1999
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-K/A
AMENDMENT NO.
1
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year
Ended December 31, 1999
OR
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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
(State or other
jurisdiction of
incorporation or
organization)
25-0687210
(I.R.S. Employer
Identification No.)
4100 Edison Lakes
Parkway,
Mishawaka,
IN
(Address of
principal executive offices)
46545-3440
(Zip
Code)
Registrants
telephone number, including area code:
219-273-7000
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each
Class
|
|
Name of
each exchange on which
registered
|
Class B Common
Stock |
|
New York Stock
Exchange |
First Mortgage
Bonds, 8 3
/8% Series due 2006
|
|
New York Stock
Exchange |
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title of
class)
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X
No
.
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ¨
At March 15, 2000,
there were 41,288,240 shares of the registrants common stock
outstanding consisting of 22,100,000 shares of Class A Common Stock and
19,188,240 shares of Class B Common Stock.
Aggregate market
value of voting stock held by non-affiliates: $129,591,210.
The amount shown is
based on the closing price of National Steel Corporations Common Stock
on the New York Stock Exchange on March 15, 2000. 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 2000 Proxy Statement of National Steel Corporation are incorporated by
reference into Part III of this Report on Form 10-K.
Item 8 to Registrants Form
10-K for the Fiscal Year Ended December 31, 1999 is hereby amended as
follows:
|
In the Consolidated Balance
Sheets which appear on page 33, retained earnings at December 31, 1999 is
changed from 362.6 to 362.8.
|
|
In the Consolidated Statements
of Cash Flows which appear on page 34 under the caption Cash Flows
from Operating Activities
|
|
|
for the year ended
December 31, 1998, the amount for accounts payable is changed from
4.4 to (4.4) and
|
|
|
for the year ended
December 31, 1997, the amount for deferred income taxes is changed from
(21.8) to (21.6).
|
|
In the Consolidated Statements
of Cash Flows which appear on page 34 under the caption Cash Flows
from Investing Activities
|
|
|
for the year ended
December 31, 1999, net proceeds from disposal of non-core assets is
changed from 0.6 to 0.8 and
|
|
|
for the year ended
December 31, 1998, Net Cash Provided by (Used in) Investing Activities is
changed from (168.4) to (166.4).
|
|
In the table describing
long-term obligations which appears on page 42 in Note 5Long-Term
Obligations, the Continuous Caster Facility Loan balance at December 31,
1999 is changed from 83.9 to 93.9.
|
|
In the table describing future
minimum payments for all long-term obligations and leases as of December
31, 1999, which appears on page 43 in Note 5Long-Term Obligations
under the caption Operating Leases for the year 2003, the
amount is changed from 45.8 to 46.8.
|
|
In the table describing the
significant components of deferred tax assets and liabilities which
appears on page 47 in Note 8Income Taxes,
|
|
|
Total deferred tax
assets at December 31, 1999 is changed from 446.5 to
446.6,
|
|
|
Deferred tax assets
net of valuation allowance at December 31, 1998 is changed from 366.2
to 386.2 and
|
|
|
Net deferred tax
assets after valuation allowance at December 31, 1998 is changed from
202.8 to 202.6.
|
A complete copy of
Item 8, including these corrections, is attached to this Form
10-K/A.
Item 14.
Exhibit
Attached hereto as
Exhibit 23
is the Consent of 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, on April 3, 2000.
|
NATIONAL
STEEL
CORPORATION
|
|
Senior Vice
President and Chief Financial Officer
|
Item 8. Financial Statements
The following consolidated
financial statements of National Steel Corporation and subsidiaries are
submitted pursuant to the requirements of Item 8:
National Steel
Corporation and Subsidiaries
Index to Financial
Statements
MANAGEMENTS RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the
preparation, integrity and fair presentation of the consolidated financial
statements and related notes. The financial statements, presented on pages
32 to 55, have been prepared in conformity with generally accepted
accounting principles and include amounts based upon our estimates and
judgments, as required. Management also prepared the other information
included in the Form 10-K and is responsible for its accuracy and
consistency with the financial statements. The financial statements have
been audited in accordance with generally accepted auditing standards and
reported upon by our independent auditors, Ernst & Young LLP, who were
given free access to all financial records and related data, including
minutes of the meetings of the Board of Directors and committees of the
board. We believe the representations made to the independent auditors
during the audit were valid and appropriate. Ernst & Young LLPs
audit report is presented on page 31.
National Steel Corporation
maintains a system of internal accounting control designed to provide
reasonable assurance for the safeguarding of assets and reliability of
financial records. The system is subject to review through its internal
audit function, which monitors and reports on the adequacy of and compliance
with the internal control system and appropriate action is taken to address
control deficiencies and other opportunities for improving the system as
they are identified. Although no cost effective internal control system will
preclude all errors and irregularities, management believes that through the
careful selection, training and development of employees, the division of
responsibilities and the application of formal policies and procedures,
National Steel Corporation has an effective and responsive system of
internal accounting controls.
The Audit Committee of the Board
of Directors, which is composed solely of non-employee directors, provides
oversight to the financial reporting process through periodic meetings. The
Audit Committee is responsible for recommending to the Board of Directors,
subject to approval by the Board and ratification by stockholders, the
independent auditors to perform audit and related work for the Company, for
reviewing with the independent auditors the scope of their audit of the
Companys financial statements, for reviewing with the Companys
internal auditors the scope of the plan of audit, for meeting with the
independent auditors and the Companys internal auditors to review the
results of their audits and the Companys internal accounting controls
and for reviewing other professional services being performed for the
Company by the independent auditors. Both the independent auditors and the
Companys internal auditors have free access to the Audit
Committee.
Management believes the system of
internal accounting controls provides reasonable assurance that business
activities are conducted in a manner consistent with the Companys high
standards of business conduct, and the Companys financial accounting
system contains the integrity and objectivity necessary to maintain
accountability for assets and to prepare National Steel Corporations
financial statements in accordance with generally accepted accounting
principles.
/s/ Yutaka
Tanaka
Yutaka
Tanaka
Chairman &
Chief Executive Officer
|
/s/ John A. Maczuzak
John A. Maczuzak
President &
Chief Operating Officer
|
|
/s/ Glenn H.
Gage
Glenn H.
Gage
Senior Vice
President & Chief Financial Officer
|
|
REPORT OF ERNST & YOUNG LLP
INDEPENDENT
AUDITORS
Board of
Directors
National Steel
Corporation
We have audited the accompanying
consolidated balance sheets of National Steel Corporation and subsidiaries
(the Company) as of December 31, 1999 and 1998, and the related
consolidated statements of income, cash flows, and changes in stockholders
equity and redeemable preferred stockSeries B for each of the
three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in
accordance with auditing standards generally accepted in the United States.
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, 1999 and
1998, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United
States.
|
[Ernst & Young
Signature Logo]
|
Indianapolis,
Indiana
January 25,
2000
NATIONAL
STEEL
CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF
INCOME
(Dollars in
Millions, Except Per Share Amounts)
|
|
Years Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
Net
Sales |
|
$2,849.6 |
|
|
$2,848.0 |
|
|
$3,139.7 |
|
Cost of products sold |
|
2,581.7 |
|
|
2,496.8 |
|
|
2,674.4 |
|
Selling, general and
administrative expense |
|
147.8 |
|
|
153.6 |
|
|
141.3 |
|
Depreciation |
|
140.1 |
|
|
129.1 |
|
|
134.5 |
|
Equity income of
affiliates |
|
(2.1 |
) |
|
(1.2 |
) |
|
(1.5 |
) |
Unusual credit |
|
|
|
|
(26.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
from Operations |
|
(17.9 |
) |
|
96.3 |
|
|
191.0 |
|
Other (income)
expense |
|
|
|
|
|
|
|
|
|
Interest and other financial
income |
|
(11.5 |
) |
|
(15.8 |
) |
|
(19.2 |
) |
Interest and other financial
expense |
|
39.6 |
|
|
26.7 |
|
|
33.8 |
|
Net gain on disposal of non-core
assets and other related activities |
|
(0.8) |
|
|
(2.7 |
) |
|
(58.7 |
) |
|
|
|
|
|
|
|
|
|
|
Income (Loss)
before Income Taxes and Extraordinary Item |
|
(45.2 |
) |
|
88.1 |
|
|
235.1 |
|
Income taxes
(credit) |
|
(2.1 |
) |
|
4.3 |
|
|
16.2 |
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
before Extraordinary Item |
|
(43.1 |
) |
|
83.8 |
|
|
218.9 |
|
Extraordinary
item |
|
|
|
|
|
|
|
(5.4 |
) |
|
|
|
|
|
|
|
|
|
|
Net Income
(Loss) |
|
(43.1 |
) |
|
83.8 |
|
|
213.5 |
|
Less preferred stock
dividends |
|
|
|
|
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
Net Income
(Loss) Applicable to Common Stock |
|
$
(43.1 |
) |
|
$
83.8 |
|
|
$
203.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings
Per Share: |
|
|
|
|
|
|
|
|
|
Income (loss) before
extraordinary item |
|
$
(1.04 |
) |
|
$
1.94 |
|
|
$
4.82 |
|
Extraordinary item |
|
|
|
|
|
|
|
(.12 |
) |
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
Applicable to Common Stock |
|
$
(1.04 |
) |
|
$
1.94 |
|
|
$
4.70 |
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share: |
Income (loss) before
extraordinary item |
|
$
(1.04 |
) |
|
$
1.94 |
|
|
$
4.76 |
|
Extraordinary item |
|
|
|
|
|
|
|
(.12 |
) |
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
Applicable to Common Stock |
|
$
(1.04 |
) |
|
$
1.94 |
|
|
$
4.64 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding (in thousands) |
|
41,411 |
|
|
43,202 |
|
|
43,288 |
|
|
|
Dividends paid
per common share |
|
$
0.28 |
|
|
$
0.28 |
|
|
$
|
|
See notes to
consolidated financial statements.
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollars in
Millions, Except Per Share Amounts)
|
|
December
31,
|
|
|
1999
|
|
1998
|
ASSETS |
|
|
|
|
|
|
Current
assets |
|
|
|
|
|
|
Cash and cash
equivalents |
|
$
58.4 |
|
|
$
137.9 |
|
Receivables, net |
|
322.8 |
|
|
245.7 |
|
Inventories |
|
519.7 |
|
|
472.8 |
|
Deferred tax assets |
|
28.2 |
|
|
23.3 |
|
Other |
|
29.5 |
|
|
19.9 |
|
|
|
|
|
|
|
|
Total current assets |
|
958.6 |
|
|
899.6 |
|
Investments in
affiliated companies |
|
21.8 |
|
|
19.5 |
|
Property, plant
and equipment, net |
|
1,446.4 |
|
|
1,270.5 |
|
Deferred tax
assets |
|
178.0 |
|
|
179.3 |
|
Intangible
pension asset |
|
63.0 |
|
|
89.5 |
|
Other
assets |
|
32.7 |
|
|
25.6 |
|
|
|
|
|
|
|
|
|
|
$2,700.5 |
|
|
$2,484.0 |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
|
Accounts payable |
|
$
246.1 |
|
|
$
241.7 |
|
Current portion of long-term
obligations |
|
31.2 |
|
|
30.3 |
|
Short-term
borrowings |
|
|
|
|
6.9 |
|
Salaries, wages, benefits and
related taxes |
|
109.5 |
|
|
95.7 |
|
Pension |
|
78.6 |
|
|
14.9 |
|
Income taxes |
|
11.9 |
|
|
22.6 |
|
Other accrued
liabilities |
|
120.6 |
|
|
134.7 |
|
|
|
|
|
|
|
|
Total current liabilites |
|
597.9 |
|
|
546.8 |
|
Long-term
obligations |
|
555.6 |
|
|
285.8 |
|
Long-term pension
liabilities |
|
91.6 |
|
|
128.5 |
|
Minimum pension
liabilities |
|
68.5 |
|
|
140.5 |
|
Postretirement
benefits other than pensions |
|
433.0 |
|
|
398.1 |
|
Other long-term
liabilities |
|
120.7 |
|
|
134.0 |
|
Commitments And
Contingencies |
|
|
|
|
|
|
Stockholders
equity |
|
|
|
|
|
|
Common Stock par value
$.01: |
|
|
|
|
|
|
Class Aauthorized 30,000,000 shares;
issued and outstanding 22,100,000
shares in 1999 and 1998 |
|
0.2 |
|
|
0.2 |
|
Class Bauthorized 65,000,000 shares;
issued 21,188,240 shares in 1999 and
1998 |
|
0.2 |
|
|
0.2 |
|
Additional paid-in
capital |
|
491.8 |
|
|
491.8 |
|
Retained earnings |
|
362.8 |
|
|
417.5 |
|
Treasury stock, at cost:
2,000,000 shares in 1999; 1,109,700 shares in 1998 |
|
(16.3 |
) |
|
(8.4 |
) |
Accumulated other
comprehensive income (loss): |
|
|
|
|
|
|
Minimum pension liability |
|
(5.5 |
) |
|
(51.0 |
) |
|
|
|
|
|
|
|
Total stockholders
equity |
|
833.2 |
|
|
850.3 |
|
|
|
|
|
|
|
|
|
|
$2,700.5 |
|
|
$2,484.0 |
|
|
|
|
|
|
|
|
See notes to
consolidated financial statements.
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars in
Millions)
|
|
Years Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
Cash Flows
from Operating Activities: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$
(43.1 |
) |
|
$
83.8 |
|
|
$
213.5 |
|
Adjustments to reconcile net
income (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
140.1 |
|
|
129.2 |
|
|
134.5 |
|
Net gain on disposal of non-core
assets |
|
(0.8 |
) |
|
(2.7 |
) |
|
(58.8 |
) |
Extraordinary item (net) |
|
|
|
|
|
|
|
5.4 |
|
Deferred income taxes |
|
(2.9 |
) |
|
(19.6 |
) |
|
(21.6 |
) |
Changes in assets and
liabilities: |
|
|
|
|
|
|
|
|
|
Receivables |
|
(77.1 |
) |
|
38.4 |
|
|
4.8 |
|
Inventories |
|
(46.9 |
) |
|
(98.6 |
) |
|
56.4 |
|
Accounts payable |
|
4.4 |
|
|
(4.4 |
) |
|
0.9 |
|
Pension liability (net of change in
intangible pension asset) |
|
26.9 |
|
|
(86.5 |
) |
|
(24.0 |
) |
Postretirement benefits |
|
24.9 |
|
|
26.5 |
|
|
34.9 |
|
Accrued liabilities |
|
(1.2 |
) |
|
(46.9 |
) |
|
1.5 |
|
Other |
|
(16.1 |
) |
|
12.5 |
|
|
(15.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating
Activities |
|
8.2 |
|
|
31.7 |
|
|
332.2 |
|
Cash Flows
from Investing Activities: |
|
|
|
|
|
|
|
|
|
Purchases of property, plant
and equipment |
|
(318.3 |
) |
|
(171.1 |
) |
|
(151.8 |
) |
Net proceeds from sale of
assets |
|
0.5 |
|
|
1.4 |
|
|
|
|
Net proceeds from disposal of
non-core assets |
|
0.8 |
|
|
3.3 |
|
|
320.6 |
|
Acquisition of
ProCoil |
|
(7.7 |
) |
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Investing
Activities |
|
(324.7 |
) |
|
(166.4 |
) |
|
168.5 |
|
Cash Flows
from Financing Activities: |
|
|
|
|
|
|
|
|
|
Redemption of Preferred Stock
Series A and B |
|
|
|
|
|
|
|
(83.8 |
) |
Repurchase of Class B common
stock |
|
(7.9 |
) |
|
(8.4 |
) |
|
|
|
Prepayment of related party
debt and associated costs |
|
|
|
|
|
|
|
(158.8 |
) |
Debt repayment |
|
(55.4 |
) |
|
(34.2 |
) |
|
(35.0 |
) |
Borrowingsnet |
|
311.9 |
|
|
14.7 |
|
|
3.9 |
|
Payment of released Weirton
benefit liabilities and unreleased Weirton
liabilities and their release in lieu of cash
dividends on Preferred Stock
Series B |
|
|
|
|
|
|
|
(19.2 |
) |
Dividend payments on common
stock |
|
(11.6 |
) |
|
(12.1 |
) |
|
|
|
Dividend payments on Preferred
StockSeries A and B |
|
|
|
|
|
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Financing
Activities |
|
237.0 |
|
|
(40.0 |
) |
|
(297.1 |
) |
|
|
|
|
|
|
|
|
|
|
Net Increase
(Decrease) In Cash and Cash Equivalents |
|
(79.5 |
) |
|
(174.7 |
) |
|
203.6 |
|
Cash and cash
equivalents, at beginning of the year |
|
137.9 |
|
|
312.6 |
|
|
109.0 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents, at end of the year |
|
$
58.4 |
|
|
$
137.9 |
|
|
$
312.6 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Payment Information |
|
|
|
|
|
|
|
|
|
Interest and other financing costs
paid |
|
$
30.6 |
|
|
$
27.7 |
|
|
$
38.9 |
|
Income taxes paid |
|
19.2 |
|
|
17.2 |
|
|
45.2 |
|
See notes to
consolidated financial statements.
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND REDEEMABLE
PREFERRED STOCKSERIES B
(Dollars in
Millions)
|
|
Common
Stock
Class A
|
|
Common
Stock
Class B
|
|
Preferred
Stock
Series A
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders
Equity
|
|
Redeemable
Preferred
Stock
Series B
|
Balance at
January 1, 1997 |
|
$0.2 |
|
$0.2 |
|
$
36.7 |
|
|
$465.3 |
|
$142.6 |
|
|
$
|
|
|
$
(0.5 |
) |
|
$644.5 |
|
|
$
63.5 |
|
Comprehensive
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
213.5 |
|
|
|
|
|
|
|
|
213.5 |
|
|
|
|
Other comprehensive
income: Minimum
pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.6 |
) |
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
excess of book
value over redemption value
of Redeemable Preferred
StockSeries B |
|
|
|
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
|
1.3 |
|
|
(1.3 |
) |
Cumulative
dividends on
Preferred StockSeries A
and B |
|
|
|
|
|
|
|
|
|
|
(11.6 |
) |
|
|
|
|
|
|
|
(11.6 |
) |
|
|
|
Redemption of
Preferred Stock
Series A |
|
|
|
|
|
(36.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(36.7 |
) |
|
|
|
Redemption of
Redeemable
Preferred StockSeries B
and related settlement with
Avatex |
|
|
|
|
|
|
|
|
26.5 |
|
|
|
|
|
|
|
|
|
|
26.5 |
|
|
(62.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 1997 |
|
0.2 |
|
0.2 |
|
|
|
|
491.8 |
|
345.8 |
|
|
|
|
|
(1.1 |
) |
|
836.9 |
|
|
|
|
Comprehensive
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
83.8 |
|
|
|
|
|
|
|
|
83.8 |
|
|
|
|
Other comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension
liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49.9 |
) |
|
(49.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on
common stock |
|
|
|
|
|
|
|
|
|
|
(12.1 |
) |
|
|
|
|
|
|
|
(12.1 |
) |
|
|
|
Purchase of
1,109,700 shares of
Class B common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.4 |
) |
|
|
|
|
(8.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 1998 |
|
0.2 |
|
0.2 |
|
|
|
|
491.8 |
|
417.5 |
|
|
(8.4 |
) |
|
(51.0 |
) |
|
850.3 |
|
|
|
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(43.1 |
) |
|
|
|
|
|
|
|
(43.1 |
) |
|
|
|
Other comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension
liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45.5 |
|
|
45.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on
common stock |
|
|
|
|
|
|
|
|
|
|
(11.6 |
) |
|
|
|
|
|
|
|
(11.6 |
) |
|
|
|
Purchase of
890,300 shares of
Class B common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.9 |
) |
|
|
|
|
(7.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 1999 |
|
$0.2 |
|
$0.2 |
|
$
|
|
|
$491.8 |
|
$362.8 |
|
|
$(16.3 |
) |
|
$
(5.5 |
) |
|
$833.2 |
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to
consolidated financial statements.
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
December 31,
1999
Note 1.
Description of the Business and Significant Accounting
Policies
National Steel Corporation
(together with its majority owned subsidiaries, the Company)
is a domestic manufacturer engaged in a single line of business, the
production and processing of steel. The Company targets high value-added
applications of flat rolled carbon steel for sale primarily to the
automotive, construction and container markets. The Company also sells hot
and cold-rolled steel to a wide variety of other users including the pipe
and tube industry and independent steel service centers. The Company
s principal markets are located throughout the United
States.
Since 1986, the Company has had
cooperative labor agreements with the United Steelworkers of America (the
USWA), the International Chemical Workers Union Council of the
United Food and Commercial Workers and other labor organizations, which
collectively represent 82% of the Companys employees. The Company
entered into five-year agreements with these labor organizations in 1999.
Additionally, these 1999 agreements contain a no-strike clause also
effective through the term of the agreements.
|
Principles of
Consolidation
|
The consolidated financial
statements include the accounts of National Steel Corporation and its
majority-owned subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
Substantially all revenue is
recognized when products are shipped to customers.
Cash equivalents are short-term
liquid investments consisting principally of time deposits and commercial
paper at cost which approximates market. Generally, these investments have
maturities of three months or less at the time of purchase.
Receivables consist of trade and
notes receivable and other miscellaneous receivables including refundable
income taxes. Concentration of credit risk related to trade receivables is
limited due to the large numbers of customers in differing industries and
geographic areas and managements credit practices. Receivables are
shown net of allowances, and estimated claims of $19.6 million and $16.9
million at December 31, 1999 and 1998, respectively. Activity relating to
the allowance was as follows:
|
|
1999
|
|
1998
|
|
1997
|
|
|
Dollars in
millions |
Balance, January
1 |
|
$16.9 |
|
|
$17.6 |
|
|
$19.3 |
|
Provision for
doubtful accounts |
|
2.8 |
|
|
1.3 |
|
|
1.0 |
|
Doubtful accounts
written off, net of recoveries |
|
(0.6 |
) |
|
(0.4 |
) |
|
0.1 |
|
Other,
net |
|
0.5 |
|
|
(1.6 |
) |
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, December
31 |
|
$19.6 |
|
|
$16.9 |
|
|
$17.6 |
|
|
|
|
|
|
|
|
|
|
|
Risk Management
Contracts
In the normal course of
business, the Company enters into certain derivative financial
instruments, primarily commodity purchase swap contracts and zero cost
collars, to manage its exposure to fluctuations in commodity
prices. The Company designates the financial instruments as hedges for
specific anticipated transactions. Gains and losses from hedges are
classified in the consolidated statement of income in cost of goods sold
when the contracts are closed. Cash flows from hedges are classified in
the consolidated statement of cash flows under the same category as the
cash flows from the related anticipated transaction. The Company does not
enter into any derivative transactions for speculative purposes. (See Note
14. Risk Management Contracts.)
Inventories are stated at the
lower of last-in, first-out (LIFO) cost or market.
Based on replacement cost,
inventories would have been approximately $145.6 million and $178.2
million higher than reported at December 31, 1999 and 1998, respectively.
In 1999 and 1998 there were no liquidations of LIFO inventory values.
During 1997 certain inventory quantity reductions caused liquidations of
LIFO inventory values that did not have a material effect on net
income.
Inventories as of December 31,
are as follows:
|
|
1999
|
|
1998
|
|
|
Dollars in
millions |
Inventories |
|
|
|
|
Finished and
semi-finished |
|
$461.4 |
|
$421.6 |
Raw materials and
supplies |
|
196.3 |
|
197.2 |
|
|
|
|
|
|
|
657.7 |
|
618.8 |
Less LIFO
reserve |
|
138.0 |
|
146.0 |
|
|
|
|
|
|
|
$519.7 |
|
$472.8 |
|
|
|
|
|
|
Investments in
Affiliated Companies
|
Investments in affiliated
companies (corporate joint ventures and 20.0% to 50.0% owned companies)
are stated at cost plus equity in undistributed earnings since
acquisition. Undistributed deficit of affiliated companies included in
retained earnings at December 31, 1999 and 1998 amounted to $1.5 million
and $1.9 million, respectively. (See Note 10. Non-Operational Income
Statement Activities.)
In May 1997, the Company
acquired an additional 12% of the equity in ProCoil Corporation (
ProCoil) for approximately $0.4 million, bringing the Company
s total ownership to 56% as of December 31, 1997. On March 31, 1999,
the Company completed the acquisition of the remaining 44% minority
interest of ProCoil for $7.7 million in cash. The acquisition was
accounted for using the purchase method of accounting. During the third
quarter of 1999, the excess purchase price over the book value of the
underlying assets was allocated to property, plant and equipment to
reflect their fair value and will be depreciated over the remaining useful
life of these assets.
|
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 $13.0 million in 1999, $3.8
million in 1998 and $5.3 million in 1997. Depreciation of capitalized
interest amounted to $3.6 million in both 1999 and 1998 and $4.5 million
in 1997.
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Property, plant and equipment
as of December 31, are as follows:
|
|
1999
|
|
1998
|
|
|
Dollars in
millions |
Land and land
improvements |
|
$
180.1 |
|
$
187.1 |
Buildings |
|
313.5 |
|
310.1 |
Machinery and
equipment |
|
3,235.6 |
|
2,978.3 |
|
|
|
|
|
Total property,
plant and equipment |
|
3,729.2 |
|
3,475.5 |
Less accumulated
depreciation |
|
2,282.8 |
|
2,205.0 |
|
|
|
|
|
Net property,
plant and equipment |
|
$1,446.4 |
|
$1,270.5 |
|
|
|
|
|
Depreciation of production
facilities, equipment and capitalized lease obligations are generally
computed by the straight-line method over their estimated useful life or,
if applicable, remaining lease term, if shorter. The following useful
lives are used for financial statement purposes:
Land
improvements |
|
1020
years |
Buildings |
|
1540
years |
Machinery and
equipment |
|
315
years |
Depreciation of furnace
relinings are computed on the basis of tonnage produced in relation to
estimated total production to be obtained from such
facilities.
Research and development costs
are expensed when incurred as a component of cost of products sold.
Expenses for 1999, 1998 and 1997 were $10.7 million, $11.0 million and
$10.9 million, respectively.
Financial instruments consist of
cash and cash equivalents and long-term obligations (excluding capitalized
lease obligations). The fair value of cash and cash equivalents
approximates their carrying amounts at December 31, 1999. The carrying
value of long-term obligations (excluding capitalized lease obligations)
exceeded the fair value by approximately $1.2 million at December 31,
1999. The fair value is estimated using discounted cash flows based on
current interest rates for similar issues.
|
Earnings per
Share (Basic and Diluted)
|
Basic Earnings per Share (
EPS) is computed by dividing net income available to common
stockholders by the weighted average number of common stock shares
outstanding during the year. Diluted EPS is computed by dividing net
income available to common stockholders by the weighted-average number of
common stock shares outstanding during the year plus potential dilutive
instruments such as stock options. The effect of stock options on diluted
EPS is determined through the application of the treasury stock method,
whereby proceeds received by the Company based on assumed exercises are
hypothetically used to repurchase the Companys common stock at the
average market price during the period. If a net loss is incurred,
dilutive stock options are considered antidilutive and are excluded from
the dilutive EPS calculation.
The calculation of the dilutive
effect of stock options on the weighted average shares is as
follows:
|
|
1999
|
|
1998
|
|
1997
|
|
|
Shares in
thousands |
Denominator for
basic earnings per shareweighted-
average shares |
|
41,411 |
|
43,202 |
|
43,288 |
Effect of stock
options |
|
|
|
69 |
|
485 |
|
|
|
|
|
|
|
Denominator for
diluted earnings per share |
|
41,411 |
|
43,271 |
|
43,773 |
|
|
|
|
|
|
|
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Options to purchase common
stock of 1,069,993 shares in 1999, 429,967 shares in 1998 and 194,000
shares in 1997 were outstanding, but were excluded from the computation of
diluted earnings per share because a net loss was incurred or the exercise
prices were greater than the average market price of the common shares
during those years.
The Company has elected to
follow Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the
exercise price of employee stock options equals or exceeds the market
price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards (SFAS
) No. 123, Accounting for Stock-Based Compensation (SFAS
123). (See Note 15. Long-Term Incentive Plan)
Preparation of the consolidated
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure
of contingent liabilities at the date of the consolidated financial
statements, and the reported amounts of revenue and expense during the
year. Actual results could differ from those estimates.
Certain amounts in prior years
consolidated financial statements have been reclassified to conform with
the current year presentation.
|
Impact of
Recently Issued Accounting Standards
|
In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), which was required to be adopted in
years beginning after June 15, 1999. In June 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of FASB Statement No. 133, which
delays the required adoption date of SFAS No. 133 to all fiscal quarters
of all fiscal years beginning after June 15, 2000. SFAS 133 will require
the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion
of a derivatives change in fair value will be immediately recognized
in earnings. The Company has not yet determined what the effect of SFAS
133 will be on earnings and the financial position of the
Company.
Note 2. Audit
Committee Inquiry and Securities and Exchange Commission
Inquiry
In the third quarter of 1997,
the Audit Committee of the Companys Board of Directors was informed
of allegations about managed earnings, including excess reserves and the
accretion of such reserves to income over multiple periods, as well as
allegations about deficiencies in the system of internal controls. The
Audit Committee engaged legal counsel who, with the assistance of an
accounting firm, inquired into these matters. The Company, based upon the
inquiry, restated its financial statements for certain prior periods. On
January 29, 1998, the Company filed a Form 10-K/A for 1996 and Forms
10-Q/A for the first, second and third quarters of
1997 reflecting the restatements. (See these Forms for information about the
restatement, the report of legal counsel to the Audit Committee and the
recommendations, approved by the Board of Directors, to improve the Company
s system of internal controls contained in the aforementioned
report.) In accordance with the recommendations, the Company in early 1998
undertook an assessment of its internal control over financial reporting,
made improvements and engaged a major independent accounting firm to
examine and report on managements assertion about the effectiveness
of the Companys internal control over financial reporting. The
accounting firms report was issued in March 1999 and indicated that
in that firms opinion, managements assertion that the Company
maintained effective internal control over financial reporting, including
safeguarding of assets, as of March 1, 1999 is fairly stated, in all
material respects, based upon the criteria established in Internal
ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Because of inherent limitations in internal control, misstatements due to
error or fraud may occur and not be detected. Also, projections of any
evaluation of internal control over financial reporting, including
safeguarding of assets, to future periods are subject to the risk that
internal control may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
The Securities and Exchange
Commission (the Commission) has authorized an investigation
pursuant to a formal order of investigation relating to the matters
described above. The Company has been cooperating with the staff of the
Commission and intends to continue to do so. Additionally, a complaint has
been filed seeking shareholder class action status and alleging violations
of the federal securities laws, generally relating to the matters
described above. The lawsuit was dismissed with prejudice, but the
plaintiffs have filed an appeal of the dismissal.
Note 3. Capital
Structure
At December 31, 1999, the Company
s capital structure was as follows.
|
Class A Common
Stock: The Company had 30,000,000 shares of $.01 par value Class A
Common Stock authorized, of which 22,100,000 shares were issued and
outstanding and owned by NKK U.S.A. Corporation. Each share is entitled
to two votes. Dividends of $0.28 per share were paid in 1999 and 1998.
No cash dividends were paid on the Class A Common Stock in 1997 or 1996.
As a result of its ownership of the Class A Common Stock, NKK U.S.A.
Corporation controls approximately 69.7% of the voting power of the
Company.
|
|
Class B Common
Stock: The Company had 65,000,000 shares of $.01 par value Class B
Common Stock authorized, 21,188,240 shares issued, and 19,188,240
outstanding net of 2,000,000 shares of Treasury Stock. Dividends of
$0.28 per share were paid in 1999 and 1998. No cash dividends were paid
on the Class B Common Stock in 1997. All of the issued and outstanding
shares of Class B Common Stock are publicly traded and are entitled to
one vote.
|
On August 26, 1998, the Board of
Directors authorized the repurchase of up to two million shares of the
Class B Common Stock. In March 1999, the Company completed the repurchase
of these shares at a total cost during 1998 and 1999 of $16.3
million.
In years prior to 1997, the
Company had two series of preferred stock outstanding. Both of these
series of stock were redeemed in the fourth quarter of 1997.
Prior to redemption, which
occurred on December 29, 1997, there were 5,000 shares of $1.00 par value
Series A Preferred Stock issued and outstanding. All of this stock was
owned by NKK U.S.A Corporation. Annual dividends of $806.30 per share were
cumulative and payable quarterly. Dividend payments of
approximately $4 million were paid in 1997. This stock was redeemed at its
book value of approximately $36.7 million plus accrued dividends through
the redemption date. This stock had not been subject to mandatory
redemption provisions.
The Company also had 10,000
shares of Redeemable Preferred StockSeries B issued and outstanding
prior to the redemption of these shares on November 24, 1997. This stock
had been owned by Avatex Corporation (Avatexformerly
known as FoxMeyer Health Corporation). Annual dividends of $806.30 per
share were cumulative and payable quarterly. This stock was subject to
mandatory redemption on August 5, 2000 at a price of $58.3 million. The
difference between this price and the book value of the stock was being
amortized to retained earnings. Concurrent with the stock repurchase in
1997, the Company and Avatex settled Avatexs obligations relating to
certain Weirton liabilities for which Avatex agreed to indemnify the
Company in prior recapitalization programs. In 1997, dividends were
accrued and paid on this stock through November 4, 1997.
Note 4. Segment
Information
The Company has one reportable
segment: Steel. The Steel segment consists of two operating segments, the
Regional Division and the Granite City Division, that produce and sell hot
and cold-rolled steel to automotive, construction, container, and pipe and
tube customers as well as independent steel service centers. The Company
s operating segments are primarily organized and managed by
geographic location. A third operating segment, National Steel Pellet
Company, has been combined with All Other as it does not meet
the quantitative thresholds for determining reportable segments. All
Other includes the Companys pellet operations, transportation
divisions, administrative office and certain steel processing and
warehousing operations. All Other revenues from external
customers are attributable primarily to steel processing, warehousing and
transportation services.
The Company evaluates
performance and allocates resources based on operating profit or loss
before income taxes. The accounting policies of the Steel segment are the
same as described in Note 1 to the financial statements. Intersegment
sales and transfers are accounted for at market prices and are eliminated
in consolidation.
|
|
1999
|
|
1998
|
|
|
Steel
|
|
All
Other
|
|
Total
|
|
Steel
|
|
All
Other
|
|
Total
|
|
|
Dollars in
millions |
Revenues from
external customers |
|
$2,831.9 |
|
|
$
17.7 |
|
$2,849.6 |
|
|
$2,829.1 |
|
$
18.9 |
|
|
$2,848.0 |
Intersegment
revenues |
|
654.4 |
|
|
3,171.4 |
|
3,825.8 |
|
|
612.4 |
|
3,131.0 |
|
|
3,743.4 |
Depreciation
expense |
|
110.8 |
|
|
29.3 |
|
140.1 |
|
|
99.4 |
|
29.7 |
|
|
129.1 |
Segment income
(loss) from operations |
|
(29.1 |
) |
|
11.2 |
|
(17.9 |
) |
|
128.9 |
|
(32.6 |
) |
|
96.3 |
Segment
assets |
|
1,708.6 |
|
|
991.9 |
|
2,700.5 |
|
|
1,524.3 |
|
959.7 |
|
|
2,484.0 |
Expenditures for
long-lived assets |
|
237.4 |
|
|
80.9 |
|
318.3 |
|
|
128.6 |
|
42.5 |
|
|
171.1 |
Included in All Other
intersegment revenues in 1999 and 1998, respectively, is $2,907.6
million and $2,886.9 million of qualified trade receivables sold to
National Steel Funding Corporation, a wholly-owned subsidiary.
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table sets forth
the percentage of the Companys revenues from various markets for
1999, 1998 and 1997:
|
|
1999
|
|
1998
|
|
1997
|
Automotive |
|
32.6 |
% |
|
29.5 |
% |
|
27.0 |
% |
Construction |
|
23.5 |
|
|
26.6 |
|
|
24.8 |
|
Containers |
|
11.6 |
|
|
11.3 |
|
|
11.0 |
|
Pipe and
Tube |
|
6.3 |
|
|
5.6 |
|
|
7.3 |
|
Service
Centers |
|
20.0 |
|
|
19.5 |
|
|
21.3 |
|
All
Other |
|
6.0 |
|
|
7.5 |
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
No single customer accounted for
more than 10.0% of net sales in 1999, 1998 or 1997. Export sales accounted
for approximately 2.0% of revenues in 1999, 2.1% in 1998 and 2.0% in 1997.
The Company has no long-lived assets that are maintained outside of the
United States.
Note 5.
Long-Term Obligations
Long-term obligations were as
follows:
|
|
December
31,
|
|
|
1999
|
|
1998
|
|
|
Dollars in
millions |
First Mortgage
Bonds, 9.875% Series due March 1, 2009, with general first liens on
principal
plants, properties and certain
subsidiaries |
|
$300.0 |
|
$
|
First Mortgage
Bonds, 6.375% Series due August 1, 2005, with general first liens on
principal plants, properties and certain
subsidiaries |
|
75.0 |
|
75.0 |
Vacuum Degassing
Facility Loan, 10.336% fixed rate due in semi-annual installments
through 2000, with a first mortgage in favor
of the lenders |
|
4.3 |
|
12.4 |
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 |
|
93.9 |
|
101.2 |
Pickle Line Loan,
7.726% fixed rate due in equal semi-annual installments through 2007,
with a first mortgage in favor of the
lender |
|
68.2 |
|
73.7 |
ProCoil, various
rates and due dates |
|
4.7 |
|
17.3 |
Capitalized lease
obligations |
|
23.5 |
|
16.6 |
Other |
|
17.2 |
|
19.9 |
|
|
|
|
|
Total long-term
obligations |
|
586.8 |
|
316.1 |
Less long-term
obligations due within one year |
|
31.2 |
|
30.3 |
|
|
|
|
|
Long-term
obligations |
|
$555.6 |
|
$285.8 |
|
|
|
|
|
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Future minimum payments for
all long-term obligations and leases as of December 31, 1999 are as
follows:
|
|
Capitalized
Leases
|
|
Operating
Leases
|
|
Other
Long-Term
Obligations
|
|
|
Dollars in
millions |
2000 |
|
$
9.9 |
|
|
$
58.1 |
|
$
23.2 |
2001 |
|
10.0 |
|
|
46.9 |
|
23.8 |
2002 |
|
3.3 |
|
|
42.2 |
|
26.4 |
2003 |
|
3.0 |
|
|
46.8 |
|
25.7 |
2004 |
|
0.9 |
|
|
43.4 |
|
27.3 |
Thereafter |
|
|
|
|
30.3 |
|
436.9 |
|
|
|
|
|
|
|
|
Total
payments |
|
27.1 |
|
|
$267.7 |
|
$563.3 |
|
|
|
|
|
|
|
|
Less amount
representing interest |
|
3.6 |
|
|
|
|
|
Less current
portion of obligations under capitalized leases |
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
obligations under capitalized leases |
|
$
15.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under
capitalized leases: |
|
|
|
|
|
|
|
Machinery and
equipment |
|
$
50.3 |
|
|
|
|
|
Less accumulated
depreciation |
|
(33.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
16.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases include a coke
battery facility which services Granite City and expires in 2004, a
continuous caster and the related ladle metallurgy facility which services
Great Lakes and expires in 2008, and an electrolytic galvanizing facility
which services Great Lakes and expires in 2001. Upon expiration, the
Company has the option to extend the leases or purchase the equipment at
fair market value. The Companys remaining operating leases cover
various types of properties, primarily machinery and equipment, which have
lease terms generally for periods of 2 to 20 years, and which are expected
to be renewed or replaced by other leases in the normal course of
business. Rental expense totaled $71.8 million in 1999, $73.1 million in
1998, and $75.3 million in 1997.
The Companys credit
arrangements consist of a Receivables Purchase Agreement with commitments
of up to $200.0 million that expires in September 2002 and a new $200.0
million credit facility secured by the Companys inventories (the
Inventory Facility) that expires in November 2004. The new
inventory credit facility replaces the previous $150 million inventory
credit facilities which were due to expire in 2000.
The Company is currently in
compliance with all covenants of, and obligations under, the Receivables
Purchase Agreement, the Inventory Facility and other debt instruments. On
December 31, 1999, there were no cash borrowings outstanding under the
Receivables Purchase Agreement or the Inventory Facility, and outstanding
letters of credit under the Receivables Purchase Agreement totaled $48.4
million. During 1999, the maximum availability under the Receivables
Purchase Agreement, after reduction for letters of credit outstanding,
varied from $71.8 million to $151.6 million and was $151.6 million as of
December 31, 1999.
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 $392.0 million
was free of such limitations at December 31, 1999.
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 6. Pension
and Other Postretirement Employee Benefits
The Company has various
qualified and nonqualified pension plans and other postretirement employee
benefit (OPEB) plans for its employees. The following tables
provide a reconciliation of the changes in the plans benefit
obligations and fair value of assets over the periods ended September 30,
1999 and 1998, and the plans funded status at September 30 reconciled to
the amounts recognized on the balance sheet on December 31, 1999 and
1998:
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
|
Dollars in
millions |
Reconciliation of
benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, October 1
Prior Year |
|
$2,213.2 |
|
|
$2,077.2 |
|
|
$
794.9 |
|
|
$
710.8 |
|
Service cost |
|
31.1 |
|
|
27.3 |
|
|
13.1 |
|
|
11.2 |
|
Interest cost |
|
142.1 |
|
|
151.9 |
|
|
51.9 |
|
|
52.3 |
|
Participant
contributions |
|
|
|
|
|
|
|
4.9 |
|
|
4.9 |
|
Other contributions |
|
5.1 |
|
|
7.2 |
|
|
|
|
|
|
|
Plan amendments |
|
92.3 |
|
|
|
|
|
4.2 |
|
|
|
|
Actuarial loss
(gain) |
|
(126.4 |
) |
|
113.1 |
|
|
(60.0 |
) |
|
67.6 |
|
Benefits paid |
|
(157.7 |
) |
|
(163.5 |
) |
|
(57.8 |
) |
|
(51.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, September
30 |
|
$2,199.7 |
|
|
$2,213.2 |
|
|
$
751.2 |
|
|
$
794.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of
fair value of plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets,
October 1 Prior Year |
|
$1,830.1 |
|
|
$1,846.5 |
|
|
$
97.3 |
|
|
$
82.7 |
|
Actual return on plan
assets |
|
237.9 |
|
|
17.1 |
|
|
17.0 |
|
|
9.6 |
|
Company
contributions |
|
29.4 |
|
|
122.8 |
|
|
57.9 |
|
|
52.0 |
|
Participant
contributions |
|
|
|
|
|
|
|
4.9 |
|
|
4.9 |
|
Other contributions |
|
5.1 |
|
|
7.2 |
|
|
|
|
|
|
|
Benefits paid |
|
(157.7 |
) |
|
(163.5 |
) |
|
(57.8 |
) |
|
(51.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets,
September 30 |
|
$1,944.8 |
|
|
$1,830.1 |
|
|
$
119.3 |
|
|
$
97.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
Status |
|
|
|
|
|
|
|
|
|
|
|
|
Funded status, September
30 |
|
$
(254.9 |
) |
|
$
(383.1 |
) |
|
$(631.9 |
) |
|
$(697.6 |
) |
Unrecognized actuarial (gain)
loss |
|
(90.0 |
) |
|
124.7 |
|
|
(159.3 |
) |
|
(95.1 |
) |
Unamortized prior service
cost |
|
156.9 |
|
|
75.4 |
|
|
4.2 |
|
|
|
|
Unrecognized net transition
obligation |
|
17.8 |
|
|
26.6 |
|
|
345.9 |
|
|
373.2 |
|
Fourth quarter reimbursement
from trust |
|
|
|
|
|
|
|
(5.5 |
) |
|
|
|
Fourth quarter
contributions |
|
|
|
|
13.0 |
|
|
13.6 |
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized,
December 31 |
|
$
(170.2 |
) |
|
$
(143.4 |
) |
|
$(433.0 |
) |
|
$(408.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the terms of the
1993 Settlement Agreement between the Company and the United Steelworkers
of America (USWA), a VEBA Trust was established. Under the
terms of the agreement, the Company agreed to contribute a minimum of
$10.0 million annually. Effective August 1, 1999, a new five-year
agreement was ratified between the Company and the USWA and the
requirement for mandatory contributions to the VEBA Trust was eliminated
over the term of the agreement. Prior to the new agreement, a $5.0 million
contribution was made to the Trust in 1999. In 1998, there was no
contribution made to the VEBA Trust due to a special agreement with the
USWA. The Company was reimbursed $5.5 million during the fourth quarter of
1999 by the Trust in recognition of benefits paid during the year to
participants of the Funded Hourly Postretirement Welfare Plan.
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Other contributions reflect
reimbursements from the Weirton Steel Corporation (Weirton),
the Companys former Weirton Steel Division, for retired Weirton
employees whose pension benefits are paid by the Company but are partially
the responsibility of Weirton. An offsetting amount is reflected in
benefits paid.
Due to a November 30, 1997
acquisition, assets and liabilities disclosed at 1998 year-end for the
Weirton benefit plans were determined as of November 30, 1998. Except for
a discount rate of 7.00%, the November 30, 1998 assumptions were the same
as the September 30, 1998 assumptions disclosed below. Effective in 1999,
the Weirton benefit plans results are determined as of September 30. The
impact of this change in measurement date was not material.
The following table provides the
amounts recognized in the consolidated balance sheet as of December 31 of
both years:
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
|
Dollars in
millions |
Prepaid benefit
cost |
|
$
30.8 |
|
|
$
20.5 |
|
|
$
N/A |
|
|
$
N/A |
|
Accrued benefit
liability |
|
(201.0 |
) |
|
(163.9 |
) |
|
(433.0 |
) |
|
(408.1 |
) |
Additional
minimum liability |
|
(68.5 |
) |
|
(140.5 |
) |
|
N/A |
|
|
N/A |
|
Intangible
asset |
|
63.0 |
|
|
89.5 |
|
|
N/A |
|
|
N/A |
|
Accumulated other
comprehensive income |
|
5.5 |
|
|
51.0 |
|
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
amount |
|
$(170.2 |
) |
|
$(143.4 |
) |
|
$(433.0 |
) |
|
$(408.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The projected benefit
obligation, accumulated benefit obligation (ABO) and fair
value of plan assets for pension plans with an ABO in excess of plan
assets were $1,741.8 million, $1,627.5 million and $1,451.8 million,
respectively, as of December 31, 1999 and $1,747.0 million, $1,613.8
million and $1,331.6 million, respectively, as of December 31,
1998.
The following table provides the
components of net periodic benefit cost for the plans for fiscal years
1999, 1998 and 1997.
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
|
1999
|
|
1998
|
|
1997
|
|
1999
|
|
1998
|
|
1997
|
|
|
Dollars in
millions |
Net periodic
cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost |
|
$
31.1 |
|
|
$
27.3 |
|
|
$
24.1 |
|
|
$13.1 |
|
|
$11.2 |
|
|
$11.3 |
|
Interest
cost |
|
146.8 |
|
|
151.9 |
|
|
115.0 |
|
|
53.0 |
|
|
52.3 |
|
|
48.6 |
|
Expected return
on assets |
|
(162.2 |
) |
|
(159.3 |
) |
|
(101.2 |
) |
|
(9.7 |
) |
|
(8.3 |
) |
|
(5.1 |
) |
Prior service
cost amortization |
|
10.8 |
|
|
10.8 |
|
|
11.2 |
|
|
|
|
|
|
|
|
|
|
Actuarial
(gain)/loss amortization |
|
6.1 |
|
|
0.2 |
|
|
|
|
|
(3.0 |
) |
|
(8.5 |
) |
|
(6.7 |
) |
Transition amount
amortization |
|
8.8 |
|
|
8.8 |
|
|
8.8 |
|
|
27.3 |
|
|
27.3 |
|
|
27.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic
benefit cost |
|
$
41.4 |
|
|
$
39.7 |
|
|
$
57.9 |
|
|
$80.7 |
|
|
$74.0 |
|
|
$75.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company generally uses a
September 30 measurement date. The assumptions used in the measuring of
the Companys benefit obligations and costs are shown in the
following table:
|
|
1999
|
|
1998
|
|
1997
|
|
|
Weighted-average assumptions,
September 30 |
Discount
rate |
|
7.50% |
|
6.75% |
|
7.50% |
Expected return
on plan assetsPension |
|
9.75% |
|
9.75% |
|
9.75% |
Expected return
on plan assetsRetiree Welfare |
|
9.75% |
|
9.75% |
|
9.25% |
Rate of
compensation increase |
|
4.18% |
|
4.20% |
|
4.70% |
Assumed health care cost trend
rates have a significant effect on the amounts reported for the health
care plans. A one-percentage-point change in assumed health care cost
trend rates would have the following effects on 1999 service and interest
cost and the accumulated postretirement benefit obligation at September
30, 1999:
|
|
1%
Increase
|
|
1%
Decrease
|
|
|
Dollars in
millions |
Effect on total
of service and interest cost components of net
periodic postretirement health care benefit
cost |
|
$
7.6 |
|
$
(7.8 |
) |
Effect on the
health care component of the accumulated
postretirement benefit obligation |
|
73.4 |
|
(75.9 |
) |
The Company has assumed a 6.3%
health-care cost trend rate at September 30, 1999, reducing 0.65% for two
years, reaching an ultimate trend rate of 5.0% in 2003.
Note 7. Other
Long-Term Liabilities
Other long-term liabilities at
December 31, consisted of the following:
|
|
1999
|
|
1998
|
|
|
Dollars in
millions |
Deferred gain on
sale leasebacks |
|
$
10.0 |
|
$
14.3 |
Insurance and
employee benefits (excluding pensions and OPEBs) |
|
79.5 |
|
84.5 |
Plant
closings |
|
10.7 |
|
15.3 |
Other |
|
20.5 |
|
19.9 |
|
|
|
|
|
Total Other
Long-Term Liabilities |
|
$120.7 |
|
$134.0 |
|
|
|
|
|
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 8. Income
Taxes
Deferred income taxes reflect
the net effects of temporary differences between the carrying amount of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of deferred tax
assets and liabilities at December 31 are as follows:
|
|
1999
|
|
1998
|
|
|
Dollars in
millions |
Deferred tax
assets |
|
|
|
|
|
|
Accrued liabilities |
|
$
96.6 |
|
|
$
82.6 |
|
Employee benefits |
|
211.6 |
|
|
222.1 |
|
Net operating loss (NOL
) carryforwards |
|
25.8 |
|
|
0.6 |
|
Leases |
|
4.5 |
|
|
7.1 |
|
Federal tax credits |
|
86.6 |
|
|
85.1 |
|
Other |
|
21.5 |
|
|
21.6 |
|
|
|
|
|
|
|
|
Total deferred
tax assets |
|
446.6 |
|
|
419.1 |
|
Valuation allowance |
|
(49.9 |
) |
|
(32.9 |
) |
|
|
|
|
|
|
|
Deferred tax assets net of
valuation allowance |
|
396.7 |
|
|
386.2 |
|
Deferred tax
liabilities |
|
|
|
|
|
|
Book basis of property in
excess of tax basis |
|
(170.3 |
) |
|
(156.9 |
) |
Excess tax LIFO over
book |
|
(12.5 |
) |
|
(14.8 |
) |
Other |
|
(7.7 |
) |
|
(11.9 |
) |
|
|
|
|
|
|
|
Total deferred
tax liabilities |
|
(190.5 |
) |
|
(183.6 |
) |
|
|
|
|
|
|
|
Net deferred tax
assets after valuation allowance |
|
$
206.2 |
|
|
$
202.6 |
|
|
|
|
|
|
|
|
In 1999 and 1998, the Company
determined that it was more likely than not that approximately $534
million and $525 million, respectively, of future taxable income would be
generated to justify the net deferred tax assets after the valuation
allowance. Accordingly, the Company recognized additional deferred tax
assets of $3.6 million in 1999 and $29.5 million in 1998.
Significant components of income
taxes (credit) are as follows:
|
|
1999
|
|
1998
|
|
1997
|
|
|
Dollars in
millions |
Current taxes
payable: |
|
|
|
|
|
|
Federal tax |
|
$
|
|
|
$
21.7 |
|
|
$
35.6 |
|
State and foreign |
|
0.8 |
|
|
2.2 |
|
|
2.2 |
|
Deferred tax
credit |
|
(2.9 |
) |
|
(19.6 |
) |
|
(21.6 |
) |
|
|
|
|
|
|
|
|
|
|
Income taxes
(credit) |
|
$(2.1 |
) |
|
$
4.3 |
|
|
$
16.2 |
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of income tax
computed at the federal statutory tax rates to the recorded income taxes
(credit) is as follows:
|
|
1999
|
|
1998
|
|
1997
|
|
|
Dollars in
millions |
Tax at federal
statutory rates |
|
$(15.6 |
) |
|
$
30.8 |
|
|
$
82.3 |
|
State income
taxes, net |
|
|
|
|
0.7 |
|
|
(1.3 |
) |
Change in
valuation allowance |
|
16.3 |
|
|
(29.4 |
) |
|
(68.1 |
) |
Depletion |
|
(3.2 |
) |
|
(2.2 |
) |
|
(5.2 |
) |
Other,
net |
|
0.4 |
|
|
4.4 |
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes
(credit) |
|
$
(2.1 |
) |
|
$
4.3 |
|
|
$
16.2 |
|
|
|
|
|
|
|
|
|
|
|
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
At December 31, 1999, the
Company had unused NOL carryforwards of approximately $69.3 million, which
expire in 2019, and had unused alternative minimum tax credit and other
tax credit carryforwards of approximately $86.6 million which may be
applied to offset its future regular federal income tax liabilities. These
tax credits may be carried forward indefinitely.
Note 9. Weirton
Liabilities
In 1984, NKK purchased a 50%
equity interest in the Company from Avatex. As a part of these
transactions, Avatex agreed to indemnify the Company, based on agreed-upon
assumptions, for certain ongoing employee benefit liabilities related to
the Companys former Weirton Steel Division (Weirton),
which had been divested through an Employee Stock Ownership Plan
arrangement in 1984. In 1990, NKK purchased an additional 20% equity
interest in the Company from Avatex. As a part of the 1990 transaction,
Avatex contributed $146.6 million to the Company for employee benefit
related liabilities and agreed that dividends from the Redeemable
Preferred StockSeries B would be primarily used to fund pension
obligations of Weirton. Under this arrangement, it was agreed that the
Company would release Avatex from its indemnification obligation at the
time of the scheduled redemption of the Redeemable Preferred Stock
Series B or at an earlier date if agreed to by the parties. The
Redeemable Preferred StockSeries B was scheduled to be redeemed in
the year 2000. Avatex also agreed in 1984 to indemnify the Company against
certain environmental liabilities related to Weirton and the Company
s subsidiary, The Hanna Furnace Corporation (Environmental
Liabilities). In 1994, Avatex prepaid $10.0 million to the Company
with respect to these Environmental Liabilities. In 1995, the Company
redeemed one half of the outstanding Redeemable Preferred Stock
Series B for approximately $67 million, with the proceeds going to
partially fund the Weirton pension obligations.
During the fourth quarter of
1997, the Company redeemed all remaining Redeemable Preferred Stock
Series B held by Avatex, which had a book value including accrued
dividends of $62.6 million. In addition, the Company finalized a
settlement with Avatex regarding certain employee benefit liabilities
associated with Weirton, as well as the Environmental Liabilities. As a
result of the redemption and settlement, in 1997, the Company made a
payment of $59.0 million to Avatex and paid an additional $10.0 million,
without interest, in 1998. In connection with the settlement, Avatex
released any claims to amounts received, or to be received, with respect
to settlements reached in a lawsuit brought by the Company and Avatex
against certain former insurers of the Company, wherein recovery was
sought for past and future environmental claims, which included the
Environmental Liabilities. During the fourth quarter of 1997, the Company
recognized insurance proceeds (net of taxes and expenses) aggregating
approximately $13.6 million related to the settlement of such lawsuit. The
Company also retained the $9.2 million remaining balance of the
Environmental Liabilities prepayment made by Avatex in 1994.
Under its settlement with
Avatex, the Company has recorded liabilities for the Weirton pension
obligation, certain other Weirton employee benefit liabilities and the
Environmental Liabilities and has relieved Avatex from any future
indemnity obligation with regard to all such liabilities.
The redemption of Redeemable
Preferred StockSeries B and the related transactions described
above, which are the resolution of the 1990 recapitalization plan, were
reflected as a capital transaction resulting in an increase in additional
paid-in capital of approximately $26.5 million in 1997.
Note 10.
Non-Operational Income Statement Activities
A number of non-operational
activities are reflected in the consolidated statement of income in each
of the three years ended December 31, 1999. A discussion of these items
follows.
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
During the third quarter of
1998, the Company recorded an unusual credit of $26.6 million resulting
from the settlement of a lawsuit seeking a reduction in the assessed value
of the Companys real and personal property at Great Lakes relating
to the 1991 through 1997 tax years. The Company received tax refunds and
was granted a lower assessment base that has resulted in additional tax
savings.
|
Net Gain on
the Disposal of Non-Core Assets and Other Related
Activities
|
In 1999, 1998 and 1997, the
Company disposed, or made provisions for disposing of, certain non-core
assets. The effects of these transactions and other activities relating to
non-core assets are presented as a separate component in the consolidated
statements of income. A discussion of these items follows.
During the first and fourth
quarters of 1999, the Company sold properties located in Michigan. The
Company received proceeds of $0.8 million (net of taxes and expenses) and
recorded a net gain in the same amount from the sales of these
properties.
During the second quarter of
1998, the Company sold two properties located at Midwest. The Company
received proceeds (net of taxes and expenses) of $3.3 million and recorded
a net gain of $2.7 million related to the sales.
On April 1, 1997, the Company
completed the sale of its 21.7% minority equity interest in the Iron Ore
Company of Canada (IOC) to North Limited, an Australian mining
and metal company. The Company received proceeds (net of taxes and
expenses) of $75.3 million in exchange for its interest in IOC and
recorded a $37.0 million gain. The Company will continue to purchase iron
ore at fair market value from IOC pursuant to the terms of long-term
supply agreements.
On June 12, 1997, the Company
completed the sale of the Great Lakes No. 5 coke battery and other related
assets, including coal inventories, to a subsidiary of DTE Energy Company (
DTE). The Company received proceeds (net of taxes and
expenses) of $234.0 million in connection with the sale and recorded a
total loss on the transaction of $14.3 million. The Company utilized a
portion of the proceeds to prepay the remaining $154.3 million of the
related party coke battery debt, resulting in an extraordinary loss of
$5.4 million (net of a tax benefit of $1.4 million). As part of the
arrangement, the Company has agreed to operate the battery under an
operation and maintenance agreement executed with DTE, and will purchase
the majority of the coke produced from the battery under a requirements
contract, with the price being adjusted during the term of the contract,
primarily to reflect changes in production costs.
In the second quarter of 1997,
the Company also recorded a charge of $3.6 million for exit costs related
to the decision to cease operations of American Steel Corporation, a
wholly-owned subsidiary which pickled and slit steel.
In 1997, the Company sold four
non-core coal properties and recorded a net gain of $11.8 million. In
conjunction with one of the property sales, the purchaser agreed to assume
the potential environmental liabilities and as a result, the Company
eliminated the related accrual of approximately $8.0 million.
Additionally, during 1997, the Company received new information related to
closed coal properties employee benefit liabilities and other expenses and
reduced the related accrual by $19.8 million. In aggregate the above coal
properties transactions resulted in a gain of $39.6 million in
1997.
An extraordinary loss of $5.4
million (net of a tax benefit of $1.4 million) was reflected in 1997
income. This loss relates to early debt repayment costs related to debt
associated with the Great Lakes No. 5 coke battery, which was sold in the
second quarter of 1997.
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Note 11.
Related Party Transactions
Summarized below are
transactions between the Company and NKK (the Companys principal
stockholder) and other affiliates accounted for using the equity
method.
During 1998, the Company entered
into a Turnkey Engineering and Construction Contract with NKK Steel
Engineering, Inc. (NKK SE), a subsidiary of NKK, to design,
engineer, construct and install a continuous galvanizing facility at Great
Lakes. The Agreement was unanimously approved by all directors of the
Company who were not then, and never have been, employees of NKK. The
purchase price payable by the Company to NKK SE for the facility is
approximately $139.7 million. During 1999 and 1998, $98.4 million and
$15.2 million, respectfully, was paid to NKK SE relating to the above
mentioned contract and $6.5 million is included in accounts payable, net
of a $9.3 million retention, at December 31, 1999.
During 1999, the Company
purchased from a trading company in arms length transactions at
competitively bid prices, approximately $24.8 million of finished-coated
steel produced by NKK of which $0.6 million is included in accounts
payable at December 31, 1999. The Company entered into agreements with NKK
in order to fulfill the delivery requirements of a contract with a major
automotive customer at a fixed price. During 1999, the Company recorded a
loss of $5.4 million relating to these agreements. The Company anticipates
that approximately $5.8 million of finished coated steel produced by NKK
will be purchased during 2000 so that the Company can fulfill its
obligation to the customer. Of this amount, approximately $3.2 million of
product has been received during the first two months of 2000.
During 1999, the Company also
purchased from trading companies in arms length transactions at
competitively bid prices, approximately $22.6 million of slabs produced by
NKK. The Company has committed to purchase an additional $3.8 million of
slabs produced by NKK during the first quarter of 2000. Effective as of
February 16, 2000, the Company entered into a Steel Slab Products Supply
Agreement with NKK, the initial term of which extends through December 31,
2000 and will continue on a year-to-year basis thereafter until terminated
by either party on six months notice. Pursuant to the terms of this
Agreement, the Company will purchase steel slabs produced by NKK at a
price determined in accordance with a formula set forth in the Agreement.
The quantity of slabs to be purchased is negotiated on a quarterly basis.
This Agreement was unanimously approved by all directors of the Company
who were not then, and never have been, employees of NKK.
During 1997, the Company
purchased from trading companies in arms length transactions approximately
$4.3 million of finished coated steel produced by NKK.
Effective May 1, 1995, the
Company entered into an Agreement for the Transfer of Employees (
Agreement) which supercedes a prior arrangement with NKK. The
Agreement was unanimously approved by all directors of the Company who
were not then, and never have been, employees of NKK. Pursuant to the
terms of this Agreement, technical and business advice is provided through
NKK employees who are transferred to the employ of the Company. The
Agreement further provides that the term can be extended from year to year
after expiration of the initial term, if approved by NKK and a majority of
the directors of the Company who were not then, and never have been,
employees of NKK. The Agreement has been extended through calendar year
2000 in accordance with this provision. Pursuant to the terms of the
Agreement, the Company is obligated to reimburse NKK for the costs and
expenses incurred by NKK in connection with the transfer of these
employees, subject to an agreed upon cap. The cap was $7.0 million during
each of 1999, 1998 and 1997 and will remain at that amount during 2000.
The Company incurred expenditures of approximately $6.3 million, $6.0
million and $6.6 million under this Agreement during 1999, and 1998 and
1997, respectively. In addition, the
Company utilized various other engineering services provided by NKK and
incurred expenditures of approximately $0.3 million, $0.9 million and $1.3
million for these services during 1999, and 1998 and 1997,
respectively.
In 1999 and 1998, cash dividends
of $0.28 per share, or approximately $6.2 million, were paid on 22,100,000
shares of Class A Common Stock owned by NKK. In 1997 cash dividends of
approximately $4.0 million were paid on the Preferred Stock-Series A. On
December 29, 1997, all shares of Preferred StockSeries A were
redeemed. (See Note 3. Capital Structure.)
The Company prepaid related
party debt of $154.3 million in June of 1997. (See Note 10.
Non-Operational Income Statement Activity.)
The Company is contractually
required to purchase its proportionate share of raw material production or
services from certain affiliated companies. Such purchases of raw
materials and services aggregated $35.8 million in 1999, $34.3 million in
1998 and $38.3 million in 1997. Additional expenses were incurred in
connection with the operation of a joint venture agreement. (See Note 13.
Other Commitments and Contingencies.) Accounts payable at December 31,
1999 and 1998 included amounts with affiliated companies accounted for by
the equity method of $4.1 million and $3.8 million, respectively. Accounts
receivable at December 31, 1999 and 1998 included amounts with affiliated
companies of $5.8 million and $5.5 million, respectively.
The Company has agreed to
purchase its proportionate share of the limestone production from an
affiliated company, which will approximate $2 million per year. These
agreements contain pricing provisions that are expected to approximate
market price at the time of purchase.
The Company sold various prime
and non-prime steel products to an affiliated company at prices that
approximate market price. Sales totaled approximately $16.2 million in
1999, $12.6 million in 1998 and $13.1 million in 1997.
Note 12.
Environmental Liabilities
The Companys 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 Companys policy
to expense or capitalize, as appropriate, environmental expenditures that
relate to current operating sites. Environmental expenditures that relate
to past operations and which do not contribute to future or current
revenue generation are expensed. With respect to costs for environmental
assessments or remediation activities, or penalties or fines that may be
imposed for noncompliance with such laws and regulations, such costs are
accrued when it is probable that liability for such costs will be incurred
and the amount of such costs can be reasonably estimated. The Company has
accrued an aggregate liability for such costs of approximately $6.9
million and $3.8 million as of December 31, 1999 and 1998,
respectively.
The Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (CERCLA
), and similar state statutes generally impose joint and several
liability on present and former owners and operators, transporters and
generators for remediation of contaminated properties regardless of fault.
The
Company and certain of its subsidiaries are involved as a potentially
responsible party (PRP) at a number of CERCLA and other
environmental cleanup proceedings. At some of these sites, the Company
does not have sufficient information regarding the nature and extent of
the contamination, the wastes contributed by other PRPs, or the required
remediation activity to estimate its potential liability. With respect to
those sites for which the Company has sufficient information to estimate
its potential liability, the Company has accrued an aggregate liability of
approximately $13.7 million and $11.2 million as of December 31, 1999 and
1998, respectively.
The Company has also recorded
reclamation and other costs to restore its shutdown coal locations to
their original and natural state, as required by various federal and state
mining statutes. The Company has recorded an aggregate liability of
approximately $2.0 million at both December 31, 1999 and 1998 relating to
these properties.
Since the Company has been
conducting steel manufacturing and related operations at numerous
locations for over sixty years, the Company potentially may be required to
remediate or reclaim any contamination that may be present at these sites.
The Company does not have sufficient information to estimate its potential
liability in connection with any potential future remediation at such
sites. Accordingly, the Company has not accrued for such potential
liabilities.
As these matters progress or the
Company becomes aware of additional matters, the Company may be required
to accrue charges in excess of those previously accrued. Although the
outcome of any of the matters described, to the extent they exceed any
applicable accruals or insurance coverages, could have a material adverse
effect on the Companys 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 Companys financial
condition.
Note 13. Other
Commitments and Contingencies
The Company has an interest in
DNN Galvanizing Limited Partnership, a joint venture which constructed a
400,000 ton per year continuous galvanizing line to serve North American
automakers. The joint venture coats steel products for the Company and an
unrelated third party. The Company is a 10% equity owner of the facility,
an unrelated third party is a 50% owner and a subsidiary of NKK owns the
remaining 40%. The Company is committed to utilize and pay a tolling fee
in connection with 50% of the available line-time of the facility. The
agreement extends for 20 years after the start of production, which
commenced in January 1993.
The Company has a 50% interest
in a joint venture with an unrelated third party, which commenced
production in May 1994. The joint venture, Double G Coatings Company, L.P.
(Double G), constructed a 300,000 ton per year coating
facility near Jackson, Mississippi which produces galvanized and Galvalume
® steel sheet for the construction market. The Company is committed to
utilize and pay a tolling fee in connection with 50% of the available
line-time at the facility through May 10, 2004. Double G provided a first
mortgage on its property, plant and equipment and the Company has
separately guaranteed $16.2 million of Double Gs debt as of December
31, 1999.
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, iron ore
pellets, natural and industrial gas, electricity and certain
transportation and other services. Commitments have also been made
relating to the supply of pulverized coal and coke briquettes. Certain
commitments contain provisions which require that the Company take
or pay for specified quantities without regard to actual usage for
periods of up to 12 years. In 2000 and 2001 the Company has commitments
with take or pay or other similar commitment provisions for
approximately $291.9 million and $247.6 million, respectively. The Company
fully utilized all such take or pay requirements during the
past three years and
purchased $350.5 million, $315.0 million and $305.5 million in 1999, 1998
and 1997, respectively, under these contracts. The Company believes that
production requirements will be such that consumption of the products or
services purchased under these commitments will occur in the normal
production process. The Company also believes that pricing mechanisms in
the contracts are such that the products or services will approximate the
market price at the time of purchase.
The Company is involved in
various routine legal proceedings which are incidental to the conduct of
its business. Management believes that the Company is not party to any
pending legal proceeding which, if decided adversely to the Company, would
individually or in the aggregate, have a material adverse effect on the
Company.
Note 14. Risk
Management Contracts
In the normal course of
business, operations of the Company are exposed to continuing fluctuations
in commodity prices, foreign currency values, and interest rates that can
affect the cost of operating, investing, and financing. Accordingly, the
Company addresses a portion of these risks, primarily commodity price
risk, through a controlled program of risk management that includes the
use of derivative financial instruments. The Companys objective is
to reduce earnings volatility associated with these fluctuations to allow
management to focus on core business issues. The Companys derivative
activities, all of which are for purposes other than trading, are executed
within the guidelines of a documented corporate risk management policy.
The Company does not enter into any derivative transactions for
speculative purposes.
The amounts of derivatives
summarized in the following paragraphs indicate the extent of the Company
s involvement in such agreements but do not represent its exposure
to market risk through the use of derivatives.
|
Commodity Risk
Management
|
In order to reduce the
uncertainty of price movements with respect to the purchase of zinc, the
Company enters into derivative financial instruments in the form of swap
contracts and zero cost collars with a major global financial institution.
These contracts typically mature within one year. While these hedging
instruments are subject to fluctuations in value, such fluctuations are
generally offset by changes in the value of the underlying exposures being
hedged. The Company had contracts to hedge future zinc requirements (up to
50% of annual requirements) in the amounts of $13.1 million and $18.5
million at December 31, 1999 and 1998, respectively. The fair value of the
zinc to be purchased under these contracts approximated the contract value
at December 31, 1999 and 1998.
The estimated fair value of
derivative financial instruments used to hedge the Companys risks
will fluctuate over time. The fair value of commodity purchase swap
contracts and zero cost collars are calculated using pricing models used
widely in financial markets.
Note 15.
Long-Term Incentive Plan
The Long-Term Incentive Plan,
established in 1993, has authorized the granting of options for up to
3,400,000 shares of Class B Common Stock to certain executive officers and
other key employees of the Company. The Non-Employee Directors Stock
Option Plan, also established in 1993, has authorized the grant of options
for up to 100,000 shares of Class B Common Stock to certain non-employee
directors. The exercise price 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. Options generally vest and become fully exercisable ratably
over three years of continued employment. However, in the event that
termination of employment is by reason of retirement, permanent
disability or death, the option must be exercised in whole or in part within
24 months of such occurrences. There were 2,122,701 and 2,390,394 options
available for granting under the stock option plans as of December 31,
1999 and 1998, respectively.
The Company cancelled 563,167
options during 1998, and replaced them with Stock Appreciation Rights (
SARs). In accordance with APB 25, the Company recorded $1.9
million of compensation expense in 1998. No compensation expense was
recorded in 1999. In addition, the Company cancelled 66,666 and 241,968
SARs and converted them back to options during 1999 and 1998,
respectively.
As permitted by SFAS 123, the
Company has chosen to continue accounting for stock options at their
intrinsic value at the date of grant consistent with the provisions of APB
25. Accordingly, no compensation expense has been recognized for the stock
option plans. Had compensation cost for the option plans been determined
based on the fair value at the grant date for awards in 1999, 1998, and
1997 consistent with the provisions of SFAS 123, the Companys net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
|
|
1999
|
|
1998
|
|
1997
|
|
|
Dollars in
millions, except EPS |
Net income
pro forma |
|
$(43.7) |
|
$83.6 |
|
$213.5 |
Basic earnings
per sharepro forma |
|
(1.06) |
|
1.93 |
|
4.70 |
Diluted earnings
per sharepro forma |
|
(1.06) |
|
1.93 |
|
4.64 |
As a result of the
aforementioned replacement of stock options with SARs, a recovery of prior
years pro forma expense for those options was required in 1998 and
1997. The recovery offset compensation costs to be recorded.
The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:
|
|
1999
|
|
1998
|
|
1997
|
Dividend
yield |
|
3.1 |
% |
|
2.7 |
% |
|
2.9 |
% |
Expected
volatility |
|
57.2 |
% |
|
48.9 |
% |
|
41.4 |
% |
Risk-free
interest rate |
|
5.4 |
% |
|
4.7 |
% |
|
6.5 |
% |
Expected term (in
years) |
|
7.0 |
|
|
6.8 |
|
|
7.0 |
|
A reconciliation of the Company
s stock option activity and related information follows:
|
|
Number of
Options
|
|
Exercise Price
(Weighted
Average)
|
Balance
outstanding at January 1, 1997 |
|
1,159,735 |
|
|
$14.03 |
Granted |
|
304,500 |
|
|
9.37 |
Forfeited |
|
(132,470 |
) |
|
12.99 |
Cancelled and
replaced with SARs |
|
(653,265 |
) |
|
14.14 |
|
|
|
|
|
|
Balance
outstanding at December 31, 1997 |
|
678,500 |
|
|
12.10 |
Granted |
|
429,500 |
|
|
12.88 |
Forfeited |
|
(51,167 |
) |
|
11.83 |
Cancelled and
replaced with SARs |
|
(563,167 |
) |
|
12.61 |
SARs cancelled
and converted to options |
|
241,968 |
|
|
12.51 |
|
|
|
|
|
|
Balance
outstanding at December 31, 1998 |
|
735,634 |
|
|
12.31 |
Granted |
|
304,000 |
|
|
8.27 |
Forfeited |
|
(36,307 |
) |
|
13.12 |
SARs cancelled
and converted to options |
|
66,666 |
|
|
12.48 |
|
|
|
|
|
|
Balance
outstanding at December 31, 1999 |
|
1,069,993 |
|
|
$11.15 |
|
|
|
|
|
|
NATIONAL STEEL
CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes
information about stock options outstanding at December 31,
1999:
Range of
Exercise Prices
|
|
Number
Outstanding
at
12/31/99
|
|
Weighted
Average
Remaining
Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
at
12/31/99
|
|
Weighted
Average
Exercise
Price
|
$5 7
/8 to $9
|
|
340,334 |
|
8.9 |
|
$
8.06 |
|
14,999 |
|
$
6.76 |
$9 to
$13 |
|
377,994 |
|
4.1 |
|
10.38 |
|
230,328 |
|
10.91 |
$13 to
$19 |
|
351,665 |
|
4.2 |
|
14.96 |
|
207,331 |
|
14.84 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
1,069,993 |
|
5.7 |
|
$11.15 |
|
452,658 |
|
$12.57 |
|
|
|
|
|
|
|
|
|
|
|
There were 170,634 exercisable
stock options with a weighted average exercise price of $13.27 as of
December 31, 1998.
Note 16.
Quarterly Results of Operations (Unaudited)
Following are the unaudited
quarterly results of operations for the years 1999 and 1998.
|
|
1999
|
Three Months
Ended |
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
Dollars in
millions, except per share amounts |
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
$657.9 |
|
|
$707.3 |
|
|
$724.5 |
|
|
$759.9 |
|
Gross
margin |
|
18.5 |
|
|
38.2 |
|
|
33.1 |
|
|
38.1 |
|
Net
loss |
|
(24.1 |
) |
|
(4.6 |
) |
|
(7.6 |
) |
|
(6.8 |
) |
Basic and diluted
earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$(0.58 |
) |
|
$(0.11 |
) |
|
$(0.18 |
) |
|
$(0.17 |
) |
|
|
|
|
1998
|
Three Months
Ended |
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
Dollars in
millions, except per share amounts |
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
$708.4 |
|
|
$747.8 |
|
|
$706.4 |
|
|
$685.4 |
|
Gross
margin |
|
39.9 |
|
|
60.0 |
|
|
58.8 |
|
|
63.4 |
|
Unusual
credit |
|
|
|
|
|
|
|
(26.6 |
) |
|
|
|
Net
income |
|
5.9 |
|
|
26.5 |
|
|
32.5 |
|
|
18.8 |
|
Basic and
diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$
0.14 |
|
|
$
0.61 |
|
|
$
0.75 |
|
|
$
0.44 |
|
Exhibit
23
CONSENT OF INDEPENDENT AUDITORS
We 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 1993 National Steel Corporation Long Term
Incentive Plan,
|
|
|
Form S-8 No.
33-51083 pertaining to the 1993 National Steel Corporation Non-Employee
Directors 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 25, 2000, with respect to the consolidated financial
statements of National Steel Corporation and subsidiaries included in the
Amendment No. 1 to the Annual Report (Form 10-K/A) for the year ended
December 31, 1999.
Indianapolis,
Indiana
April 3,
2000