Business Tax accruals and other items, which increased pre-tax income by approximately $3.7 million and $.1 million, respectively, in 1994. The 1995 restated pre-tax income includes an adjustment of approximately $3.8 million to amortize the recognition of grant income over the useful lives of the productive assets purchased with the grant, offset by other adjustments related primarily to postretirement and postemployment benefits, which increased pre-tax income by $2.0 million. Grant income had previously been recognized as income when received. Effect of Restatements on Retained Earnings (Accumulated Deficit) - ----------------------------------------------------------------- As a result of the restatement, Retained Earnings (Accumulated Deficit) as of January 1, 1992 increased by $31.0 million. A comparison of Retained Earnings (Accumulated Deficit) as originally reported and as restated for each of the last five years is as follows:
As Reported As Restated Cumulative Change ----------- ----------- ----------------- January 1, 1992 $ 136.7 $ 167.7 $ 31.0 December 31, 1992 70.8 102.4 31.6 December 31, 1993 (207.4) (177.0) 30.4 December 31, 1994 (44.0) 3.1 47.1 December 31, 1995 54.1 97.9 43.8 December 31, 1996 89.5 142.1 52.6
Adjustments made to reserves at January 1, 1992 consist of the following: - Franchise tax and state tax reserves $14.9 - General office reserve 7.0 - Reserves for shutdown properties 8.9 - Other reserves .2 ----- Total $31.0 ===== The adjustments made to reserves at January 1, 1992 included excess state tax reserves related to franchise taxes of approximately $12.4 million and state income taxes of approximately $2.5 million. The general office reserve was a reserve established to record potential out-of-period items and was determined to be unnecessary at, and subsequent to, December 31, 1991. The excess shutdown reserves related to former operating or mining properties and joint ventures and included retiree medical insurance and other benefit arrangements and other property costs. Note C -- Capital Structure and Primary Offering of Class B Common Stock Ownership: On February 1, 1995, the Company completed a primary offering of 6,900,000 shares of Class B Common Stock, bringing the total number of shares of Class B Common Stock issued and outstanding to 21,176,156 at that time. The issuance of this stock generated net proceeds of $104.7 million, all of which was used for related party debt reduction. Subsequent to the offering, NKK Corporation (collectively with its subsidiaries "NKK"), through its ownership of all 22,100,000 issued and outstanding shares of Class A Common Stock, holds 67.6% of the combined voting power of the Company. The remaining 32.4% of the combined voting power is held by the public. At December 31, 1996, the Company's capital structure was as follows: Series A Preferred Stock At December 31, 1996, there were 5,000 shares of Series A Preferred Stock, par value $1.00 per share (the "Series A Preferred Stock"), issued and outstanding. Annual dividends of $806.30 per share on the Series A Preferred Stock are cumulative and payable quarterly. The Series A Preferred Stock is not subject to mandatory redemption by the Company and is non-voting. All outstanding Shares of Series A Preferred Stock are owned by NKK. In 1996 and 1995, cash dividends of approximately $4.0 million were paid on the Series A Preferred Stock. Series B Redeemable Preferred Stock At December 31, 1996, there were 10,000 shares of Series B Redeemable Preferred Stock issued and outstanding and held by FoxMeyer Health Corporation (collectively with its subsidiaries "FOX"), which changed its name to Avatex Corporation in January 1997. Annual dividends of $806.30 per share on the Series B Redeemable Preferred Stock are cumulative and payable quarterly. Dividends and redemption proceeds, to the extent required by the Stock Purchase and Recapitalization Agreement (the "Recapitalization Agreement"), are used to release FOX from its indemnification obligations with respect to the remaining unreleased liabilities for certain employee benefits of its former Weirton Steel Division employees (the "Weirton Benefit Liabilities"). The Series B Redeemable Preferred Stock dividend permitted release and payment of $8.1 million and $7.1 million, respectively, of previously unreleased Weirton Benefit Liabilities during 1996 and 1995, and a cash payment of $1.0 million during 1995, to reimburse FOX for an obligation previously incurred in connection with the Weirton Benefit Liabilities. There were no cash payments during 1996 in connection with the Weirton Benefit Liabilities. Upon the occurrence of certain events detailed in the Recapitalization Agreement, prior to or coincident with the Series B Redeemable Preferred Stock final redemption, the released Weirton Benefit Liabilities will be recalculated by an independent actuary. Any adjustment to bring the balances of the released Weirton Benefit Liabilities to such recalculated amount will be dealt with in the Series B Redeemable Preferred Stock redemption proceeds or otherwise settled. If the Company does not meet its preferred stock dividend and redemption obligations when due, FOX has the right to cause 27 NKK to purchase the Company's preferred stock dividend and redemption obligations. The Series B Redeemable Preferred Stock is nontransferable and nonvoting. (See Note I--Weirton Liabilities.) The Series B Redeemable Preferred Stock is subject to mandatory redemption on August 5, 2000 at a redemption price of $58.3 million and may not be redeemed prior to January 1, 1998 without the consent of FOX. On January 1, 1998, the redemption price for the Series B Redeemable Preferred Stock would be $62.2 million. Periodic adjustments are made to retained earnings for the excess of the book value of the Series B Redeemable Preferred Stock at the date of issuance over the redemption value. Based upon the Company's actuarial analysis, the unreleased Weirton Benefit Liabilities approximate the aggregate remaining dividend and redemption payments with respect to the Series B Redeemable Preferred Stock, and accordingly, such payments are expected to be made in the form of releases of FOX from its obligations to indemnify the Company for corresponding amounts of the remaining unreleased Weirton Benefit Liabilities. At that time, the Company will be required to deposit cash equal to the redemption amount in the Weirton Retirement Trust, thus leaving the Company's net liability position unchanged. The Series B Redeemable Preferred Stock, with respect to dividend rights and rights on liquidation, ranks senior to the Company's common stock and equal to the Series A Preferred Stock. Class A Common Stock At December 31, 1996, the Company had 30,000,000 shares of $.01 par value Class A Common Stock authorized, of which 22,100,000 shares were issued and outstanding and owned by NKK. Each share of Class A Common Stock is entitled to two votes. No cash dividends were paid on the Class A Common Stock in 1996, 1995 or 1994. Class B Common Stock At December 31, 1996, the Company had 65,000,000 shares of $.01 par value Class B Common Stock authorized and 21,188,240 shares issued and outstanding. No cash dividends were paid on the Class B Common Stock in 1996, 1995 or 1994. All of the issued and outstanding shares of Class B Common Stock are publicly traded. 28 Note D--Long Term Obligations Long term obligations were as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 1995 Dollars in thousands - ---------------------------------------------------------------------------------------------------------------------------------- First Mortgage Bonds, 8.375% Series due August 1, 2006, with general first liens on principal plants, properties, certain subsidiaries and an affiliated company. $ 75,000 $ 75,000 Vacuum Degassing Facility Loan, 10.336% fixed rate due in semi-annual installments through 2000, with a first mortgage in favor of the lenders. 26,375 32,357 Continuous Caster Facility Loan, 10.057% fixed rate to 2000 when the rate will be reset to a current rate. Equal semi-annual payments due through 2007, with a first mortgage in favor of the lenders. 113,920 119,428 Coke Battery Loan, 7.54% fixed rate with semi-annual payments due through 2008. Lenders are wholly-owned subsidiaries of NKK and unsecured. 161,912 177,080 Pickle Line Loan, 7.726% fixed rate due in equal semi-annual installments through 2007, with a first mortgage in favor of the lender. 83,526 87,901 Capitalized lease obligations 24,965 28,485 Other 22,327 17,024 - ---------------------------------------------------------------------------------------------------------------------------------- Total long term obligations 508,025 537,275 Less long term obligations due within one year 37,731 35,750 - ---------------------------------------------------------------------------------------------------------------------------------- Long term obligations $470,294 $501,525 ==================================================================================================================================
Future minimum payments for all long term obligations and leases as of December 31 1996 are as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- CAPITALIZED OPERATING OTHER LEASE LEASES LONG TERM OBLIGATIONS Dollars in thousands - ---------------------------------------------------------------------------------------------------------------------------------- 1997 $ 6,712 $ 61,737 $ 33,792 1998 6,712 59,920 35,484 1999 6,712 52,006 38,797 2000 6,712 48,299 33,721 2001 6,712 37,273 33,729 Thereafter -------- 147,762 307,537 - ---------------------------------------------------------------------------------------------------------------------------------- Total Payments $33,560 $406,997 $483,060 =================================================================================================================================== Less amount representing interest 8,595 Less current portion of obligation under capitalized lease 3,939 - --------------------------------------------------------------------------------------------- Long term obligation under capitalized lease $21,026 =============================================================================================
Operating leases include a coke battery facility which services the Granite City Division and expires in 2004, a continuous caster and the related ladle metallurgy facility which services the Great Lakes Division and expires in 2008, and an electrolytic galvanizing facility which services the Great Lakes Division and expires in 2001. Upon expiration, the Company has the option to extend the leases or purchase the equipment at fair market value. The Company's remaining operating leases cover various types of properties, primarily machinery and equipment, which have lease terms generally for periods of 2 to 20 years, and which are expected to be renewed or replaced by other leases in the normal course of business. Rental expense totaled $72.2 million in 1996, $71.8 million in 1995 and $70.4 million in 1994. The Company borrowed a total of $350.0 million over a three year period ended in 1993 from a United States subsidiary of NKK for the rebuild of the No. 5 coke oven battery servicing the Great Lakes Division. During 1995, the Company utilized proceeds from the 6.9 million share primary offering, along with other cash funds, to prepay - -------------------------------------------------------------------------------- 29 $133.3 million aggregate principal amount of the forementioned loan. During 1996, the Company made principal payments of $15.2 million, and recorded $12.1 million in interest expenses, on the coke battery loan. During 1995, the principal and interest payments on the coke battery loan totaled $152.9 million and $19.7 million, respectively. The 1995 principal payments includes the $133.3 prepayment mentioned above. Accrued interest on the loan as of December 31, 1996 and 1995 was $4.7 million and $5.1 million, respectively. Additionally, deferred financing costs related to the loan were $2.3 million and $5.5 million, respectively, as of December 31, 1996 and 1995. (See Note J--Nonrecurring and Extraordinary Items.) CREDIT ARRANGEMENTS During July 1996, the Company entered into a new $100.0 million credit facility and a new $50.0 million credit facility, which will expire in May 2000 and July 1997, respectively, both of which are secured by the company's inventories (the "Inventory Facilities"). No amounts have been borrowed against the Inventory Facilities. The Company's credit arrangements also consist of a Receivables Purchase Agreement with commitments of up to $200.0 million. As of December 31, 1996, no funded participation interests had been sold under the facility, although $89.8 million in letters of credit had been issued. With respect to the pool of receivables at December 31, 1996, after reduction for letters of credit outstanding, the amount of participating interest eligible for sale was $88.7 million. During 1996, the eligible amount ranged from $59.3 million to $110.4 million. During July 1996, the Company amended the Receivables Purchase Agreement extending the expiration date May 2001. Various debt and certain lease agreements include restrictions on the amount of stockholders' equity available for the payment of dividends. Under the most restrictive of these covenants, stockholders' equity in the amount of $177.8 million was free of such limitations at December 31, 1996. The Company is currently in compliance with all material covenants of, and obligations under, the Receivables Purchase Agreement, the Inventory Facilities and other debts instruments. NOTE E--PENSIONS The Company has various non-contributory defined benefit pension plans covering substantially all employees. Benefit payments for salaried employees are based upon a formula which utilizes employee age, years of credited service and the highest sixty consecutive months of pensionable earnings during the last ten years preceding normal retirement. Benefit payments to most hourly employees are the greater of a benefit calculation utilizing fixed rates per year of service or the highest sixty consecutive months of pensionable earnings during the last ten years preceding retirement, with a premium paid for years of service in excess of thirty years. The Company's funding policy is to contribute, at a minimum, the amount necessary to meet minimum funding standards as prescribed by applicable law. The Company increased the long term rate of return for funding purposes from 8.5% in 1995 to 9.25% in 1996. The Company's contributions to the pension trust for 1996 and 1995 were $59.9 million and $8.9 million, respectively. As a result of recent federal legislation, the Company expects minimum pension contributions for the 1997 plan year to increase to approximately $93.0 million. As a result of a third quarter 1996 change in measurement date from December 31 to September 30 for pensions and other postemployment benefit obligations ("OPEB"), the Company recorded a retroactive adjustment of $8.3 million related to pensions. (This restatement adjustment was recorded as a cumulative effect of an accounting change on the Statement of Consolidated Income and reduced the accrued pension liability by $8.3 million at December 31, 1996. This was done in conjunction with certain restatements of prior periods. See Note B -- Audit Committee Inquiry and Restatement of Prior Periods.) Pension expense and related actuarial assumptions utilized are summarized below: - -------------------------------------------------------------------------------- 1996 1995 1994 (Restated) Dollars in thousands - -------------------------------------------------------------------------------- Assumptions: Discount rate 7.25% 8.75% 7.50% Return on assets 9.25% 8.50% 8.50% Average rate of compensation increase 4.70% 4.70% 4.55% Pension expense: Service cost $ 25,989 $ 19,143 $ 24,713 Interest cost 111,364 110,683 104,320 Actual return on plan assets (82,362) (234,792) 51,240 Net amortization and deferral 6,930 169,756 (114,855) - -------------------------------------------------------------------------------- Net pension expense 61,921 64,790 65,418 Cumulative effect of accounting change (8,300) -- -- Special termination credits -- -- (17,372) - -------------------------------------------------------------------------------- TOTAL PENSION EXPENSE $ 53,621 $ 64,790 $ 48,046 ================================================================================ 30 The funded status of the Company's plans at September 30, 1996 and December 31, 1995 along with the actuarial assumptions utilized are as follows:
- ------------------------------------------------------------------------------------------------------------------ 1996 1995 (Restated) Dollars in thousands - ------------------------------------------------------------------------------------------------------------------ Assumptions: Discount rate 8.00% 7.25% Average rate of compensation increase 4.70% 4.70% - ------------------------------------------------------------------------------------------------------------------ Funded Status: Accumulated benefit obligation ("ABO") including vested benefits of $1,249,551 and $1,328,302 for 1996 and 1995, respectively $1,364,742 $1,441,579 Effect of future pensionable earnings increases 99,502 116,474 - ------------------------------------------------------------------------------------------------------------------ Projected benefit obligation ("PBO") 1,464,244 1,558,053 Plans' assets at fair market value 1,181,708 1,132,077 - ------------------------------------------------------------------------------------------------------------------ PBO in excess of plan assets at fair market value 282,536 425,976 Unrecognized transition obligations (43,809) (56,770) Unrecognized net gain (loss) 106,702 (16,613) Unrecognized prior service cost (98,480) (106,694) Pension contributions October through December 1996 (7,321) -- Adjustment required to recognize minimum pension liability 17,543 110,587 - ------------------------------------------------------------------------------------------------------------------ Accrued pension liability 257,171 356,486 Less pension liability due within one year 13,934 30,335 - ------------------------------------------------------------------------------------------------------------------ Long term pension liability at December 31 $ 243,237 $ 326,151 ==================================================================================================================
As a result of an increase in long term interest rates at September 30, 1996, the Company increased the discount rate used to calculate the actuarial present value of its ABO by 75 basis points to 8.0% from the rate used at December 31, 1995. This is the primary reason for the decrease in the ABO. The adjustment required to recognize the minimum pension liability of $17.5 million and $110.6 million at December 31, 1996 and 1995, respectively, represents the excess of the ABO over the fair value of plan assets, including unfunded accrued pension cost, in underfunded plans. The decrease in the minimum pension liability is primarily attributable to the increase in the discount rate. At September 30, 1996, the Company's pension plans' assets of $1.2 billion were comprised of approximately 58% equity investments, 37% fixed income investments and 5% in real estate investments. Note F--Postretirement Benefits Other Than Pensions The Company provides contributory healthcare and life insurance benefits for certain retirees and their dependents. Generally, employees are eligible to participate in the medical benefit plans if they retired under one of the Company's pension plans on other than a deferred vested basis, and at the time of retirement had at least 15 years of continuous service. However, salaried employees hired after January 1, 1993 are not eligible to participate in the plans. The Company has elected to amortize its transition obligation over 20 years, 16 of which remain at December 31, 1996. As a result of a third quarter 1996 change in measurement date from December 31 to September 30 for pensions and OPEBs, the Company recorded a retroactive adjustment of $2.8 million related to OPEBs. (This restatement adjustment was recorded as a cumulative effect of an accounting change on the Statement of Consolidated Income and reduced the OPEB liability by $2.8 million at December 31, 1996. This was done in conjunction with certain restatements of prior periods. See Note B--Audit Committee Inquiry and Restatement of Prior Periods.) - -------------------------------------------------------------------------------- 31 The components of postretirement benefit cost and related actuarial assumptions were as follows:
- -------------------------------------------------------------------------------- 1996 1995 1994 (Restated) (Restated) (Restated) Dollars in thousands - -------------------------------------------------------------------------------- Assumptions: Discount rate 7.25% 8.75% 7.75% Health care trend rate 7.20% 7.80% 10.10% Postretirement benefit cost: Service cost $12,546 $10,573 $13,737 Interest cost 47,812 54,416 55,243 Amortization of transition obligation 27,759 27,759 27,995 Other (4,887) (5,003) (2,162) - -------------------------------------------------------------------------------- Net periodic postretirement benefit 83,230 87,745 94,813 cost Cumulative effect of accounting change (2,800) -- -- Special termination credits -- -- (4,081) - -------------------------------------------------------------------------------- Total Postretirement benefit cost $80,430 $87,745 $90,732 -------------------------------
Net periodic postretirement benefit cost increased from amounts previously recorded by $3.1 million in 1996, $3.2 million in 1995 and $3.2 million in 1994 as a result of the restatement. See Note B --Audit Committee Inquiry and Restatement of Prior Periods. The following represents the plans' funded status as of September 30, 1996 and December 31, 1995, reconciled with amounts recognized in the consolidated balance sheet and related actuarial assumptions:
- -------------------------------------------------------------------------------- 1996 1995 (Restated) (Restated) Dollars in thousands - -------------------------------------------------------------------------------- Assumptions: Discount rate 8.00% 7.25% Health care trend rate 6.60% 7.20% Accumulated postretirement benefit obligation ("APBO") Retirees $429,774 $ 548,191 Fully eligible active participants 76,945 85,871 Other active participants 108,823 107,388 - -------------------------------------------------------------------------------- Total 615,542 741,450 Plan assets at fair value 48,287 33,201 - -------------------------------------------------------------------------------- APBO in excess of plan assets 567,255 708,249 Unrecognized transition obligation (427,800) (463,144) Unrecognized net gain (loss) 137,432 (8,828) Claims and contributions October through December 1996 (15,118) (971) - -------------------------------------------------------------------------------- Accrued postretirement liability 261,769 235,306 Less postretirement benefit liability due within one year 10,000 10,000 - -------------------------------------------------------------------------------- Long term postretirement benefit liability at December 31 $251,769 $ 225,306 - --------------------------------------------------------------------------------
As a result of the increase in the long term interest rates at September 30, 1996, the Company increased the discount rate used to calculate the actuarial present value of its APBO by 75 basis points to 8.0% from the rate used at December 31, 1995. This is the primary reason for the decrease in the APBO. The assumed healthcare cost trend rate of 6.6% in 1996 decreases gradually to the ultimate trend rate of 5.0% in 2002 and thereafter. A 1.0% increase in the assumed healthcare trend rate would have increased the APBO at September 30, 1996, and postretirement benefit cost for 1996 by $55.3 million and $6.6 million, respectively. In connection with the 1993 Settlement Agreement between the Company and the USWA, the Company began prefunding the OPEB obligation with respect to USWA represented employees beginning in 1994. Pursuant to the terms of the 1993 Settlement Agreement, a Voluntary Employee Benefit Association trust (the "VEBA Trust") was established. Under the terms of the agreement, the Company agreed to contribute a minimum of $10.0 million annually and, under certain circumstances, additional amounts calculated as set forth in the 1993 Settlement Agreement. In 1996 and 1995, the Company contributed $15.5 million and $10.0 million, respectively, to the VEBA Trust. VEBA Trust assets of $48.3 million at September 30, 1996, were comprised of 70.0% equity investments and 30.0% fixed income investments. Note G--Other Long Term Liabilities Other long term liabilities at December 31 consisted of the following:
- -------------------------------------------------------------------------------- 1996 1995 (Restated) (Restated) Dollars in thousands - -------------------------------------------------------------------------------- Deferred gain on sale leasebacks $ 21,503 $ 24,179 Insurance and employee benefits (excluding pensions and OPEB) 117,913 110,986 Plant Closings 45,480 54,319 Released Weirton Benefit Liabilities 122,697 121,373 Other 24,537 32,716 - -------------------------------------------------------------------------------- Total other long term liabilities $332,130 $343,573 - --------------------------------------------------------------------------------
32 Note H--Income Taxes Deferred income taxes reflect the net effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities at December 31, are as follows:
- -------------------------------------------------------------------------------- 1996 1995 (Restated) (Restated) Dollars in thousands - -------------------------------------------------------------------------------- Deferred tax assets Reserves $139,900 $146,200 Employee benefits 206,300 197,200 Net operating loss ("NOL") carryforwards 55,200 55,700 Leases 12,700 17,500 Federal tax credits 30,400 12,600 Other 28,000 22,600 - -------------------------------------------------------------------------------- Total deferred tax assets 472,500 451,800 Valuation allowance (98,400) (135,600) - -------------------------------------------------------------------------------- Deferred tax assets net of valuation allowance 374,100 316,200 - -------------------------------------------------------------------------------- Deferred tax liabilities Book basis of property in excess of tax basis (168,200) (138,500) Excess tax LIFO over book (40,400) (29,100) Other (14,000) (18,700) - -------------------------------------------------------------------------------- Total deferred tax liabilities (222,600) (186,300) - -------------------------------------------------------------------------------- Net deferred tax assets after valuation allowance $ 151,500 $129,900 ================================================================================
In 1996, 1995, and 1994, the Company determined that it was more likely than not that sufficient future taxable income would be generated and tax planning strategies are available to justify increasing the net deferred tax assets after the valuation allowance. Accordingly, the Company recognized additional deferred tax assets of $21.6 million, $28.6 million and $20.7 million in 1996, 1995 and 1994, respectively. Significant components of the provision for income taxes are as follows: - -------------------------------------------------------------------------------- 1996 1995 1994 (Restated) (Restated) (Restated) Dollars in thousands - -------------------------------------------------------------------------------- Current taxes payable: Federal (alternative minimum tax) $ 10,426 $ 9,498 $ 4,146 State and foreign 334 6,901 8 Deferred taxes (21,600) (28,600) (20,700) - -------------------------------------------------------------------------------- Total tax credit $(10,840) $(12,201) $(16,546) ================================================================================
The reconciliation of income tax computed at the federal statutory tax rates to the recorded total tax credit on income before income taxes, extraordinary item and cumulative effect of accounting change is as follows: - -------------------------------------------------------------------------------- 1996 1995 1994 (Restated) (Restated) (Restated) Dollars in thousands - -------------------------------------------------------------------------------- Tax at federal statutory rates $ 11,200 $ 31,500 $ 59,000 Benefits of operating loss carryforward (9,900) (62,200) (86,500) Temporary deductible differences for which (benefit) no benefit was recognized (net) (27,300) 14,700 17,100 Depletion (1,900) (4,300) ------ Dividend exclusion (1,200) (1,800) (1,600) Alternative minimum tax 10,426 9,498 4,146 Other 7,834 401 (8,692) - -------------------------------------------------------------------------------- Total tax credit $(10,840) $(12,201) $(16,546) ================================================================================
The provision for income taxes increased from amounts previously reported by $4.9 million in 1996, $1.4 million in 1995 and $.1 million in 1994 as a result of the restatement. See Note B --Audit Inquiry and Restatement of Prior Periods. At December 31, 1996, the Company had unused NOL carryforwards of approximately $152.6 million, which expire as follows: $35.6 million in 2007 and $117.0 million in 2008. At December 31, 1996, the Company had unused alternative minimum tax credit carryforwards of approximately $24.1 million which may be applied to offset its future regular federal income tax liabilities. These tax credits may be carried forward indefinitely. 33 Note I--Weirton Liabilities On January 11, 1984, the Company completed the sale of substantially all of the assets of its Weirton Steel Division ("Weirton") to Weirton Steel Corporation. In connection with the sale of Weirton, the Company retained certain existing and contingent liabilities (the "Weirton Liabilities") including the Weirton Benefit Liabilities, which consist of, among other things, pension benefits for the then active employees based on service prior to the sale, pension, life and health insurance benefits for the then retired employees and certain environmental liabilities. As part of the 1984 sale of a 50% interest in the Company to NKK, FOX agreed, as between FOX and the Company, to provide in advance sufficient funds for payment and discharge of, and to indemnify the Company against, all obligations and liabilities of the Company, whether direct, indirect, absolute or contingent, incurred or retained by the Company in connection with the sale of Weirton. As part of the 1990 ownership transaction whereby NKK purchased an additional 20% ownership in the Company, the Company released FOX from indemnification of $146.6 million of certain defined Weirton Benefit Liabilities. FOX also reaffirmed its agreement to indemnify the Company for Weirton environmental liabilities as to which the Company is obligated to Weirton Steel Corporation. On May 4, 1993, the Company released FOX from an additional $67.8 million of previously unreleased Weirton Benefit Liabilities in connection with an early redemption of 10,000 shares of Series B Redeemable Preferred Stock. During the first quarter of 1994, FOX sold all of its 3,400,000 shares of Class B Common Stock. In connection with the initial public stock offering, the Company entered into an agreement (the "Definitive Agreement") with FOX and NKK which amends certain terms and conditions of the Recapitalization Agreement. Pursuant to the Definitive Agreement, FOX paid the Company $10.0 million as an unrestricted prepayment for environmental obligations which may arise after such prepayment and for which FOX has previously agreed to indemnify the Company. Such prepayment accrues interest at a variable interest rate which is based upon the prime rate. The interest rate on such prepayment was 10.75% at December 31, 1996. The Company is required to repay to FOX portions of the $10.0 million to the extent the Company's expenditures for such environmental liabilities do not reach specified levels by certain dates over a twenty year period. FOX retains responsibility to indemnify the Company for remaining environmental liabilities arising after such prepayment and in excess of $10.0 million (as reduced by any above described repayments to FOX). At December 31, 1996 and 1995, the balance of the prepayment recorded in accrued liabilities totaled $8.6 million and $7.2 million, respectively. The failure of FOX to satisfy its indemnity obligations in excess of the $10.0 million prepayment could have a material adverse effect on the Company's liquidity or results of operations. The Company's ability to fully realize the benefits of FOX's indemnification beyond the $10 million prepayment is necessarily dependent upon FOX's financial condition at the time of any claim with respect to such obligations. On August 20, 1996, FOX filed a Form 10-Q for its quarter ended June 30, 1996 in which it reported a writedown of $238.7 million in its investment in FoxMeyer Drug Company, its principal operating subsidiary. Primarily as a result of this writedown, the consolidated stockholders' equity of FOX was reported as a deficit of $88.4 million. At December 31, 1996, this deficit was $83.0 million. On August 27, 1996, most of FOX's operating subsidiaries (including FoxMeyer Drug Company) filed for relief under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court in Delaware. Although FOX, the parent company, was not included in the Chapter 11 filing, the Chapter 11 filing has caused the Company to have increased concerns about FOX's ability to honor its remaining indemnification obligations to the Company. FOX is subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, files reports and other information with the Securities and Exchange Commission. At December 31, 1996, the net present value of the released Weirton Benefit Liabilities, based upon a contractual discount factor of 12.0% per annum, is $140.7 million. FOX continues to indemnify the Company for the remaining unreleased Weirton Benefit Liabilities and other liabilities. The Company is indemnified by FOX for such remaining liabilities and, therefore, they are not recorded in the consolidated balance sheet. Such Weirton Liabilities are comprised of (i) the unreleased Weirton Benefit Liabilities, the amount of which, based on the Company's actuarial analysis, approximates the aggregate remaining dividend and redemption payments of $88.6 million with respect to the Series B Redeemable Preferred Stock and (ii) other contingent liabilities, such as environmental liabilities, that are not currently estimable. 34 Note J--Nonrecurring and Extraordinary Items 1996--The Company retroactively reflected in its 1996 income statement the cumulative effect of an accounting change which resulted from a change in the valuation date used to measure liabilities related to pension and OPEBs. The cumulative impact of this change was $11.1 million. The valuation date to measure the liabilities was changed from December 31 to September 30 and was made in order to provide more timely information with respect to pension and OPEB provisions. This restatement adjustment was done in conjunction with certain restatements of prior periods. (See Note B-Audit Committee Inquiry and Restatement of Prior Periods.) 1995--During 1995, the Company's Statement of Consolidated Income reflected two nonrecurring items. An unusual charge of $5.3 million was recorded during the first quarter pursuant to the finalization of a restructuring plan that the Company began in 1994 related to the salaried nonrepresented workforce. In addition, a $5.4 million extraordinary item was recorded during the third quarter in connection with the prepayment of $133.3 million aggregate principal amount of related party debt associated with the No. 5 coke oven battery serving the Great Lakes Division. 1994--During 1994, the Company recorded a net unusual credit of $24.9 million. An unusual charge of $34.2 million was recorded in connection with the restructuring of the salaried nonrepresented workforce. This charge was entirely offset by a $59.1 million credit recorded as a result of the reopening of National Steel Pellet Company ("NSPC"). NSPC had previously been idled in 1993 following a strike by the USWA. Additionally, during 1994 the United States Supreme Court denied the Bessemer and Lake Erie Railroad (the "B&LE") petition to hear the appeal in the Iron Ore Antitrust Litigation, thus sustaining a judgment in favor of the Company against the B&LE. Accordingly, the Company received $111.0 million in satisfaction of this judgment, which was recorded as other income. Note K--Related Party Transactions Summarized below are transactions between the Company and NKK, and the Company's affiliated companies accounted for using the equity method. The Company had U.S. dollar denominated borrowings outstanding with an NKK affiliate totaling $161.9 million and $177.1 million as of December 31, 1996 and 1995, respectively. (See Note D--Long Term Obligations and Note J--Nonrecurring and Extraordinary Items.) Accounts receivable with related parties totaled $3.2 million at December 31, 1995. Accounts payable with related parties totaled $2.5 million at December 31, 1995. There were no related party accounts receivable or payable balances at December 31, 1996. Effective May 1, 1995, the Company entered into an Agreement for the Transfer of Employees (superseding a prior arrangement) with NKK Corporation. The agreement was unanimously approved by all directors of the Company who were not then, and never have been, employees of NKK. Pursuant to the terms of the agreement, technical and business advice is provided through NKK employees who are transferred to the employ of the Company. The Company has agreed to reimburse NKK for the costs and expenses incurred by NKK in connection with the transfer of the employees. The total amount of reimbursable expenses which the Company is obligated to pay was capped at $11.7 million for the initial term of the agreement, which ran from May 1, 1995 through December 31, 1996. The agreement can be extended from year to year thereafter if approved by NKK and by a majority of those directors of the Company who are not then, and have never been, employees of NKK. The agreement has been extended for 1997, with the total amount of reimbursable expenses capped at $7.0 million. The Company expensed $4.2 million and $5.1 million under this contract in 1996 and 1995, respectively. In both 1996 and 1995, cash dividends of approximately $4.0 million were paid on the Series A Preferred Stock. Accrued dividends of $0.6 million were recorded as of December 31, 1996 and 1995 related to the Series A Preferred Stock. The Company is contractually required to purchase its proportionate share of raw material production from certain affiliated companies. Such purchases of raw materials and services aggregated $111.4 million in 1996, $86.5 million in 1995 and $87.0 million 1994. Additional expenses were incurred in connection with the operation of a joint venture agreement. (See Note M--Other Commitments and Contingencies and Note N--Investment in Iron Ore Company of Canada.) Accounts payable at December 31, 1996 and 1995 included amounts with affiliated companies accounted for by the equity method of $18.6 million and $19.0 million, respectively. Note L--Environmental Liabilities The Company's operations are subject to numerous laws and regulations relating to the protection of human health and the environment. Because these environmental laws and regulations are quite stringent and are generally becoming more stringent, the Company has expended, and can be expected to expend in the future, substantial amounts for compliance with these laws and regulations. Due to the possibility of future changes in circumstances or regulatory requirements, the amount and timing of future environmental expenditures could vary substantially from those currently anticipated. It is the Company's policy to expense or capitalize, as appropriate, environmental expenditures that relate to current operating sites. Environmental expenditures that relate to past operations and which do not contribute to future or current revenue generation are expensed. With respect to costs for environmental assessments or remediation activities, or penalties of fines that may be imposed for noncompliance with such laws and regulations, such costs are accrued when it is probable that liability for such costs will be incurred and the amount of such costs can be reasonably estimated. The Company has accrued an aggregate liability of approximately $4.4 million and $2.4 million for these items at December 31, 1996 and 1995, respectively. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and similar state superfund statutes generally impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated properties regardless of fault. The Company and certain of its subsidiaries are involved as a potentially responsible party ("PRP") at a number of off-site CERCLA or state superfund site proceedings. At some of these sites, any remediation costs incurred by the Company would constitute liabilities for which FOX is required to indemnify the Company ("FOX Environmental Liabilities"--See Note I--Weirton Liabilities). In addition, at some of these sites, the Company does not have sufficient information regarding the nature and extent of the contamination, the wastes contributed by other PRPs, or the required remediation activity to estimate its potential liability. With respect to those sites for which the Company has sufficient information to estimate its potential liability, the Company has accrued an aggregate liability for CERCLA claims of approximately $5.1 million and $4.6 million as of December 31, 1996 and 1995, respectively. The Company has also recorded reclamation and other costs to restore its coal and iron ore mines at its shutdown locations to their original and natural state, as required by various federal and state mining statutes. The Company has recorded an aggregate liability of approximately $12.1 million and $11.6 million at December 31, 1996 and 1995, respectively, relating to these properties. Since the Company has been conducting steel manufacturing and related operations at numerous locations for over sixty years, the Company potentially may be required to remediate or reclaim any contamination that may be present at these sites. The Company does not have sufficient information to estimate its potential liability in connection with any potential future remediation at such sites. Accordingly, the Company has not accrued for such potential liabilities. As these matters progress or the Company becomes aware of additional matters, the Company may be required to accrue charges in excess of those previously accrued. However, although the outcome of any of the matters described, to the extent they exceed any applicable reserves, could have a material adverse effect on the Company's results of operations and liquidity for the applicable period, the Company has no reason to believe that such outcomes, whether considered individually or in the aggregate, will have a material adverse effect on the Company's financial condition. Note M--Other Commitments and Contingencies The Company has an agreement providing for the availability of raw material loading and docking facilities through 2002. Pursuant to this agreement, the Company must make advance freight payments if shipments fall below the contract requirements. At December 31, 1996, the maximum amount of such payments, before giving effect to certain credits provided in the agreement, totaled approximately $12 million, or $2 million per year. During the three years ended December 31, 1996, no advance freight payments were made as the Company met all of the contract requirements. The Company anticipates meeting the specified contract requirements in 1997. In September 1990, the Company entered into a joint venture agreement to build a $240 million continuous galvanizing line to serve North American automakers. This joint venture, which was completed in 1993, coats steel products for the Company and an unrelated third party. The Company is a 10% equity owner of the facility, an unrelated third party is a 50% owner, and a subsidiary of NKK owns the remaining 40%. The Company is committed to utilize and pay a tolling fee in connection with 50% of the available line-time of the facility. The agreement extends for 20 years after the start of production, which commenced in January 1993. The Company has a 50% interest in a joint venture with an unrelated third party. The joint venture, Double G Coatings Company, L.P. ("Double G"), constructed a $90 million steel coating facility near Jackson, Mississippi to produce galvanized and Galvalume(R) steel sheet for the construction market, which commenced production in May 1994. The Company is committed to utilize and pay a tolling fee in 36 connection with 50% of the available line-time at the facility through May 10, 2004. Double G provided a first mortgage on its property, plant and equipment and the Company has separately guaranteed $24.1 million of Double G's debt as of December 31, 1996. The Company has agreements to purchase 1.8 million gross tons of iron ore pellets in 1997 from the Iron Ore Company of Canada ("IOC") for approximately $65.5 million. Beginning in 1998, the Company's firm obligation to purchase iron ore pellets from IOC is .9 million gross tons per year through the year 2004. Other potential commitments with IOC consist of the purchase of an additional .5 million gross tons per year, based upon National Steel's production requirements, and are effective through 1999. (See Note N-Investments in Iron Ore Company of Canada.) The Company has also agreed to purchase its proportionate share of the limestone production from another affiliated company, which will approximate $2 million per year. These agreements contain pricing provisions that are expected to approximate market price at the time of purchase. The Company has entered into certain commitments with suppliers which are of a customary nature within the steel industry. Commitments have been entered into relating to future expected requirements for such commodities as coal, coke, natural and industrial gas, electricity and certain transportation and other services. Commitments have also been made relating to the supply of pulverized coal and coke briquettes. Certain commitments contain provisions which require that the Company "take or pay" for specified quantities without regard to actual usage for periods of up to 15 years. In 1997 and 1998 the Company has commitments with "take or pay" or other similar commitment provisions for approximately $200.0 million and $190.0 million, respectively. The Company believes that production requirements will be such that consumption of the products or services purchased under these commitments will occur in the normal production process. The Company also believes that pricing mechanisms in the contracts are such that the products or services will approximate the market price at the time of purchase. The Company is guarantor of specific obligations of ProCoil Corporation, an affiliated company, approximating $8.1 million at December 31, 1996. NOTE N--INVESTMENT IN IRON ORE COMPANY OF CANADA Summarized financial information for IOC, an affiliated company accounted for by the equity method, is presented below: - -------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------- 1996 1995 1994 Dollars in thousands - -------------------------------------------------------------------------------- Current assets $160,440 $151,868 $151,480 Property, plant and equipment and other assets 337,812 331,881 354,857 Current liabilities 153,071 115,178 108,689 Long term obligations and other liabilities 99,652 116,168 141,268 Sales and operating revenues 461,917 434,357 444,519 Gross profit 112,479 111,367 87,729 Net income 41,923 44,869 30,668 Company's equity in: Net assets 53,353 54,847 55,711 Net income 9,110 9,750 6,664 Ownership percentage 27.73% 21.73% 19.96% - -------------------------------------------------------------------------------- On January 31, 1997, the Company entered into a definitive agreement with North Limited ("North") and Bethlehem Steel Corporation ("BSC"), pursuant to which the Company and BSC will sell to North their respective minority interests in IOC. The Company, which owns 21.73% of the shares of IOC, will receive approximately $85 million in proceeds in exchange for its shares and realize an after-tax gain of approximately $25 million. This transaction is subject to approval by the other shareholders of IOC and customary governmental approvals and is expected to occur late in the first quarter of 1997. The Company will continue to purchase iron ore from IOC pursuant to long-term contracts. (See Note M--Other Commitments and Contingencies). 37 Note O--Long Term Incentive Plan The Long Term Incentive Plan established in 1993 authorized the granting of options for up to 3,400,000 shares of Class B Common Stock to certain executive officers and other key employees of the Company. The Non-Employee Directors Stock Option Plan, also established in 1993, has authorized the grant of options for up to 100,000 shares of Class B Common Stock to certain non-employee directors. The exercise price of the options equals the fair market value of the Common Stock on the date of the grant. All options granted have ten year terms and generally vest and become fully exercisable at the end of three years of continued employment. However, in the event that termination is by reason of retirement, permanent disability or death, the option must be exercised in whole or in part within 24 months of such occurrences. The Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation" during 1996. SFAS 123 required the Company to either adopt a fair value based method of expense recognition for all stock compensation based awards, or provide pro forma net income and earnings per share information as if the recognition and measurement provisions of SFAS 123 had been adopted. The Company decided to account for its stock based compensation awards following the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"). APB 25 requires compensation expense to be recognized only if the market price of the underlying stock exceeds the exercise price on the date of grant. The Company's stock based awards consist of stock options with an exercise price equal to market price on the date of grant. As such, the Company has not recorded compensation expense in connection with these awards. In addition, the effect of applying the SFAS 123 fair value method to the Company's stock-based awards results in net income and EPS that are not materially different from amounts reported. A reconciliation of the Company's stock option activity and related information follows:
- -------------------------------------------------------- Exercise Price Number of (Weighted Options Average) - -------------------------------------------------------- Balance outstanding at January 1, 1994 584,168 $13.99 Granted 304,500 14.00 Exercised (15,056) 14.00 Forfeited (155,139) - -------------------------------------------------------- Balance outstanding at December 31, 1994 718,473 14.00 - -------------------------------------------------------- Granted 427,500 15.02 Exercised (12,084) 14.00 Forfeited (165,973) - -------------------------------------------------------- Balance outstanding at December 31, 1995 967,916 14.38 - -------------------------------------------------------- Granted 314,000 12.96 Exercised ---------- Forfeited (122,181) - -------------------------------------------------------- Balance outstanding at December 31, 1996 1,159,735 $14.03 ========================================================
Exercisable stock options as of December 31, 1996, 1995 and 1994 were 457,401; 324,249; and 213,973, respectively. Outstanding stock options did not enter into the determination of EPS in 1996, 1995, or 1994 as their dilutive effect was less than 3%. 38 Note P--Quarterly Results of Operations (Unaudited) Following are the unaudited quarterly results of operations for the years 1996 and 1995. Reference should be made to Note B--Audit Committee Inquiry and Restatement of Prior Periods and Note J--Nonrecurring and Extraordinary Items.
- ------------------------------------------------------------------------------------------------------------- 1996 - ------------------------------------------------------------------------------------------------------------- Three Months Ended, March 31 June 30 September 30 December 31 (Restated) (Restated) (Restated) (Restated) --------------------------------------------------------- Dollars in thousands, except per share amounts - ------------------------------------------------------------------------------------------------------------- Net Sales $682,143 $769,481 $735,858 $766,551 Gross Profit 16,853 52,614 54,397 67,605 Income (loss) before cumulative effect of accounting change (14,196) 17,917 11,527 27,576 Cumulative effect of accounting change -- -- 11,100 -- - ------------------------------------------------------------------------------------------------------------- Net Income (Loss) (14,196) 17,917 22,627 27,576 Per share earnings applicable to Common Stock Income (loss) before cumulative effect of accounting change (.39) .35 .21 .57 Cumulative effect of accounting change -- -- .25 -- -------- -------- -------- -------- Net Income (Loss) $ (.39) $ .35 $ .46 $ .57 =============================================================================================================
- ------------------------------------------------------------------------------------------------------------- 1995 - ------------------------------------------------------------------------------------------------------------- Three Months Ended, March 31 June 30 September 30 December 31 (Restated) (Restated) (Restated) (Restated) --------------------------------------------------------- Dollars in thousands, except per share amounts - ------------------------------------------------------------------------------------------------------------- Net Sales $752,676 $736,611 $724,798 $740,133 Gross Profit 97,501 80,544 53,718 47,680 Unusual charges 5,336 -------- -------- -------- Income before extraordinary item 48,884 32,874 13,853 6,560 Extraordinary item -------- -------- 5,373 -------- Net Income 48,884 32,874 19,226 6,560 - ------------------------------------------------------------------------------------------------------------- Per share earnings applicable to Common Stock Income before extraordinary item 1.13 .70 .26 .09 Extraordinary item -------- -------- .12 -------- - ------------------------------------------------------------------------------------------------------------- Net Income $ 1.13 $ .70 $ .38 $ .09 =============================================================================================================
39 Report of Ernst & Young LLP Independent Auditors To the Board of Directors National Steel Corporation We have audited the accompanying consolidated balance sheets of National Steel Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related statements of consolidated income, cash flows, and changes in stockholders' equity and redeemable preferred stock--Series B for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note B to the consolidated financial statements the Company has changed the measurement date that is used in accounting for pensions and postretirement benefits other than pensions. As discussed in Note B to the consolidated financial statements, the Company has restated its previously issued 1996, 1995 and 1994 consolidated financial statements. Ernst & Young LLP Fort Wayne, Indiana January 23, 1997, except for Notes N and B, as to which the dates are January 31, 1997, and January 28, 1998, respectively. CORPORATE INFORMATION HEADQUARTERS 4100 Edison Lakes Parkway Mishawaka, Indiana 46545-3440 Telephone: (219) 273-7000 Telefax: (219) 273-7869 ANNUAL MEETING The Annual Stockholders' Meeting of National Steel Corporation will be held April 21, 1997. Formal notice of the meeting and proxy materials will be mailed to stockholders. LISTING OF COMMON STOCK Class B Common Stock (NS) New York Stock Exchange INDEPENDENT AUDITORS Ernst & Young LLP TRANSFER AGENT AND REGISTRAR Chemical Mellon Shareholders Services Pittsburgh, Pennsylvania ADDITIONAL REPORTS More detailed information on the Company's business is available in its Form 10-K filed annually with the Securities and Exchange Commission. Stockholders desiring a copy of this report for the most recent fiscal year may obtain it, without charge, by written request to the Director, Investor Relations, at the Company's headquarters. COMMON STOCK INFORMATION The following table sets forth for the periods indicated the high and low sales prices of the Class B Common Stock on a quarterly basis as reported on the New York Stock Exchange Composite Tape.
- -------------------------------------------------------------------------------- PERIOD HIGH LOW - -------------------------------------------------------------------------------- 1996 First Quarter $ 15-1/4 $ 12-1/4 Second Quarter 14-1/2 10-1/4 Third Quarter 11-7/8 8-1/2 Fourth Quarter 11-1/2 8 - -------------------------------------------------------------------------------- 1995 First Quarter $ 18-7/8 $ 14-5/8 Second Quarter 16-1/8 12-5/8 Third Quarter 17-5/8 14-1/2 Fourth Quarter 15-1/2 11-3/4 - --------------------------------------------------------------------------------
As of December 31, 1996, there were approximately 184 registered holders of Class B Common Stock. (See Note C--Capital Structure and Primary Offering of Class B Common Stock.) The Company has not paid dividends on its Common Stock since 1984, with the exception of an aggregate dividend payment of $6.7 million in 1989. The decision whether to pay dividends on the Common Stock will be determined by the Board of Directors in light of the Company's earnings, cash flows, financial condition, business prospects and other relevant factors. Holders of Class A Common Stock and Class B Common Stock will be entitled to share ratably, as a single class, in any dividends paid on the Common Stock. In addition, dividends with respect to the Common Stock are subject to the prior payment of cumulative dividends on any outstanding series of Preferred Stock, including the Series A Preferred Stock and Series B Redeemable Preferred Stock, and must be matched by a payment into the VEBA Trust, the amount of which is calculated under the terms of the 1993 Settlement Agreement between the Company and the USWA, until the asset value of the VEBA Trust exceeds $100.0 million. During 1997, the Company has the capability of declaring a Common Stock dividend slightly in excess of $26 million without having to contribute any matching amounts into the VEBA Trust. Various debt and certain lease agreements include restrictions on the amount of stockholders' equity available for the payment of dividends. Under the most restrictive of these covenants, stockholders' equity in the amount of $177.8 million was free of such limitations at December 31, 1996. - -------------------------------------------------------------------------------- EX-23 3 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual report (Form 10-K/A) of National Steel Corporation and subsidiaries (the "Company") of our report dated January 23, 1997 (except for Notes N and B, as to which the dates are January 31, 1997 and January 28, 1998, respectively), included in the 1996 Annual Report to Shareholders of the Company. Our audit also included the financial statement schedule, as restated, of the Company listed in item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the following Registration Statements. . Form S-8 No. 33-51991 pertaining to the 1994 and 1995 Stock Grants to Union Employees, . Form S-8 No. 33-51081 pertaining to the 1994 National Steel Corporation Long Term Incentive Plan, . Form S-8 No. 33-51083 pertaining to the 1993 National Steel Corporation Non- Employee Director's Stock Option Plan, and . Form S-8 No. 33-61087 pertaining to the National Steel Retirement Savings Plan and National Steel Represented Employee Retirement Savings Plan; of our report dated January 23, 1997 (except for Notes N and B, as to which the dates are January 31, 1997 and January 28, 1998, respectively) with respect to the consolidated financial statements, as restated, incorporated by reference, and our report included in the preceding paragraph with respect to the financial statement schedule, as restated, included in this Annual Report Form 10-K/A of the Company for the year ended December 31, 1996. Ernst & Young LLP Fort Wayne, Indiana January 28, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 109,041 0 301,209 19,320 440,567 831,497 3,664,597 2,209,079 2,556,292 550,770 470,294 433 63,530 36,650 607,479 2,556,292 2,954,033 2,954,033 2,618,151 2,618,151 266,983 666 36,249 31,984 (10,840) 42,824 0 0 11,100 53,924 .99 .99
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