-----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, Wa2YlBd+oxKdhHrnNLWZwvm4JiAZc5Gez1dXDLw4lZ82XdeusFEoXrWJCNjHNinc xhsUhaK8HdvfxnDdJezNhg== 0000950131-97-001926.txt : 19970320 0000950131-97-001926.hdr.sgml : 19970320 ACCESSION NUMBER: 0000950131-97-001926 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970319 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 SEC ACT: 1934 Act SEC FILE NUMBER: 001-00983 FILM NUMBER: 97559426 BUSINESS ADDRESS: STREET 1: 4100 EDISON LAKES PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 465453440 BUSINESS PHONE: 2192737000 MAIL ADDRESS: STREET 1: 4100 EDISON LAKE PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 46545-3440 10-K 1 FORM 10-K 1996 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [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. [ ] 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 NATIONAL STEEL CORPORATION TABLE OF CONTENTS
Page ---- Part I Item 1 Business 3 Item 2 Properties 11 Item 3 Legal Proceedings 14 Item 4 Submission of Matters to a Vote of Security Holders 21 Part II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 24 Item 6 Selected Financial Data 24 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 8 Financial Statements and Supplementary Data 24 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24 Part III Item 10 Directors and Executive Officers of the Registrant 25 Item 11 Executive Compensation 25 Item 12 Security Ownership of Certain Beneficial Owners and Management 25 Item 13 Certain Relationships and Related Transactions 25 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
2 PART I ITEM 1. Business National Steel Corporation, a Delaware corporation, and its consolidated subsidiaries (the "Company") is the fourth largest integrated steel producer in the United States as measured by production and is engaged in the manufacture and sale of a wide variety of flat rolled carbon steel products, including hot rolled, cold rolled, galvanized, tin and chrome plated steels. The Company targets high value-added applications of flat rolled carbon steel for sale to the automotive, construction and container markets. Since 1984, the Company has invested approximately $2.4 billion in capital improvements to enhance the Company's competitive position and penetrate growing segments of these markets. The Company was formed through the merger of Great Lakes Steel Corporation, Weirton Steel Corporation and Hanna Iron Ore Company and was incorporated in Delaware on November 7, 1929. The Company built a finishing facility, now the Midwest Division, in 1961, and in 1971 purchased Granite City Steel Corporation, now the Granite City Division. On September 13, 1983, the Company became a wholly-owned subsidiary of National Intergroup, Inc., which in October 1994 changed its name to FoxMeyer Health Corporation (collectively, with its subsidiaries, hereinafter referred to as "FOX"), through a restructuring. In January 1997, FOX changed its name to Avatex Corporation. On January 11, 1984, the Company sold the principal assets of its Weirton Steel Division and retained certain liabilities related thereto. On August 31, 1984, NKK Corporation (collectively, with its subsidiaries, "NKK") purchased a 50% equity interest in the Company from FOX. On June 26, 1990, NKK purchased an additional 20% equity interest in the Company from FOX. In April 1993, the Company completed an initial public offering of its Class B Common Stock. In October 1993, FOX converted all of its shares of Class A Common Stock to an equal number of shares of Class B Common Stock and subsequently sold substantially all of its shares of Class B Common Stock in the market in January 1994, resulting in NKK owning 75.6% voting interest in the Company at December 31, 1994. On February 1, 1995, the Company completed a primary offering of 6.9 million shares of Class B Common Stock. Subsequent to the transaction, NKK's voting interest decreased to 67.6%. The Company's principal executive offices are located at 4100 Edison Lakes Parkway, Mishawaka, Indiana 46545-3440; telephone (219) 273-7000. Strategy The Company's mission is to achieve sustained profitability, thereby enhancing stockholder value, by reducing the costs of production, and improving productivity and product quality and shifting its product mix to higher priced, higher value products. Management has developed a number of strategic initiatives designed to achieve the Company's goals. Reduction in Production Costs. Management's primary focus is to reduce the costs of producing hot rolled bands, the largest component of the Company's finished product cost. However, reducing all costs associated with the production process is essential to the Company's overall cost reduction program. Management has reduced production costs by better utilizing existing equipment, improving productivity, involving labor in improving operating practices and by the cost efficient use of steelmaking inputs. In addition, the Company's facility engineers, who have access to a wide range of NKK process technologies, analyze and implement innovative steelmaking and processing methods on an ongoing basis. Marketing Strategy. The Company's marketing strategy has concentrated on increasing the level of sales of higher value-added products to the automotive, construction and container markets. These segments demand high quality products, on-time delivery and effective and efficient customer service. This strategy is designed to increase margins, reduce competitive threats and maintain high capacity utilization rates by shifting the Company's product mix to higher quality products and providing superior customer service. 3 To enable the Company to more efficiently meet the needs of its target markets and focus on higher value-added products, the Company has entered into two separate joint ventures to operate hot dip galvanizing facilities. One joint venture is with NKK and an unrelated third party and has been built to service the automotive industry. The second joint venture has been built to service the construction industry. See "Properties--DNN Galvanizing Limited Partnership" and "Double G Coatings, L.P." In 1995, the Company began construction of an additional coating line which will serve the construction market. The line, located at the Granite City Division, cost approximately $85.0 million and was completed during the first quarter of 1996. A second line, currently under construction at the Midwest Division, will cost approximately $70.0 million and is scheduled to be completed during the second quarter of 1998. In addition, during 1996, the Company began an expansion of the 72" galvanizing line at the Midwest Division to further enable it to more effectively compete in these value-added markets. Quality Improvement. An important element of the Company's strategy is to reduce the cost of poor quality, which currently results in the sale of non-prime products at lower prices and requires substantial reprocessing costs. The Company has made improvements in this area by improving process control, utilizing employee based problem solving methods, eliminating dependence on final inspection and reducing internal rejections and extra processing. In addition, the Company became ISO 9002/QS 9000 registered during 1996. Predictive Maintenance Program. Management is installing a predictive maintenance program designed to maximize production and equipment life while minimizing unscheduled equipment outages. This program should improve operations stability through improved equipment reliability, which is expected to result in improved productivity and reduced costs. Alliance with NKK The Company has a strong alliance with its principal stockholder, NKK, the second largest steel company in Japan and the seventh largest in the world as measured by production. Since 1984, the Company has had access to a wide range of NKK's steelmaking, processing and applications technology. The Company's engineers include approximately 35 engineers transferred from NKK, who serve primarily at the Company's Divisions. These engineers, as well as engineers and technical support personnel at NKK's facilities in Japan, assist in improving operating practices and developing new manufacturing processes. This support also includes providing input on ways to improve raw steel production to finished product yields. In addition, NKK has provided financial assistance to the Company in the form of investments, loans and introductions to Japanese financial institutions and trading companies; however, there can be no assurances given as to the extent of NKK's future financial support beyond existing contractual commitments. This alliance with NKK was further strengthened by the Agreement for the Transfer of Employees (superceding a prior arrangement) entered into by the Company and NKK effective as of May 1, 1995. This agreement was unanimously approved by all directors of the Company who were not then, and have never been, employees of NKK. Pursuant to the terms of the agreement, technical and business advice is provided to the Company through NKK employees who are transferred to the employ of the Company. The Company has agreed to reimburse NKK for certain 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 is 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. This agreement has been extended for 1997 with the total amount of reimbursable expenses capped at $7.0 million for the term of the agreement, which runs from January 1, 1997 through December 31, 1997. Customer Partnership The Company's customer partnership enables the Company to differentiate its products through superior quality and service. Management believes it is able to differentiate the Company's products and promote 4 customer loyalty by establishing close relationships through early customer involvement, providing technical services and support and utilizing its Product Application Center and Technical Research Center facilities. The Company operates a research and development facility near its Great Lakes Division to develop new products, improve existing products and develop more efficient operating procedures to meet the constantly increasing demands of the automotive, construction and container markets. The research center employs approximately 50 chemists, physicists, metallurgists and engineers. The research center is responsible for, among other things, the development of five new high strength steels for automotive weight reduction and a new galvanized steel for the construction market. In addition, the Company operates a Product Application Center near Detroit dedicated to providing product and technical support to customers. The Product Application Center assists customers with application engineering (selecting optimum metal and manufacturing methods), application technology (evaluating product performance) and technical developments (performing problem solving at plants). The Company spent $11.6 million, $9.8 million and $7.9 million for research and development in 1996, 1995 and 1994, respectively. In addition, the Company participates in various research efforts through the American Iron and Steel Institute (the "AISI"). Capital Investment Program Since 1984, the Company has invested over $2.4 billion in capital improvements aimed at upgrading the Company's steelmaking and finishing operations to meet its customers' demanding requirements for higher quality products and to reduce production costs. As described above, one of the Company's strategic initiatives is to more effectively utilize these substantial capital improvements. Major projects include an electrolytic galvanizing line, a continuous caster, a ladle metallurgy station, a vacuum degasser, a complete coke oven battery rebuild and a high speed pickle line, each of which services the Great Lakes Division and a continuous caster, a coating line and a ladle metallurgy station, each of which services the Granite City Division. Major improvements at the Midwest Division include the installation of process control equipment to upgrade its finishing capabilities, expansion of the 72" galvanizing line and construction of a new coating line scheduled for completion in 1998. Capital investments for each of 1996, 1995 and 1994 were $128.6 million, $215.4 million and $137.5 million, respectively. Capital investments for 1997 and 1998 are expected to total approximately $297.0 million. Customers The Company is a major supplier of hot and cold rolled steel and galvanized coils to the automotive industry, one of the most demanding steel consumers. Car and truck manufacturers require wide sheets of steel, rolled to exact dimensions. In addition, formability and defect-free surfaces are critical. The Company has been able to successfully meet these demands. Its steel has been used in a variety of automotive applications including exposed and unexposed panels, wheels and bumpers. The Company is also a leading supplier of steel to the domestic construction market. Roof and building panels are the principal applications for galvanized and Galvalume(R) steel in this market. Management believes that demand for Galvalume(R) steel will exhibit strong growth for the next several years partially as a result of a trend away from traditional building products, and that the Company is well positioned to profit from this growth as a result of both its position in this market and additional capacity referred to above. The Company produces chrome and tin plated steels to exacting tolerances of gauge, shape, surface flatness and cleanliness for the container industry. Tin and chrome plated steels are used to produce a wide variety of food and non-food containers. In recent years, the market for tin and chrome plated steels has been both stable and profitable for the Company. The Company also supplies the pipe and tube and service center markets with hot rolled, cold rolled and coated sheet. The Company is a key supplier to transmission pipeline, downhole casing and structural pipe producers. Service centers generally purchase steel coils from the Company and may process them further or sell them directly to third parties without further processing. 5 The following table sets forth the percentage of the Company's revenues from various markets for the past five years.
1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Automotive 27.6% 27.8% 28.5% 28.9% 27.2% Construction 21.6 20.5 18.3 16.8 15.2 Containers 10.6 11.3 13.2 13.3 14.9 Pipe and Tube 6.5 7.4 6.9 8.2 9.4 Service Centers 20.2 15.4 17.9 15.5 13.6 All Other 13.5 17.6 15.2 17.3 19.7 ----- ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- -----
Shipments to General Motors accounted for approximately 10% of net sales in 1994. No customer accounted for more than 10% of net sales in 1996 or 1995. Export sales accounted for approximately .5% of revenue in 1996, 2.6% in 1995 and .9% in 1994. The Company's products are sold through sales offices located in Chicago, Detroit, Houston, Indianapolis, Kansas City, Pittsburgh and St. Louis. Substantially all of the Company's net revenues are based on orders for short-term delivery, accordingly, backlog is not meaningful when assessing future results of operations. Operations The Company operates three principal facilities: two integrated steel plants, the Great Lakes Division in Ecorse and River Rouge, Michigan, near Detroit, and the Granite City Division in Granite City, Illinois, near St. Louis, and a finishing facility, the Midwest Division in Portage, Indiana, near Chicago. In January 1997, the Company consolidated the Great Lakes Division and the Midwest Division into a single business enterprise in order to improve the planning and coordination of production at both plants. In addition, this will ensure the best monitoring of costs and utilization of resources and will allow the Company to more effectively meet customer needs. The Company's centralized corporate structure, the close proximity of the Company's principal steel facilities and the complementary balance of processing equipment shared by them, will enable the Company to closely coordinate the operations of these facilities in order to maintain high operating rates throughout its processing facilities and to maximize the return on its capital investments. 6 The following table details effective steelmaking capacity, actual production, effective capacity utilization and percentage of steel continuously cast for the Company and the domestic steel industry for the years indicated.
RAW STEEL PRODUCTION DATA Effective Percent Effective Actual Capacity Continuously Capacity Production Utilization Cast --------- ---------- ----------- ------------ (000's of net tons) (%) (%) The Company 1996 7,000 6,557 93.7 100.0 1995 6,300 6,081 96.5 100.0 1994 6,000 5,763 96.1 100.0 1993 5,550 5,551 100.0 100.0 1992 5,355 5,380 100.5 100.0 Domestic Steel Industry* 1996 116,100 104,356 89.9 93.2 1995 112,500 104,930 93.3 91.1 1994 108,200 100,579 93.0 89.5 1993 109,900 97,877 89.1 85.7 1992 113,100 92,949 82.2 79.3
* Information as reported by the AISI. The 1996 industry information is preliminary. In 1996, capacity increased to 7,000,000 net tons primarily due to successfully negotiated environmental relief at the Granite City Division. Unanticipated blast furnace outages at midyear were the primary reason actual steel production fell short of capacity. In 1995, effective capacity increased to 6,300,000 net tons due to higher production levels at both the Great Lakes and Granite City Divisions. Effective capacity increased to 6,000,000 net tons in 1994 due to the fact that the Company did not reline any blast furnaces during this period. The effective capacity of the Company was 5,355,000 net tons in 1992 as a result of a scheduled blast furnace reline. Raw Materials Iron ore. The metallic iron requirements of the Company are supplied primarily from iron ore pellets that are produced from a concentration of low grade ores. The Company, directly through its wholly owned subsidiary, National Steel Pellet Company ("NSPC") and through Iron Ore of Canada ("IOC") (see paragraph below), has reserves of iron ore adequate to produce approximately 492 million gross tons of iron ore pellets. The Company's iron ore reserves are located in Minnesota, Michigan and Quebec, Canada. Excluding the effects of the thirteen month period from August 1, 1993 through August 28, 1994 when NSPC was idled, a significant portion of the Company's average annual consumption of iron ore pellets was obtained from the deposits of the Company or those of its affiliate during the last five years. The remaining iron ore pellets consumed by the Company were purchased from third parties. Iron ore pellets available to the Company from its own deposits, its affiliate and outside suppliers are sufficient to meet the Company's total iron ore requirements at competitive market prices for the foreseeable future. On January 31, 1997, the Company announced that it had 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 IOC. The Company currently owns 21.7% of the shares of IOC and plans to continue to purchase iron ore from IOC pursuant to long-term contracts. 7 Coal. In 1992, the Company decided to exit the coal mining business. At that time, the Company owned underground coal properties in Pennsylvania, Kentucky and West Virginia as well as undeveloped coal reserves in Pennsylvania and West Virginia. During 1993, the Pennsylvania and Kentucky properties were sold except for the coal reserves which were leased on a long term basis. During 1994, one of the West Virginia plant sites was sold, and in 1995, the remaining plant site in West Virginia was leased for a 5 year term, with an option to extend for two additional 5 year periods. Negotiations are in process for the long term lease of certain West Virginia partially developed coal reserves. The remaining coal assets constitute less than 2% of the Company's total assets. Adequate supplies of coal are readily available at competitive market prices . Coke. The Company operates two efficient coke oven batteries servicing the Granite City Division and the recently rebuilt No. 5 coke oven battery at the Great Lakes Division. The No. 5 coke battery enhances the quality and stability of the Company's coke supply, and incorporates state-of-the-art technology while meeting the requirements of the Clean Air Act. With the No. 5 coke battery rebuild in 1992, the Company has significantly improved its self-sufficiency and can supply approximately 60% of its annual coke requirements. In the fourth quarter of 1996, the Company started up a pulverized coal injection process at one of its three blast furnaces at the Great Lakes Division, with plans to start up the same process at the other blast furnaces during 1997. Successful implementation of this process should further reduce the Company's dependency on outside coke supplies. The remaining coke requirements are met through competitive market purchases. Limestone. An affiliated company in which the Company holds a minority equity interest has limestone reserves of approximately 74 million gross tons located in Michigan. During the last five years, approximately 67% of the Company's average annual consumption of limestone was derived from these reserves. The Company's remaining limestone requirements were purchased at competitive market prices from unaffiliated third parties. Scrap and Other Materials. Supplies of steel scrap, tin, zinc and other alloying and coating materials are readily available at competitive market prices. Patents and Trademarks The Company has the patents and licenses necessary for the operation of its business as now conducted. The Company does not consider its patents and trademarks to be material to the business of the Company. Employees As of December 31, 1996, the Company employed 9,579 people. The Company has labor agreements with the United Steelworkers of America (the "USWA") and other labor organizations which collectively represent approximately 82.6% of the Company's employees. In 1993, the Company entered into labor agreements, which expire in 1999, with these various labor organizations. Competition The Company is in direct competition with domestic and foreign flat rolled carbon steel producers and producers of plastics, aluminum and other materials which can be used in place of flat rolled carbon steel in manufactured products. Price, service and quality are the primary types of competition experienced by the Company. The Company believes it is able to differentiate its products from those of its competitors by, among other things, providing technical services and support, utilizing its Product Application Center and Technical Research Center facilities and by its focus on improving product quality through, among other things, capital investment and research and development, as previously described. 8 Imports. Domestic steel producers face significant competition from foreign producers and have been adversely affected by what the Company believes to be unfairly traded imports. Imports of finished steel products accounted for approximately 19% of the domestic market over the past three years. Many foreign steel producers are owned, controlled or subsidized by their governments. Decisions by these foreign producers with respect to production and sales may be influenced to a greater degree by political and economic policy considerations than by prevailing market conditions. Reorganized/Reconstituted Mills. The intensely competitive conditions within the domestic steel industry have been exacerbated by the continued operation, modernization and upgrading of marginal steel production facilities through bankruptcy reorganization procedures, thereby perpetuating overcapacity in certain industry product lines. Overcapacity is also caused by the continued operation of marginal steel production facilities that have been sold by integrated steel producers to new owners, who operate such facilities with a lower cost structure. Mini-mills. Domestic integrated producers, such as the Company, have lost market share in recent years to domestic mini-mills. Mini-mills provide significant competition in certain product lines, including hot rolled and cold rolled sheets, which represented, in the aggregate, approximately 58% of the Company's shipments in 1996. Mini-mills are relatively efficient, low-cost producers which produce steel from scrap in electric furnaces, have lower employment and environmental costs and target regional markets. Thin slab casting technologies have allowed mini-mills to enter certain sheet markets which have traditionally been supplied by integrated producers. One mini-mill has constructed two such plants and is completing construction on a third plant. Certain companies have announced plans for, or have indicated that they are currently considering, additional mini-mill plants for sheet products in the United States. Steel Substitutes. In the case of many steel products, there is substantial competition from manufacturers of other products, including plastics, aluminum, ceramics, glass, wood and concrete. Conversely, the Company and certain other manufacturers of steel products have begun to compete in recent years in markets not traditionally served by steel producers. Environmental Matters The Company's operations are subject to numerous laws and regulations relating to the protection of human health and the environment. The Company currently estimates that it will incur capital expenditures in connection with matters relating to environmental control of approximately $3.2 million and $21.0 million for 1997 and 1998, respectively. A major capital project in 1998 will be the installation of air pollution control equipment at the National Steel Pellet Plant. This equipment will be necessary to enable the Company to meet National Ambient Air Quality Standards as anticipated increases in production levels occur in the future. In addition, the Company expects to record expenses for environmental compliance, including depreciation, of approximately $69.0 million and $70.0 million for 1997 and 1998, respectively. Since environmental laws and regulations are becoming increasingly stringent, the Company's environmental capital expenditures and costs for environmental compliance may increase in the future. In addition, due to the possibility of future factual or regulatory developments, the amount and timing of future environmental expenditures could vary substantially from those currently anticipated. The costs for environmental compliance may also place the Company at a competitive disadvantage with respect to foreign steel producers, as well as manufacturers of steel substitutes, that are subject to less stringent environmental requirements. In 1990, Congress passed amendments to the Clean Air Act which impose stringent standards on air emissions. The Clean Air Act amendments will directly affect the operations of many of the Company's facilities, including its coke ovens. Under such amendments, coke ovens generally will be required to comply with progressively more stringent standards over the next thirty years. The Company believes that the costs for complying with the Clean Air Act amendments will not have a material adverse effect, on an individual site basis or in the aggregate, on the Company's financial position, results of operations or liquidity. 9 In 1990, the United States Environmental Protection Agency (the "EPA") released a proposed rule which establishes standards for the implementation of a corrective action program under the Resource Conservation Recovery Act of 1976, as amended ("RCRA"). The corrective action program requires facilities that are operating under a permit, or are seeking a permit, to treat, store or dispose of hazardous wastes to investigate and remediate environmental contamination. The Company has conducted an investigation at its Midwest Division facility and is currently waiting for comments from the EPA regarding the results of the investigation. The Company estimates that the potential capital costs for implementing corrective actions at such facility will be approximately $8.0 million payable over the next several years. At the present time, the Company's other facilities are not subject to corrective action. The Company has recorded the reclamation costs to restore its coal and iron ore mines at its shut down locations to their original and natural state, as required by various federal and state mining statutes. 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. In addition, the Company and certain of its subsidiaries are involved as potentially responsible parties ("PRPs") in a number of off-site CERCLA or state superfund site proceedings. At several of these sites, any remediation costs incurred by the Company are liabilities for which FOX has agreed to indemnify the Company. 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 PRP's or the required remediation activity to estimate its potential liability. In connection with those sites involving Fox Meyer Health Corporation (collectively with its subsidiaries "FOX"), which changed its name to Avatex Corporation in January 1997, Environmental Liabilities, in January 1994 the Company received $10.0 million from FOX as an unrestricted prepayment for such liabilities for which the Company recorded $10.0 million as a liability in its consolidated balance sheet. The Company is required to repay FOX portions of the $10.0 million to the extent the Company's expenditures for such FOX Environmental Liabilities do not meet specified levels by certain dates over a twenty year period. At December 31, 1996 and December 31, 1995, the balance, including accrued interest and environmental insurance settlements, recorded as prepaid FOX Environmental 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 above 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 stockholder's equity of FOX was reported in its Form 10-Q for the quarter ended June 30, 1996 as a deficit of $88.4 million. As of 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. 10 ITEM 2. Properties The Granite City Division. The Granite City Division, located in Granite City, Illinois, has an effective steelmaking capacity of approximately 3.0 million tons. All steel at this Division is produced by continuous casting. The Granite City Division also uses ladle metallurgy to refine the steel chemistry to enable it to meet the exacting specifications of its customers. The Division's ironmaking facilities consist of two coke batteries and two blast furnaces. Finishing facilities include an 80 inch hot strip mill, a continuous pickler and two hot dip galvanizing lines. In 1996, the Granite City Division completed construction of a 270,000 ton coating facility to serve the construction market. This facility, known as Triple G, cost approximately $85.0 million. Granite City Division ships approximately 20% of its total production to the Midwest Division for finishing. Principal products of the Granite City Division include hot rolled, cold rolled, hot dipped galvanized, grain bin and high strength, low alloy steels. The Granite City Division is located on 1,540 acres and employs 3,042 people. The Division's proximity to the Mississippi River and other interstate transit systems, both rail and highway, provides easy accessibility for receiving raw materials and supplying finished steel products to customers. The Great Lakes Division. The Great Lakes Division, located in Ecorse and River Rouge, Michigan, is an integrated facility engaged in steelmaking primarily for use in the automotive market with an effective steelmaking capacity of approximately 4.0 million tons. All steel at this Division is produced by continuous casting. The Division's ironmaking facilities consist of a rebuilt 85-oven coke battery and three blast furnaces. The Division also operates steelmaking facilities consisting of two basic oxygen process vessels, a vacuum degasser and a ladle metallurgy station. Finishing facilities include a hot strip mill, a skinpass mill, a shear line, a new high speed pickle line, a tandem mill, a batch annealing station, two temper mills, two customer service lines, and an electrolytic galvanizing line. The Great Lakes Division ships approximately 40% of its production to the Midwest Division for finishing. Principal products of the Great Lakes Division include hot rolled, cold rolled, electrolytic galvanized, and high strength, low alloy steels. The Great Lakes Division is located on 1,100 acres and employs 3,717 people. The Division is strategically located with easy access to water, rail and highway transit systems for receiving raw materials and supplying finished steel products to customers. The Midwest Division. The Midwest Division, located in Portage, Indiana, finishes hot rolled bands produced at the Granite City and Great Lakes Divisions primarily for use in the automotive, construction and container markets. The Midwest Division's facilities include a continuous pickling line, two cold reduction mills, two continuous galvanizing lines, a 48 inch wide line which can produce galvanized or Galvalume(R) steel products and which services the construction market, and a 72 inch wide line which services the automotive market; finishing facilities for cold rolled products consisting of a batch annealing station, a sheet temper mill and a continuous stretcher leveling line, an electrolytic cleaning line, a continuous annealing line, two tin temper mills, two tin recoil lines, an electrolytic tinning line and a chrome line which services the container markets. In 1995, the Midwest Division commenced construction of a 270,000 ton coating line to serve the construction market. The line will cost approximately $70.0 million and is scheduled to be completed in the second quarter of 1998. In addition, during 1996, the Company began an expansion of the 72" galvanizing line. Principal products of the Midwest Division include tin mill products, hot dipped galvanized and Galvalume(R) steel, cold rolled, and electrical lamination steels. 11 The Midwest Division is located on 1,100 acres and employs 1,489 people. Its location provides excellent access to rail, water and highway transit systems for receiving raw materials and supplying finished steel products to customers. In January 1997, the Company consolidated the Great Lakes Division and the Midwest Division into a single business enterprise in order to improve the planning and coordination of production at both plants. National Steel Pellet Company National Steel Pellet Company ("NSPC"), located on the western end of the Mesabi Iron Ore Range in Keewatin, Minnesota, mines, crushes, concentrates and pelletizes low grade taconite ore into iron ore pellets. NSPC operations include two primary crushers, ten primary mills, five secondary mills, a concentrator and a pelletizer. The facility has a current annual effective iron ore pellet capacity of over 5 million gross tons and has a combination of rail and vessel access to the Company's integrated steel mills. DNN Galvanizing Limited Partnership As part of its strategy to focus its marketing efforts on high quality steels for the automotive industry, the Company entered into an agreement with NKK and Dofasco Inc., a large Canadian steel producer ("Dofasco"), to build and operate DNN, a 400,000 ton per year, hot dip galvanizing facility in Windsor, Ontario, Canada. This facility incorporates state-of-the-art technology to galvanize steel for critically exposed automotive applications. The facility is modeled after NKK's Fukuyama Works Galvanizing Line that has provided high quality galvanized steel to the Japanese automotive industry for several years. The Company is committed to utilize 50% of the available line time of the facility and pay a tolling fee designed to cover fixed and variable costs with respect to 50% of the available line time, whether or not such line time is utilized. The plant began production in January 1993 and is currently operating at full capacity. The Company's steel substrate requirements are provided to DNN by the Great Lakes Division. Double G Coatings, L.P. To continue to meet the needs of the growing construction market, the Company and an unrelated third party formed a joint venture to build and operate Double G Coatings, L.P. ("Double G"). Double G is a 270,000 ton per year hot dip galvanizing and Galvalume(R) steel facility near Jackson, Mississippi. The facility is capable of coating 48 inch wide steel coils with zinc to produce a product known as galvanized steel and with a zinc and aluminum coating to produce a product known as Galvalume(R) steel. Double G primarily serves the metal buildings segment of the construction market in the south central United States. The Company is committed to utilize and pay a tolling fee in connection with 50% of the available line time at the facility. The joint venture commenced production in the second quarter of 1994 and reached full operating capacity in 1995. The Company's steel substrate requirements are provided to Double G by the Great Lakes and Midwest Division. ProCoil Corporation ProCoil Corporation ("ProCoil"), a joint venture between the Company, Marubeni Corporation, Mitsubishi Corporation and NKK, located in Canton, Michigan, operates a steel processing facility which began operations in 1988 and a warehousing facility which began operations in 1992. The Company and Marubeni Corporation each own a 44% equity interest in ProCoil. ProCoil blanks, slits and cuts steel coils to desired lengths to service automotive market customers. In addition, ProCoil warehouses material to assist the Company in providing just-in-time delivery to customers. The Company is currently in the process of purchasing NKK Corporation's two percent interest in ProCoil. 12 Other Properties Generally, the Company's properties are well maintained, considered adequate and being utilized for their intended purposes. The Company's corporate headquarters is located in Mishawaka, Indiana. Except as stated below, the steel production facilities are owned in fee by the Company. A continuous caster and related ladle metallurgy facility and an electrolytic galvanizing line, which each service the Great Lakes Division, and a coke battery, which services the Granite City Division, are operated pursuant to the terms of operating leases with third parties and are not subject to a lien securing the Company's First Mortgage Bonds. The electrolytic galvanizing line lease, the coke battery lease and the continuous caster and related metallurgy facility lease are scheduled to expire in 2001, 2004, and 2008, respectively. Upon expiration, the Company has the option to extend the respective lease or purchase the facility at fair market value. All land (excluding certain unimproved land), buildings and equipment (excluding, generally, mobile equipment) that are owned in fee by the Company at the Great Lakes Division, Granite City Division and Midwest Division are subject to a lien securing the First Mortgage Bonds, with certain exceptions, including a vacuum degasser and a pickle line which service the Great Lakes Division, a continuous caster which services the Granite City Division and the corporate headquarters in Mishawaka, Indiana. Additionally, the Company has agreed to grant to the Voluntary Employee Benefit Association trust (the "VEBA Trust") a second mortgage on the No. 5 coke oven battery at the Great Lakes Division. For a description of certain properties related to the Company's production of raw materials, see "Raw Materials" in Item 1 of this Form 10-K. 13 ITEM 3. Legal Proceedings In addition to the environmental matters discussed below, the Company is involved in various legal proceedings occurring in the normal course of its business. In the opinion of the Company's management, adequate provision has been made for losses which are likely to result from these actions. Environmental Matters CERCLA and State Superfund Proceedings 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. Currently, an inactive site located at the Great Lakes Division facility is listed on the Michigan Environmental Response Act Site List, but remediation activity has not been required by the Michigan Department of Environmental Quality ("MDEQ"). In addition, the Company and certain of its subsidiaries are involved as potentially responsible parties ("PRPs") in a number of off-site CERCLA or state superfund site proceedings. The outcome of these proceedings is not expected to have a material adverse effect on the financial position, results of operations or liquidity of the Company. The more significant of these matters are described below. Buck Mine Complex. This is a proceeding involving a large site, located in Caspian, Michigan, called the Buck Mine Complex, two discrete portions of which were formerly owned or operated by a subsidiary of the Company. This subsidiary was subsequently merged into the Company. The Company received a notice of potential liability from the MDEQ with respect to this site on June 24, 1992. The Company's subsidiary had conducted mining operations at only one of these two parcels and had leased the other parcel to a mining company for numerous years. The MDEQ alleges that this site discharged and continues to discharge heavy metals into the environment, including the Iron River. Because the Company and approximately eight other PRPs have declined to undertake a remedial investigation and feasibility study, the MDEQ has advised the Company that it will undertake the investigation at this site and charge the costs thereof to those parties ultimately held responsible for the cleanup. The Company does not have complete information regarding the relationship of the other PRPs to the site, does not know the extent of the contamination or of any cleanup that may be required and, consequently, is unable to estimate its potential liability, if any, in connection with this site. Ilada Energy Company Site. The Company and certain other PRPs have performed a removal action pursuant to an order issued by the United States Environmental Protection Agency ("EPA") under Section 106 of CERCLA at this waste oil/solvent reclamation site located in East Cape Girardeau, Illinois. The Company received a special notice of liability with respect to this site on December 21, 1988. The Company believes that there are approximately 63 PRPs identified at such site. Pursuant to an Administrative Order on Consent ("AOC"), the Company and other PRPs performed a remedial investigation and feasibility study ("RI/FS") at this site to determine whether the residual levels of contamination of soil and groundwater remaining after the removal action pose any threat to either human health or the environment and therefore whether or not the site will require further remediation. The PRPs submitted a draft RI/FS to EPA and the Illinois Environmental Protection Agency ("IEPA") and responded to the agencies' comments on that document. Discussions between the PRPs and the agencies are ongoing. In the course of performance of the RI/FS, a floating layer of material was discovered above the groundwater. The Company's position, which was recently sustained by both EPA and IEPA, is that this material is bulk aviation fuel and is not considered to be a hazardous substance as defined under CERCLA. Due to legal and factual uncertainties remaining at this site, the Company is unable to estimate its ultimate potential liability. To date, the Company has paid approximately $2 million for work and oversight costs. 14 Iron River (Dober Mine) Site. On July 15, 1994, the State of Michigan filed a complaint in the Circuit Court for Ingham County, Michigan against M.A. Hanna Company ("M.A. Hanna") seeking response costs in the amount of approximately $365,000, natural resource damages in the amount of approximately $2 million and implementation of additional response activities related to an alleged discharge in Iron County, Michigan, to the Iron and Brule Rivers of acid mine drainage. The State subsequently revised its response costs claim upward to approximately $487,000 and its natural resources damages claim upward to $4,600,000. Under the applicable statute, the State is also entitled to recover its attorneys' fees and litigation costs if it prevails. M.A. Hanna operated the Dober Mine pursuant to a management agreement with the Company. M.A. Hanna has requested that the Company defend and indemnify it and the Company has undertaken the defense of the State's claim. The Company, however, reserved the right to terminate such defense. The Company filed on behalf of M.A. Hanna an answer to the complaint denying liability at this site. On September 21, 1994 and November 9, 1994, respectively, the Company filed a third party complaint and an amended third party complaint naming a total of seven additional defendants. Additionally, on November 15, 1994, the Company negotiated a case management order with the State pursuant to which the court must rule on liability issues prior to addressing other aspects of the case. That order also stays the third party actions pending the court's decision regarding the liability issues. Subsequently, the court denied the Company's motion for summary disposition of the liability issues in the case. After some discovery, the court entered an order in November 1996 staying any further proceedings in this case while the Company engages in settlement negotiations with the State and some of the third party defendants. These settlement negotiations are ongoing. Port of Monroe Site. In February 1992, the Company received a notice of potential liability from the MDEQ as a generator of waste materials at this landfill located in Monroe County, Michigan. The Company believes that there are approximately 80 other PRPs identified at this site. The Company's records indicate that it sent some material to the landfill. A draft RI/FS for remediation work has been prepared by the owner/operator PRPs and submitted to the MDEQ for its approval. The cost of this RI/FS was approximately $280,000. In March 1994, the MDEQ demanded reimbursement from the PRPs for its past and future response costs. The MDEQ has since agreed to accept $500,000 as reimbursement for its past response costs incurred through October 1993. This settlement has been embodied in a consent decree. The owner/operators of this site and certain of the generator/transporter PRPs (including the Company) have reached an agreement regarding an interim allocation that will generate sufficient funds to satisfy the PRPs' obligations under the above-described settlement with the MDEQ. The Company's share under this interim allocation is approximately $50,000, which amount has been paid to the State. The owner/operator PRPs have advised the Company orally that the overall cost of the remedy for the site is expected to be less than $10 million. However, the Company does not yet have sufficient information regarding the nature and extent of contamination at the site and the nature and extent of the wastes that the other PRPs have sent to the site to determine whether the $10 million estimate is accurate. Based on currently available information, the Company believes that its proportionate share of the ultimate liability at this site will be no more than 10% of the total costs. Rasmussen Site. The Company and nine other PRPs have entered into a Consent Decree with the EPA in connection with this disposal site located in Livingston, Michigan. The Company received a general notice of liability with respect to this site on September 27, 1988. The Company believes that there are approximately 23 PRPs at this site. A record of decision selecting the final remedial action for this site was issued by the EPA in March 1991. The PRP steering committee has estimated that remediation costs are approximately $19.7 million. Pursuant to a participation agreement among the PRPs, the Company's share of such costs is 2.25%. Therefore, the Company's share of liability should be approximately $443,000. To date, the Company has paid approximately $275,000 of that amount. Springfield Township Site. This is a proceeding involving a disposal site located in Springfield Township, Davisburg, Michigan in which approximately 22 PRPs have been identified. The Company received a general notice of liability with respect to this site on January 23, 1990. The Company and 11 other PRPs have entered into AOCs with the EPA for the performance of partial removal actions at such site and reimbursement of past response costs to the EPA. The Company's share of costs under the AOCs was 15 $48,000. On November 10, 1993, the EPA issued a unilateral order pursuant to Section 106 of CERCLA requiring the PRP steering committee to implement the groundwater portion of the final remedy. The members of the PRP steering committee have entered into an agreement among themselves for the implementation of this unilateral order. Subject to a final determination by the EPA as to what must be included, a preliminary estimate by the PRP steering committee of the cost of such work is approximately $300,000. Additionally, the PRP steering committee and the MDEQ have negotiated an AOC pursuant to which the MDEQ will be reimbursed approximately $700,000 for its past response costs incurred through July 1993. The Company has paid its share of this settlement amount, which was approximately $11,000. The PRPs are currently negotiating with the EPA regarding the final remedial action at this site. The EPA and the PRP steering committee had originally estimated the cost to implement the final remedy at approximately $33 million and $20 million, respectively. Based upon this overall cost estimate, the Company had offered to pay $175,000 as its share of the costs to implement the final remedy. A proposed amendment to the Record of Decision has been submitted to the EPA which would allow greater post-remediation concentrations of PCBs to remain in the subsurface soil, and discussions relating to this amendment are ongoing. If approved by the EPA, the cost range for implementation of the final remedy would be between $3.3 million and $12.2 million. Settlement discussions among the various PRPs are also ongoing, and a tentative settlement has been reached. If that settlement is ultimately accepted by all parties, the Company's share of the remediation costs would be less than the Company's original $175,000 settlement offer. Waste, Inc. Site. On December 30, 1994, the EPA notified the Company's Midwest Division that it was a PRP with respect to a site located in Michigan City, Indiana known as the Waste, Inc. Landfill Site. The EPA's correspondence noted that the Company may have contributed only a small amount of waste to this site and that the Company may be a de minimis PRP. The EPA has informed the Company that there are approximately 25 non de minimis PRPs, as well as approximately 200 de minimis PRPs, at this site. The EPA has estimated the cost of the remedy at this site to be between $16 and $16.5 million. The Company has been advised that EPA issued a Section 106 Unilateral Order to some non-de minimis PRPs to implement the remedy and that EPA is continuing to negotiate with those PRPs the terms of a buyout which EPA will ultimately offer to the de minimis parties, including the Company. When those negotiations are complete, EPA intends to initiate settlement negotiations with the de minimis PRPs. FOX Sites Remediation costs incurred by the Company at the following sites constitute environmental liabilities for which FOX has agreed to indemnify the Company. In accordance with the terms of an agreement between the Company and FOX, in January 1994, FOX paid the Company $10 million as an unrestricted prepayment for environmental obligations which may arise after such prepayment and for which FOX had previously agreed to indemnify the Company. FOX retained responsibility to indemnify the Company for any remaining environmental liabilities arising before such prepayment or arising after such prepayment and in excess of $10 million. However, the failure of FOX to satisfy any such indemnity obligations 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 obligation is necessarily dependent upon FOX's financial condition at the time of any claim with respect to such obligations. FOX is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports and other information with the Commission. See "Environmental Matters" in Item 1 of this Form 10-K. Buckeye Site. The EPA has notified the Company that it is one of a number of PRPs with respect to the Buckeye Site located in Belmont County, Ohio, and has requested the Company's voluntary participation in certain remedial actions. The Company and thirteen other PRPs have entered into a consent order with the EPA to perform collectively the remedial design pursuant to an AOC between the PRP group and the EPA which took effect on February 10, 1992. The Company's allocated share for the remedial design, as established by a participation agreement for the remedial design executed by the PRPs, is 4.63% for the first $1.6 million and 5.05% thereafter. The EPA and the PRP steering committee have estimated the total cost for the remedial design phase to be approximately $3 million. The EPA's proposed remediation 16 activities with respect to the site are estimated to cost approximately $25 million. The PRPs are currently negotiating with EPA to reduce the scope of the remedy at the site and, therefore, the ultimate cost of remediation at this site cannot be estimated. In March 1994, the Company was served with a copy of a complaint filed in Federal District Court for the Southern District of Ohio, located in Columbus, Ohio, by Consolidation Coal Company, a former owner and operator of the site. Among other claims, the complaint seeks participation from the Federal Abandoned Mine Reclamation Fund, joinder of certain public entities, one of which delivered waste to the site, and damages and indemnity from current owners of the site. One count of the complaint names the Company and nine other industrial PRPs and seeks a determination of the allocation of responsibility among the alleged industrial generators involved with the site. On June 27, 1996 the Company entered into a Settlement Agreement with Consolidated Coal Company, Allegheny Ludlum Corporation, USX Corporation, Beazer East, Inc., SKF USA, Inc., Ashland, Inc., Aristech Chemical Corporation and the Pullman Company which resolved the litigation brought by Consolidated Coal Company with respect to the Buckeye Site. Under the terms of the settlement, the Company has agreed to pay 2.8 percent of the response costs associated with the Buckeye Site. The Settlement Agreement is contingent upon the Court's approval and entry of a Consent Decree with EPA. Weirton Steel - Browns Island. In January 1993, the Company was notified that the West Virginia Division of Environmental Protection ("WVDEP") had conducted an investigation on Brown's Island, Weirton, West Virginia which was formerly owned by the Company's Weirton Steel Division and is currently owned by Weirton Steel Corporation ("WSC"). The WVDEP alleged that samples taken from four groundwater monitoring wells located at this site contained elevated levels of contamination. WVDEP informed WSC that additional investigation, possible groundwater and soil remediation, and on-site housecleaning were required at the site. WSC has spent approximately $210,000 to date on remediation of an emergency wastewater lagoon located on Brown's Island. WSC has sought reimbursement of that amount and is likely to seek reimbursement of any additional remediation costs involving the lagoon from the Company. The Company paid the $210,000 to WSC in February, 1997 and FOX has reimbursed the Company for that amount. In addition, assuming a site accepts the waste material, additional sums will be spent on disposal and backfilling. The WVDEP may require additional investigation or remediation at the Brown's Island facility in the future. In addition, WSC agreed to a three-year groundwater monitoring program of the Brown's Island facility. The Company receives copies of the results of that groundwater monitoring program. To date, no groundwater remediation has been required, and the Company cannot yet determine if remediation will be required in the future. Weirton Steel - EPA Order. On September 16, 1996, EPA issued an administrative unilateral order under the Resource Conservation and Recovery Act ("RCRA"), requiring WSC to undertake certain investigative activities with regard to cleanup of possible environmental contamination on Weirton Steel property. WSC has informed the Company that the Mainland Coke Plant, Brown's Island, and the Avenue H Disposal Site are likely to be included within the areas of investigation required by EPA and that WSC considers these areas to be within the scope of certain indemnity provisions of the Assignment and Assumption Agreement between WSC and the Company. At this time, the Company is unable to determine the cost of the activities resulting from the EPA's unilateral order or the extent to which those activities will result in an indemnity obligation on the part of the Company. Tex-Tin Site. On or about August 12, 1996 Amoco Chemical Company ("Amoco") filed a cost recovery and contribution civil suit pursuant to CERCLA Sections 107 and 113(f) in the United States District Court for the Southern District of Texas. Plaintiff Amoco has been involved in investigations of the contamination at the former Tex-Tin Superfund Site in Texas City, Galveston County, Texas, pursuant to an AOC entered into with the EPA. Plaintiff alleges that the Company is one of approximately 100 defendants jointly and severally liable under CERCLA Section 107 for plaintiff's costs of those investigations and future response costs. Amoco has spent approximately $9 million pursuant to the AOC at the Tex- Tin Superfund Site. The Company is unable to ascertain the extent of its liability at the Tex-Tin site at this time, although waste-in lists indicate that the Company's former Weirton Steel Division sent less than 1 percent of the waste identified at the site. 17 Other Environmental Matters The Company and its subsidiaries have been conducting steel manufacturing and related operations at numerous locations, including their present facilities, for over sixty years. Although the Company believes that it has utilized operating practices that were standard in the industry at the time, hazardous materials may have been released on or under these currently or previously owned sites. Consequently, the Company potentially may also be required to remediate contamination at some of these sites. The Company does not have sufficient information to estimate its potential liability in connection with any potential future remediation. However, based on its past experience and the nature of environmental remediation proceedings, the Company believes that if any such remediation is required, it will occur over an extended period of time. In addition to the aforementioned proceedings, the Company is or may be involved in proceedings with various regulatory authorities which may require the Company to pay various fines and penalties relating to violations of environmental laws and regulations, comply with applicable standards or other requirements or incur capital expenditures to add or change certain pollution control equipment or processes. These proceedings are described below: Granite City Division - Alleged Air Violations. On or about March 2, 1995, the Company received Notices of Violation ("NOVs") and Findings of Violation ("FOVs") issued by the EPA covering alleged violations of various air emission requirements at the Granite City Division basic oxygen furnace shop, coke oven batteries and by-products plant. On or about February 6, 1996, the EPA filed an administrative complaint proposing a penalty assessment of approximately $125,000 with respect to the alleged violations at the coke oven battery and the by-products plant. The Company responded by requesting an administrative hearing to resolve outstanding legal and factual issues and also requested an informal settlement conference. EPA also issued to the Company a Request for Information under the Clean Air Act pursuant to which the Company was required to, and did, conduct visible emission observations at the stack of the basic oxygen furnace shop through June 30, 1996. Great Lakes Division - Coke Oven By-Products Plant. On or about February 24, 1997, the Company received an FOV issued by the EPA that alleges certain violations of labeling, equipment and monitoring requirements at the Great Lakes Division Coke Oven By-Products Plant. No demand for penalties or sanctions was set forth in the FOV. A conference has been scheduled with the EPA to discuss the allegations. Great Lakes Division - Multimedia Inspection. Representatives from the EPA National Enforcement Investigation Center ("NEIC") conducted a two-week, multimedia inspection of the Company's Great Lakes facility in April 1996. Similar NEIC investigations have been conducted at other industrial facilities over the past year, including a significant number in the iron and steel industry. At the close of the inspection, the NEIC presented a preliminary list of enforcement issues and questions. The Company is in the process of evaluating the NEIC's preliminary findings and has taken action to address a number of the issues. Great Lakes Division - Opacity Notice of Violation. The EPA issued an NOV to the Company's Great Lakes Division on or about August 28, 1995, alleging violations of specified opacity regulations at the Division's A blast furnace and basic oxygen furnace shop. The Company requested a conference with EPA, which was held on September 25, 1995. No demand or proposal for penalties or other sanctions was contained in the NOV. Great Lakes Division Outfalls Proceedings. The United States Coast Guard ("USCG") has issued or proposes to issue a number of penalty assessments with respect to alleged oil discharges at certain outfalls at the Company's Great Lakes Division facility. The Company has appealed many of the USCG's determinations, has paid amounts in settlement of a few, and is engaged in settlement discussions with respect to the others. The Company believes that its aggregate exposure with respect to these proposed penalty assessments is not expected to exceed $500,000. 18 The MDEQ, in April 1992, notified the Company of a potential enforcement action alleging approximately 63 exceedances of limitations at the outfall at the 80- inch hot strip mill. In July 1994, the MDEQ requested that the Company submit a comprehensive plan for addressing oil discharges from the 80-inch hot strip mill. The Company submitted the proposed plan in August 1994, and the plan was fully implemented by February 1995. The Company has proposed to MDEQ that it will perform a preliminary engineering and treatability study with respect to alternate control systems while it simultaneously evaluates the effectiveness of the comprehensive plan. Under this proposal, the Company would continue with the installation of alternate control systems only if the comprehensive plan proved to be unsuccessful. By letter dated June 28, 1995, the MDEQ accepted the Company's proposal and, by subsequent correspondence, proposed a one year demonstration period commencing on July 15, 1995, which has since been completed. By letter of May 28, 1996, the MDEQ sent the Company a draft consent order to address compliance issues at the 80-inch hot strip mill. Subsequently, on June 17, 1996, representatives of the Company, the MDEQ and the USCG met to discuss settlement. At that meeting, the Company presented evidence that no further control equipment is necessary at the 80-inch hot strip mill. Additionally, at this meeting, the MDEQ made an initial penalty demand of $350,000. Settlement negotiations are ongoing. In the event that the Company's comprehensive plan were to prove unsuccessful in addressing the MDEQ's concerns, the cost of installation of alternative control systems would be approximately $13 million. On February 5, 1997, the State of Michigan filed a complaint in the Circuit Court for the 30th Judicial District, Ingham County, Michigan, against the Company's Great Lakes Division alleging approximately 75 violations of limitations contained in two NPDES water discharge permits covering the Zug Island and Main Plant facilities. The complaint seeks (i) to enjoin the Company from discharging substances into the water in violation of Michigan law, (ii) fines of not less than $2,500 and not more than $25,000 per day of violation, and (iii) attorneys fees and costs incurred by the State. Settlement discussions are ongoing. Great Lakes Division - Wayne County Air Pollution Control Department. Since January 1992, the Wayne County Air Pollution Control Department ("Wayne County") has issued approximately 109 NOVs to the Company in connection with alleged exceedances of emission standards and work practice standards covering various process and fugitive emission sources at the Company's Great Lakes Division. Wayne County and the Company currently have negotiated a consent order to resolve approximately 68 of these NOVs. Pursuant to the terms of the consent order, the Company has paid a $250,000 penalty and will implement an environmental credit program valued at $250,000. The consent order was executed by the parties and was effective December 15, 1996. There has been no activity with respect to the other 41 NOVs. National Mines Corporation - Isabella Mine. National Mines Corporation ("NMC"), a wholly-owned subsidiary of the Company, previously owned and operated a coal mine and coal refuse disposal area in Pennsylvania commonly known as the Isabella Mine. The area covered under NMC's mining permit was approximately 140 acres. A reclamation bond in the amount of $1,200,000 was held by the Pennsylvania Department of Environmental Resources ("DEP") for that area. NMC subsequently ceased coal refuse disposal and mining operations at the site and reclaimed the disposal areas. In June 1993, NMC sold the Isabella property to Global Coal Recovery, Inc. ("Global"), a coal refuse reprocessor. Global applied for and received a new mining permit from DEP for a total area of about 375 acres, including acreage previously covered under NMC's permit. As part of the terms of sale, NMC agreed to allow Global to use NMC's $1,200,000 reclamation bond as security to obtain the new permit from the DEP. Global was obligated to repay NMC the $1,200,000. Global assumed all environmental liability associated with the Isabella Mine as part of the transaction. Subsequent to the sale of the Isabella Mine to Global, Global extracted coal from a refuse pile at the mine, and in doing so, disturbed reclamation work NMC had previously performed. Global was ultimately unable to profitably operate the Isabella Mine at a profit and subsequently defaulted on its agreements to NMC. Global and its contractors abandoned the site in October 1995. The DEP subsequently took enforcement actions against Global and its contractors for unabated discharges of mine drainage as well as other violations associated with reclamation obligations at the Isabella site. The enforcement actions were unsuccessful in eliminating the environmental violations at the site. On August 13, 1996, the DEP revoked the mining permit 19 for the Isabella Mine held by Global. Additionally, on November 1, 1996, the DEP issued a notice of forfeiture with respect to the $1,200,000 reclamation bond posted by NMC. NMC has appealed this forfeiture to the Environmental Hearing Board. NMC has presented DEP with a plan pursuant to which NMC would perform reclamation of the site, in lieu of the forfeiture of the bond. Negotiations are ongoing. Granite City Division - Illinois Environmental Protection Agency Violation Notice. On October 18, 1996, the Illinois Environmental Protection Agency ("IEPA") issued a Violation Notice alleging (i) releases to the environment between 1990 and 1996; (ii) violations of solid waste requirements; and (iii) violations of the National Pollutant Discharge Elimination System ("NPDES") water permit limitations, at the Company's Granite City Division. No demand or proposal for penalties or other sanctions was contained in the Notice; however, the Notice does contain a recommendation by IEPA that the Company conduct an investigation of these releases and, if necessary, remediate any contamination discovered during that investigation. The Company responded to the Notice on December 4, 1996. Discussions between the Company and IEPA are ongoing. In connection with certain of these proceedings, the Company has only commenced investigation or otherwise does not have sufficient information to estimate its potential liability, if any. Although the outcomes of the proceedings described above or any fines or penalties that may be assessed in any such proceedings, to the extent that 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 does not believe that any such outcomes, fines or penalties, whether considered individually or in the aggregate, will have a material adverse effect on the Company's financial condition. The Company's accrued environmental liabilities at December 31, 1996 and December 31, 1995 were $21.6 million, and $18.6 million, respectively. 20 ITEM 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of 1996. 21 Executive Officers of the Registrant The following sets forth certain information with respect to the executive officers of the Company. Executive officers are elected by the Board of Directors of the Company generally, at the first meeting of the Board after each annual meeting of stockholders. Officers of the Company serve at the discretion of the Board of Directors and are subject to removal at any time. Osamu Sawaragi, Chairman of the Board and Chief Executive Officer. Mr. Sawaragi, age 68, has been a Director of the Company since June 1990 and was elected Chairman in 1994. In August 1996, Mr. Sawaragi was appointed to the position of Chief Executive Officer. Prior thereto he was employed by NKK as a Director beginning in 1984, Managing Director in 1986, Senior Managing Director in 1989, Executive Vice President from 1990 to 1994 and Senior Counsel from 1994 to 1996. John A. Maczuzak, President and Chief Operating Officer. Mr. Maczuzak, age 55, joined the Company as Vice President and General Manager - Granite City Division in May 1996. He was appointed Executive Vice President and Acting Chief Operating Officer in August 1996. On December 10, 1996 Mr. Maczuzak was appointed to his present position. Mr. Maczuzak was formerly employed by ProTec Coating Company as General Manager and has more than 31 years of broad based experience in the steel industry. Hiroshi Matsumoto, Executive Vice President, Corporate Planning and Development. Mr. Matsumoto, age 45, joined the Company as Vice President and Assistant to the Chief Operating Officer in June 1994, following eighteen years with NKK. In July 1995, Mr. Matsumoto was appointed Vice President - Business and Strategic Planning. He was appointed to his present position in February 1996. Mr. Matsumoto served as manager of NKK's corporate planning department from 1982 to 1986. For the following three years, he was a guest fellow at The Brookings Institution, lecturing on "The Trade Balance Between Japan and the United States-Problems and Solutions." In 1989 he was appointed to serve as the first senior representative in the Washington D.C. office of NKK's American subsidiary, NKK America Inc. Bernard D. Henely, Senior Vice President and General Counsel. Mr. Henely, age 53, joined the Company as Vice President and General Counsel in September 1995. He was appointed to his present position in February 1996. Mr. Henely was formerly employed by Clark Equipment Company for over twenty-five years, where he served as Vice President and General Counsel from 1984 to 1995. George D. Lukes, Jr., Senior Vice President - Quality Assurance, Technology and Production Planning. Mr. Lukes, age 50, joined the Company in June 1994 to fill the newly created position of Vice President-Quality Assurance and Customer Satisfaction. He was appointed to his present position in February 1996. Mr. Lukes had previously been employed by U.S. Steel since 1968. He served in a succession of process, product and administrative metallurgical posts before being appointed Manager-Quality Assurance at U.S. Steel's Fairless Works in 1983. David A. Pryzbylski, Senior Vice President - Administration and Secretary. Mr. Pryzbylski, age 47, joined the Company in June 1994 as Vice President-Human Resources and Secretary. He was appointed to his present position in February 1996. Mr. Pryzbylski had previously been employed by U.S. Steel since 1979. He held a number of management positions at steel and mining operations, serving since 1987 as Senior Human Resource Manager at its Gary Works facility. 22 David L. Peterson, Group Vice President - Regional Operations. Mr. Peterson, age 46, joined the Company in June 1994 as Vice President and General Manager - Great Lakes Division. In January 1997 he was appointed to the position of Group Vice President - Regional Operations which includes the Great Lakes and the Midwest Divisions. Mr. Peterson had formerly been employed by U.S. Steel since 1971. He was promoted to the plant manager level at U.S. Steel in 1988 and directed all operating functions from cokemaking to sheet and tin products. In 1988 he was named Plant Manager - Primary Operations at U.S. Steel's Gary Works facility. Robert G. Pheanis, Vice President and General Manager - Midwest Division. Mr. Pheanis, age 61, joined the Company in June 1994 as Vice President and General Manager - Midwest Division. Mr. Pheanis formerly served in various management positions at U.S. Steel at the Gary Works facility for 35 years and in 1992 was named its Plant Manager - Finishing Operations, with responsibility for its total hot rolled, sheet and tin operations. James H. Squires, Vice President and General Manager - Granite City Division. Mr. Squires, age 58, began his career with the Company in 1956 as a laborer in the blast furnace area and went on to hold numerous positions as an hourly worker. In 1964, he accepted a salaried position and advanced through the operating organization. In October 1996, Mr. Squires was appointed to his current position. Joseph R. Dudak, Vice President, Strategic Sourcing. Mr. Dudak, age 49, began his career with the Company as an engineer at the Midwest Division in 1970. In 1973, he moved to the Granite City Division and served as Superintendent of Energy Management & Utilities from 1977 until moving to corporate headquarters in 1981. He served as Director of Energy & Environmental Affairs from 1981 to 1994, when he was appointed to his present position. William E. Goebel, Vice President, Marketing and Sales. Mr. Goebel, age 57, joined the Company in 1968 following employment with Morgan Guaranty Trust Company and Bethlehem Steel Corporation. After assignments in the Company's New York and Philadelphia district sales offices, he moved to the Great Lakes Division as a Product Manager-Cold Rolled in 1979. He transferred to the corporate marketing and sales department in 1981, holding a succession of management posts before assuming the Company's top marketing and sales post in 1993. William E. McDonough, Acting Chief Financial Officer and Treasurer. Mr. McDonough, age 38, began his career with the Company in 1985 in the financial department. He has held various positions of increasing responsibility including Assistant Treasurer and Manager, Treasury Operations and was promoted to Treasurer in December 1995. In July 1996, Mr. McDonough was appointed Acting Chief Financial Officer. Carl M. Apel, Controller. Mr. Apel, age 41, joined the Company in 1986. Mr. Apel has served in various management capacities of increasing responsibility within the Company's financial organization including Manager, General Accounting and Internal Control at the Company's Midwest Division prior to being promoted to Controller in 1992. 23 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required by this item is included on page 42 of the registrant's Annual Report to the Shareholders for the fiscal year ended December 31, 1996 and is incorporated herein by reference. ITEM 6. Selected Financial Data The information required by this item is included on page 16 of the registrant's Annual Report to the Shareholders for the fiscal year ended December 31, 1996 and is incorporated herein by reference. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is included on pages 17 through 21 of the registrant's Annual Report to the Shareholders for the fiscal year ended December 31, 1996 and is incorporated herein by reference. ITEM 8. Financial Statements and Supplementary Data The information required by this item is included on pages 22 through 40 of the registrant's Annual Report to the Shareholders for the fiscal year ended December 31, 1996 and is incorporated herein by reference. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 24 PART III ITEM 10. Directors and Executive Officers of the Registrant The information required by this Item is incorporated by reference from the section captioned "Executive Officers" in Part I of this report and from the sections captioned "Information Concerning Nominees for Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, the Company's Proxy Statement is not to be deemed filed as part of this report for purposes of this Item. ITEM 11. Executive Compensation The information required by this Item is incorporated by reference from the sections captioned "Executive Compensation", "Summary Compensation Table", "Stock Option Tables", "Option Grants in 1996", "Aggregated Option Exercises in 1996 and December 31, 1996 Option Values", "Pension Plans", "Pension Plan Table", "Employment Agreements" and "Compensation of Directors" in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, the Company's Proxy Statement is not to be deemed filed as part of this report for purposes of this Item. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated by reference from the sections captioned "Security Ownership of Directors and Management" and "Additional Information Relating to Voting Securities" in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, the Company's Proxy Statement is not to be deemed filed as part of this report for purposes of this Item. ITEM 13. Certain Relationships and Related Transactions The information required by this Item is incorporated by reference from the section captioned "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, the Company's Proxy Statement is not to be deemed filed as part of this report for purposes of this Item. 25 PART IV ITEMS 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this Report: The following is an index of the financial statements, schedule and exhibits included in this Report or incorporated herein by reference. (1) Financial Statements NATIONAL STEEL CORPORATION AND SUBSIDIARIES Page ---- Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 ................................... * Consolidated Balance Sheets as of December 31, 1996, and December 31, 1995 .................................................. * Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ................................... * Consolidated Statements of Shareholders' Equity and Redeemable Preferred Stock -Series B for the years ended December 31, 1996, 1995 and 1994 ............................. * Notes to Consolidated Financial Statements (Including Quarterly Financial Data) .......................................... * (2) Consolidated Financial Statement Schedule The following consolidated financial statement schedule of National Steel Corporation and Subsidiaries is filed as a part of this Report: Schedule II -- Valuation and Qualifying Accounts and Reserves, years ended December 31, 1996, 1995 and 1994 ............. F-1 * Incorporated in Item 8 of this Report by reference from pages 22 to 40, inclusive, of the Company's 1996 Annual Report to Stockholders referred to below which pages are filed with this Report as Exhibit 13. With the exception of those pages, the 1996 Annual Report to Stockholders is not to be deemed filed as part of this Report for purposes of this Item. The Schedule listed above should be read in conjunction with the consolidated financial statements in such 1996 Annual Report to Stockholders. Schedules not included have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 26 Separate financial statements of subsidiaries not consolidated and 50 percent or less owned persons accounted for by the equity method have been omitted because considered in the aggregate as a single subsidiary they do not constitute a significant subsidiary. (3) Exhibits See the attached Exhibit Index. Items 10-N, 10-O, 10-P, 10-CC, 10-DD, 10-EE, 10- FF, 10-GG, 10-HH, 10-II, 10-KK, 10-LL and 10-MM are management contracts or compensatory plans or arrangements. (b) Reports on Form 8-K: During the quarter ended December 31, 1996, no reports on Form 8-K were filed by the Company. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mishawaka, State of Indiana, on March 14, 1997. NATIONAL STEEL CORPORATION By: /s/ William E. McDonough -------------------------------------------- William E. McDonough Acting Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities indicated on March 14, 1997. Name Title ---- ----- /s/ Osamu Sawaragi Director; Chairman of the Board and Chief - ------------------------- Executive Officer Osamu Sawaragi /s/ Kenichiro Sekino Director - ------------------------- Kenichiro Sekino /s/ Yoshiharu Onuma Director - ------------------------- Yoshiharu Onuma /s/ Frank J. Lucchino Director - ------------------------- Frank J. Lucchino /s/ Bruce K. MacLaury Director - ------------------------- Bruce K. MacLaury /s/ Keiichiro Sakata Director - ------------------------- Keiichiro Sakata /s/ Susumu Terao Director; Director of Finance - ------------------------- Susumu Terao /s/ William E. McDonough Acting Chief Financial Officer and Treasurer - ------------------------- William E. McDonough /s/ Carl M. Apel Controller - ------------------------ Carl M. Apel 28 Exhibit Index Except for those exhibits which are incorporated by reference, as indicated below, all exhibits are being filed along with this Form 10-K. Exhibit Number Exhibit Description - ------ ------------------- 2-A Assets Purchase Agreement between Weirton Steel Corporation and the Company, dated as of April 29, 1983, together with collateral agreements incident to such Assets Purchase Agreement, filed as Exhibit 2-A to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 2-B Stock Purchase Agreement by and among NKK Corporation, National Intergroup, Inc. and the Company, dated August 22, 1984, together with certain collateral agreements incident to such Stock Purchase Agreement and certain schedules to such agreements, filed as Exhibit 2-B to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 2-C Stock Purchase and Recapitalization Agreement by and among National Intergroup, Inc., NII Capital Corporation, NKK Corporation, NKK U.S.A. Corporation and the Company, dated as of June 26, 1990, filed as Exhibit 2-C to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 2-D Amendment to Stock Purchase and Recapitalization Agreement by and among, National Intergroup, Inc., NII Capital Corporation, NKK Corporation, NKK U.S.A. Corporation and the Company, dated July 31, 1991, filed as Exhibit 2-F to the annual report of the Company on Form 10-K, for the year ended December 31, 1991, is incorporated herein by reference. 3-A The Sixth Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated herein by reference. 3-B Form of Amended and Restated By-laws of the Company. 4-A NSC Stock Transfer Agreement between National Intergroup, Inc., the Company, NKK Corporation and NII Capital Corporation dated December 24, 1985, filed as Exhibit 4-A to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 4-B Certificate of Designation of Series A Preferred Stock dated June 26, 1990, filed as Exhibit 4-B to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 4-C Certificate of Designation of Series B Preferred Stock dated June 26, 1990, filed as Exhibit 4-C to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 29 4-D The Company is a party to certain long term debt agreements where the amount involved does not exceed 10% of the Company's total assets. The Company agrees to furnish a copy of any such agreement to the Commission upon request. 10-A Amended and Restated Lease Agreement between the Company and Wilmington Trust Company, dated as of December 20, 1985, relating to the Electrolytic Galvanizing Line, filed as Exhibit 10-A to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10-B Lease Agreement between The Connecticut National Bank as Owner Trustee and Lessor and National Acquisition Corporation as Lessee dated as of September 1, 1987 for the Ladle Metallurgy and Caster Facility located at Ecorse, Michigan, filed as Exhibit 10-B to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10-C Lease Supplement No. 1 dated as of September 1, 1987 between The Connecticut National Bank as Owner Trustee and National Acquisition Corporation as the Lessee for the Ladle Metallurgy and Caster Facility located at Ecorse, Michigan, filed as Exhibit 10-C to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10-D Lease Supplement No. 2 dated as of November 18, 1987 between The Connecticut National Bank as Owner Trustee and National Acquisition Corporation as Lessee for the Ladle Metallurgy and Caster Facility located at Ecorse, Michigan, filed as Exhibit 10-D to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10-E Purchase Agreement dated as of March 25, 1988 relating to the Stinson Motor Vessel among Skar-Ore Steamship Corporation, Wilmington Trust Company, General Foods Credit Investors No. 1 Corporation, Stinson, Inc. and the Company, and Time Charter between Stinson, Inc. and the Company, filed as Exhibit 10-E to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10-F Amended and Restated Weirton Agreement dated June 26, 1990, between National Intergroup, Inc., NII Capital Corporation and the Company, filed as Exhibit 10-F to the annual report of the Company on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10-G Amended and Restated Weirton Liabilities Agreement dated July 31, 1991 between National Intergroup, Inc., NII Capital Corporation and the Company, filed as Exhibit 10-H to the annual report of the Company on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10-H Put Agreement by and among NII Capital Corporation, NKK U.S.A. Corporation and the Company, dated June 26, 1990, filed as Exhibit 10- H to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10-I Subordinated Loan Agreement dated May 8, 1991, between NUF Corporation and the Company, filed as Exhibit 4-P to the annual report of the Company on Form 10-K, for the year ended December 31, 1991, is incorporated herein by reference. 10-J First Amendment to Subordinated Loan Agreement dated December 9, 1991, between NUF Corporation and the Company, filed as Exhibit 4-Q to the annual report of the Company on Form 10-K, for the year ended December 31, 1991, is incorporated herein by reference. 30 10-K Second Amendment to Subordinated Loan Agreement, dated December 29, 1992, between NUF Corporation and the Company, filed as Exhibit 10-S to the annual report of the Company on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. 10-L Amended and Restated Loan Agreement, dated October 30, 1992, between NUF Corporation and the Company filed as Exhibit 10-T to the annual report of the Company on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. 10-M First Amendment to Amended and Restated Loan Agreement dated February 1, 1993, between NUF Corporation and the Company filed as Exhibit 10-U to the annual report of the Company on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. 10-N 1993 National Steel Corporation Long-Term Incentive Plan, filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated herein by reference. 10-O 1993 National Steel Corporation Non-Employee Directors' Stock Option Plan, filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated herein by reference. 10-P National Steel Corporation Management Incentive Compensation Plan dated January 30, 1989, filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated herein by reference. 10-Q Purchase and Sale Agreement, dated as of May 16, 1994 between the Company and National Steel Funding Corporation, filed as Exhibit 10-A to the quarterly report of the Company on Form 10-Q/A for the quarter ended March 31, 1994, is incorporated herein by reference. 10-R Form of Indemnification Agreement. 10-S Shareholders' Agreement, dated as of September 18, 1990, among DNN Galvanizing Corporation, 904153 Ontario Inc., National Ontario Corporation and Galvatek America Corporation, filed as Exhibit 10.27 to the Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated herein by reference. 10-T Partnership Agreement, dated as of September 18, 1990, among Dofasco, Inc., National Ontario II, Limited, Galvatek Ontario Corporation and DNN Galvanizing Corporation, filed as Exhibit 10.28 to the Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated herein by reference. 10-U Amendment No. 1 to the Partnership Agreement, dated as of September 18, 1990, among Dofasco, Inc., National Ontario II, Limited, Galvatek Ontario Corporation and DNN Galvanizing Corporation, filed as Exhibit 10.29 to the Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated herein by reference. 10-V Agreement, dated as of February 3, 1993, among the Company, NKK, NKK U.S.A. Corporation, NII and NII Capital Corporation, filed as Exhibit 10.30 to the Company's Registration Statement on Form S-1, Registration No. 33-57952, is incorporated herein by reference. 31 10-W Second Amendment to Amended and Restated Loan Agreement dated May 19, 1993, between NUF Corporation and the Company, filed as Exhibit 10-EE to the annual report of the Company on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10-X Agreement, dated as of May 19, 1993, among the Company and NKK Capital of America, Inc., filed as Exhibit 10-FF to the annual report of the Company on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10-Y Receivables Purchase Agreement, dated as of March 16, 1994, between the Company and National Steel Funding Corporation, filed as exhibit 10-A to the quarterly report of the Company on Form 10-Q/A for the quarter ended June 30, 1994, is incorporated herein by reference. 10-Z Amendment Number One to the Receivables Purchase Agreement, dated as of May 31, 1995, between the Company and National Steel Funding Corporation, filed as exhibit 10-A to the quarterly report of the Company on Form 10-Q for the quarter ended June 30, 1995, is incorporated herein by reference. 10-AA Third Amendment to Amended and Restated Loan Agreement dated August 2, 1995, between NUF Corporation and the Company, filed as exhibit 10-A to the quarterly report on Form 10-Q for the quarter ended September 30, 1995, is incorporated herein by reference. 10-BB Agreement for the Transfer of Employees by and between NKK Corporation and the Company, dated as of May 1, 1995, filed as Exhibit 10-CC to the annual report of the Company on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10-CC Employment contract dated April 30, 1996 between National Steel Corporation and V. John Goodwin, filed as Exhibit 10-A to the quarterly report of the Company on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by reference. 10-DD Employment contract dated April 30, 1996 between National Steel Corporation and Bernard D. Henely, filed as Exhibit 10-B to the quarterly report of the Company on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by reference. 10-EE Employment contract dated April 30, 1996 between National Steel Corporation and George D. Lukes, filed as Exhibit 10-C to the quarterly report of the Company on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by reference. 10-FF Employment contract dated April 30, 1996 between National Steel Corporation and David L. Peterson, filed as Exhibit 10-D to the quarterly report of the Company on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by reference. 10-GG Employment contract dated December 11, 1996 between National Steel Corporation and Robert G. Pheanis. 10-HH Employment contract dated April 30, 1996 between National Steel Corporation and David A. Pryzbylski, filed as Exhibit 10-F to the quarterly report of the Company on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by reference. 10-II Employment contract dated May 1, 1996 between National Steel Corporation and John A. Maczuzak, filed as Exhibit 10-G to the quarterly report of the Company on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by reference. 32 10-JJ Amendment No. 2 and Consent to the Receivables Purchase Agreement, dated as of July 18, 1996, among the Company, National Steel Funding Corporation and Morgan Guaranty Trust Company of New York, filed as Exhibit 10-A to the quarterly report of the Company on Form 10-Q for the quarter ended September 30, 1996, is incorporated herein by reference. 10-KK Supplement to Employment contract dated July 30, 1996 between National Steel Corporation and George D. Lukes, filed as Exhibit 10-B to the quarterly report of the Company on Form 10-Q for the quarter ended September 30, 1996, is incorporated herein by reference. 10-LL Supplement to Employment contract dated July 30, 1996 between National Steel Corporation and David L. Peterson, filed as Exhibit 10-C to the quarterly report of the Company on Form 10-Q for the quarter ended September 30, 1996, is incorporated herein by reference. 10-MM Employment contract dated December 11, 1996 between National Steel Corporation and Osamu Sawaragi. 10-NN Amendment No. 1 to Agreement for the Transfer of Employees by and between the Company and NKK Corporation. 13 Portions of the Company's 1996 Annual Report to Stockholders which are incorporated by reference into this Form 10-K. 21 List of Subsidiaries of the Company. 23 Consent of Independent Auditors. 27 Financial Data Schedule. 33 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 $23,560 (1) $ ---- $22,226 (3) $ 21,320 Valuation allowance on deferred tax assets 159,400 ---- (33,900) (2) ---- 125,500 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 208,000 ---- (48,600) (2) ---- 159,400 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 263,200 ---- (55,200) (2) ---- 208,000
NOTE 1 - Provision for doubtful accounts of $2,748, $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-3.B 2 FORM OF AMEND AND RESTATED BY-LAWS OF THE CO. Exhibit 3-B National Steel Corporation By-Laws August 20, 1996 AMENDED AND RESTATED BY-LAWS OF NATIONAL STEEL CORPORATION [Approved by the Board of Directors on May 31, 1994, as Amended by Written Consent on August 20, 1996] OFFICES ------- 1. Registered Office. The registered office of National Steel Corporation (the "Corporation") shall be in the City of Wilmington, County of New Castle, State of Delaware, and the name of the resident agent in charge thereof shall be The Corporation Trust Company. 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may determine from time to time, or as the business of the Corporation may require. MEETINGS OF STOCKHOLDERS ------------------------ 3. Place of Meeting. Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. 4. Annual Meetings. The Annual Meeting of Stockholders shall be held on such date and at such time as shall be determined by the Board of Directors and stated in the notice of the meeting at which meeting the stockholders shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting. If the Board of Directors fails to set a time and date for the Annual Meeting, it shall be held on the second Wednesday of May at 10:00 a.m., and if a legal holiday, then on the next following business day. Written notice of the Annual Meeting of Stockholders shall be given in the same manner set forth in Section 39 hereof, at least ten (10) days prior to the meeting to each stockholder entitled to vote thereat 5. Special Meetings. A Special Meeting of Stockholders, for any purpose or purposes, may be called at any time by the Board of Directors and shall be called by the Chairman of the Board of Directors, the President or the Secretary at the request in writing of stockholders owning, at least fifty percent (50%) of the voting power of the capital stock of the Corporation issued and outstanding and entitled to vote thereat. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at all Special Meetings of stockholders shall be confined to the matters specified in the notice of meeting. The place, date and hour of the Special Meeting and the purpose or purposes for which the meeting is called shall be given in the manner set forth in Section 39 hereof at least ten (10) days before such meeting to each stockholder entitled to vote thereat. 6. Quorum. Except as otherwise provided by law or by the Certificate of Incorporation, as amended and restated, the holders of a majority of the voting power of the capital stock issued and outstanding and entitled to vote thereat present in person or represented by proxy, but in no event less than one-third of the shares entitled to vote at the meeting shall constitute a quorum at all meetings of the stockholders for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present: or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. 7. Voting. Unless otherwise required by law, the Certificate of Incorporation, as amended and restated, or these By-Laws, any question brought before any meeting of stockholders shall be decided by the vote of the holders of a majority of the voting power of the capital stock represented and entitled to vote thereat. Each stockholder represented at a meeting of stockholders shall be entitled to cast such number of votes as set forth in the Certificate of Incorporation, as amended and restated, with respect to such capital stock, for each share entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy, but no proxy shall be voted on or after three years from its date unless such proxy provides for a longer period. All proxies shall be filed with the 2 Secretary of the Corporation. The vote for directors, and, upon the demand of any stockholder, the vote upon any question before the meeting shall be cast by written ballot. Each election of directors shall be conducted by one or more inspectors or judges, who may or may not be stockholders, appointed by the chairman of the meeting. The inspectors or judges shall be sworn to the faithful performance of their duties and shall, in writing certify to the returns. No person who is a candidate for the office of director shall be an inspector or judge. 8. Consent of Stockholders in Lieu of Meeting. Unless otherwise provided in the Certificate of Incorporation, as amended and restated, any action required or permitted to be taken at any Annual or Special Meeting of Stockholders of the Corporation, may be taken without a meeting, without prior notice and without a vote, if a consent in writing setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 9. List of Stockholders Entitled to Vote. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting arranged in alphabetical order, and showing the address of each stockholder and the number of shares by class registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting during ordinary business hours, for a period of at least ten (10) days prior to the meeting either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. 10. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 9 or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. 3 DIRECTORS --------- 11. Number and Election of Directors. The property and business of the Corporation shall be managed by a Board of Directors, which shall consist of eight (8) directors. Directors need not be stockholders. Except provided in Section 12, directors shall be elected by a plurality of the votes cast at the Annual Meeting of Stockholders and each director shall be elected to serve until the next Annual Meeting of Stockholders following said director's election and until said director's successor shall be duly elected and qualified, or until said director's earlier resignation or removal. 12. Vacancies. Vacancies in newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the entire Board of Directors, and any other vacancy occurring on the Board of Directors may be filled by a majority of the directors then in office though less than a quorum is present, or by a sole remaining director. The directors so chosen to fill a vacancy shall hold office until the next annual election and until their successors are duly elected and qualified, or until their earlier resignation or removal. 13. Duties and Powers. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation, as amended and restated, or by these By-Laws, directed or required to be exercised or done by the stockholders. 14. Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held at such time and at such place as may from time to time be determined by the Board of Directors. Notice of regular meetings shall be given in the manner set forth in Sections 39 and 40 hereof to each director at least five (5) days prior thereto. Special meetings of the Board of Directors may be called by the Chairman or the Secretary and shall be called by the Secretary upon the written request of any three directors. Oral or written notice thereof stating the place, date and hour of the meeting shall be given to each director at least five (5) days before the date of the meeting. 15. Quorum. At all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present and voting at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time 4 to time, without notice other than announcement at the meeting, until a quorum shall be present. 16. Actions of the Board. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing and the writing or writings are, filed with the minutes of proceedings of the Board of Directors or committee. 17. Meetings by Means of Conference Telephone. Members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 17 shall constitute presence in person at such meeting. 18. Committees. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such Committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting whether or not the member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have any and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors when required. 19. Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be compensated for their services in such manner as the Board of Directors may determine. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may also be compensated in such manner as the Board of Directors may determine for attending committee meetings. 5 OFFICERS -------- 20. General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman (who must be a director), a President, a Secretary and a Treasurer. The Board of Directors, in its discretion, may also designate any Vice Chairman of the Board of Directors (who must be a director) to be an officer and may choose one or more Senior Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers and a Controller. The Board of Directors may designate officers to serve as Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and other such designated positions and to fulfill the responsibilities of such designated positions as may from time to time be assigned by the Board in addition to their duties as officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation, as amended and restated, or these By-Laws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman and Vice Chairman of the Board of Directors need such officers be directors of the Corporation. 21. Election. The Board of Directors shall annually elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board Of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors, with or without cause. Any vacancy occurring in any of the offices of the Chairman, the President, Secretary or Treasurer shall be filled by the Board of Directors. Any vacancy occurring in any other office may be filled by, or pursuant to authority delegated by, the Board of Directors or may be left unfilled. Officers of the Corporation shall be entitled to receive such compensation for their services as officers as may be fixed by, or pursuant to authority delegated by, the Board of Directors. Each of the compensated officers of the Corporation shall be full-time employees of the Corporation unless the Board of Directors expressly authorizes otherwise. The positions of Chairman and/or Vice Chairman of the Board of Directors may be held by persons who are not full-time employees of the Corporation, in which event such persons will not be compensated by reason of holding such positions; provided that such persons shall be permitted to receive reimbursement for their expenses of attendance at Board and Board committee meetings under Section 19 hereof. 6 22. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of noticed of meeting consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President, and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution from time to time confer like powers upon any other person or persons. 23. Chairman of the Board of Directors. The Chairman of the Board shall preside at all meetings of the Board of Directors. The Chairman shall also perform all such other duties and exercise all such other powers as these By- Laws or the Board of Directors may from time to time prescribe. 24. Vice Chairman. The Vice Chairman of the Board, if there is one, in the absence or disability of the Chairman of the Board, shall perform the duties of the Chairman of the Board and shall perform such other duties as the Board of Directors may from time to time prescribe. 25. President. The President shall preside at all meetings of the stockholders. If the President is a member of the Board, then at the request, or in the absence or disability, of the Chairman or Vice Chairman of the Board of Directors, the President shall preside at meetings of the Board of Directors. Under the direction of the Board of Directors, the President shall have the general management of the business of the Corporation shall see that all orders and resolutions of the Board of Directors are carried into effect, and, in general, shall perform all duties as are usually incident to the office of president of a corporation. The President shall also perform all such other duties and exercise all such other powers as from time to time may be assigned to the President by these By-Laws by the Board of Directors. 26. Senior Vice President(s); Vice President(s). The Senior Vice Presidents, if any, and the Vice Presidents shall perform such duties and have such powers as shall be assigned to said officers by the Board of Directors or the President at the request of the President or the event of the President's absence or inability or refusal to act, the Senior Vice President or Vice President designated by the Board of Directors shall perform the 7 duties of the President and when so acting shall have all the powers of and be subject to all the restrictions upon the President. 27. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for this purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all. meetings of the stockholder and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman or the President. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation, and the Secretary or any other officer of the Corporation shall have authority to affix the same to any instrument requiring it; and when so affixed, it may be attested by the signature of the Secretary or by the signature of any other such. officer. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by the Secretary's signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. 28. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep, or cause to be kept, full and accurate accounts, of receipts and disbursements in books belonging to the Corporation and kept for that purpose. The Treasurer shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors or the President, taking proper vouchers for such disbursements, and shall render to the President an account of all transactions as Treasurer and of the financial condition of the Corporation. In addition, the Treasurer shall perform all the usual duties incident to the office of Treasurer. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of such office and for the restoration to the Corporation, in case of the Treasurer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the possession or under the control of the Treasurer belonging to the Corporation. 8 29. Assistant Secretaries. The Assistant Secretary, or Secretaries, if there be any, shall such duties and have such powers as from time to time may be assigned to such Assistant Secretary or Assistant Secretaries; by the Board of Directors or the President and, in the absence of the Secretary or in the event of the Secretary's disability or refusal to act shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. 30. Assistant Treasurers. The Assistant Treasurer or Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to such Assistant Treasurer or, Assistant Treasurers by the Board of Directors or the President, and, in the absence of the Treasurer or in the event of the Treasurer's disability or refusal to act, shall perform the duties of the Treasurer, and when so acting shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of such office and for the restoration to the Corporation, in case of the Assistant Treasurer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the possession or under the control of the Assistant Treasurer belonging to the Corporation. 31. Controller. The Controller, if any, shall perform such duties as shall be assigned to the Controller by the Board of Directors or the President. 32. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. In case of the absence of any officer of the Corporation, or for any other reason the Board of Directors may deem sufficient, the Board may delegate, for the time being the powers or duties, or any of them, of such officer to any other officer, or to any director, provided a majority of the entire Board of Directors concurs therein. 9 STOCK ----- 33. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed, either manually or by facsimile, in the name of the Corporation (i) by the Chairman of the Board of Directors, the President or the Vice President, Chief Financial Officer, and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by a stockholder in the Corporation. Each certificate issued by the Corporation representing shares of Class A Common Stock shall bear the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF l933, AS AMENDED, AND MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IF AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THESE SECURITIES ARE SUBJECT TO CERTAIN LIMITATIONS ON TRANSFER SET FORTH IN THE RESTATED CERTIFICATE OF INCORPORATION OF NATIONAL STEEL CORPORATION. A COPY OF SUCH CERTIFICATE OF INCORPORATION IS ON FILE WITH THE SECRETARY OF NATIONAL STEEL CORPORATION. 34. Signatures. Where a certificate is countersigned by (i) a transfer agent other than the Corporation or its employee, or (ii) a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if said person were such officer, transfer agent or registrar at the date of issue. 35. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost stolen or 10 destroyed certificate, or said owner's legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. 36. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these By-Laws. Transfers of stock shall be made on the books of the Corporation only by the, person named in the certificate or by said person's attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled. before a new certificate shall be issued. 37. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Director may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 38. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or riot it shall have express or other notice thereof, except as otherwise provided by law. NOTICES ------- 39. Notices. Except as otherwise provided in these By-Laws, whenever written notice is required by law, the Certificate of the corporation, as amended and restated, or these By-Laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at such address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time 11 when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telecopy, telex or cable. 40. Waiver of Notice. Whenever an, notice is required by law, the Certificate of Incorporation, as amended or restated, or these By-Laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing signed by the person or persons; entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. GENERAL PROVISIONS ------------------ 41. Fiscal Year. The fiscal year shall begin the first day of January in each year. 42. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, as amended and restated, if any, may be declared by the Board of Directors at any regular or special meeting out of funds legally available for the payment thereof, in such amounts as the Board of Directors, in its role discretion may determine. Dividends may be paid in cash, in property (including but not limited to, in the form of a release of liabilities whether or not then due and owing to the - Corporation or otherwise), or in shares of the capital stock of the Corporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. 43. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. 44. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 12 INDEMNIFICATION --------------- 45. Power to Indemnify in Actions, Suits or Proceedings other Than Those by or in the Right of the Corporation. Subject to Section 47, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (including internal investigations) (other than an action by or in the right of the Corporation) by reason of the fact that said person is or was or has agreed to become a director, officer, employee, fiduciary, trustee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employees fiduciary, trustee or agent of another corporation, partnership, joint venture, trust pension plan, employee benefit plan or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by said person or on said person's behalf in connection with such action, suit investigation or proceeding, and any appeal therefrom, if said person acted in good faith and in a manner said person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe such conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which said person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such conduct was unlawful. 46. Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 47, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action suit or investigation (including internal investigations) or proceedings by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that said person is or was or has agreed to become a director, officer, employee, fiduciary, trustee or agent of the Corporation, or is or was or has agreed to serve at the request of the Corporation as a director, officer, employee, fiduciary, trustee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, pension plan or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against expenses (including attorneys' fees) actually and reasonably 13 incurred by said person in connection with the defense or settlement of such action, suit, investigation or proceeding or any appeal therefrom, if said person acted in good faith and in a manner said person reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which said person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in view of all the circumstances of the case, said person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper. 47. Authorization of Indemnification, Any indemnification under Sections 45 and 46 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee, fiduciary, trustee or agent is proper in the circumstances because said person has met the applicable standard of conduct set forth in Sections 45 or 46, as the case may, be. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (ii) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or (iii) by the stockholders. To the extent however, that a director, officer, employee, fiduciary, trustee or agent of the Corporation has been successful on the merits or otherwise, including without limitation, the dismissal of an action without prejudice, in defense of any action, suit, investigation or proceeding referred to in Sections 45 and 46, or in defense of any claim, issue or matter therein, said person shall be indemnified against all costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by said person or on said persons behalf in connection therewith, without the necessity of authorization in the specific case. 48. Good Faith Defined. For purposes of any determination under Section 47, a person shall be deemed to have acted in good faith and in a manner said person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding to have had no reasonable cause to believe such conduct was unlawful, if said person's action is based on the records or books of account of the Corporation or another enterprise, or on information supplied by the officers of the Corporation or another enterprise in the course of such officers' duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with 14 reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section 48 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which said person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section 48 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Sections 45 or 46, as the case may be. 49. Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 47, and notwithstanding the absence of any determination thereunder, any director or officer may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Sections 45 and 46. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because such officer or director has met the applicable standards of conduct set forth in Sections 45 or 46, as the case may be. Neither a contrary determination in the specific case under Section 47 nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 49, shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application. 50. Expenses Payable in Advance. Costs, charges and expenses incurred by a person referred to in Sections 45 and 46 in defending or investigating a threatened or pending action, suit, investigation or proceeding shall be paid to the extent provided herein by the Corporation in advance of the final disposition of such action, suit, investigation or proceeding; provided, however, that (i) the payment of such costs, charges and expenses incurred by a director or officer of the Corporation in the capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer) in advance of the final disposition of such action, suit, investigation or proceeding shall be made only upon receipt of a written undertaking (in the form of an unsecured promissory note) by or on behalf of the director or officer to repay all amounts so advanced in the event that it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Corporation as authorized in these By-Laws, and (ii) the payment of such costs, charges and expenses incurred by other employees, fiduciaries, trustees and agents may be so paid in advance upon such terms and conditions, if any, as the Board of Directors deems 15 appropriate. The Board of Directors may, in the manner set forth above, and upon approval of such director, officer, employee, fiduciary, trustee or agent of the Corporation, authorize the Corporation's counsel to represent such person, in any action, suit, investigation or proceeding whether or not the Corporation is a party to such action, suit, investigation or proceeding. 51. Payment of Indemnification Amounts. Any indemnification under Sections 45, 46, and 47, or advance of costs, charges and. expenses provided for or authorized under Section 50 of these By-Laws, shall be made promptly, and in any event within sixty (60) days, upon the written request of the director, officer, employee, fiduciary, trustee or agent. The right to indemnification or advances to the extent provided by these By-Laws shall be enforceable by the director, officer, employee, fiduciary, trustee or agent in any court of competent jurisdiction, if the Corporation denies such request, in whole or in part or if no disposition thereof is made within sixty (60) days. Said person's costs and expenses incurred in connection with successfully establishing said person's right to indemnification or advances, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 50 where the required undertaking if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Sections 45 or 46, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the claimant has met the applicable standard of conduct set forth in Sections 45 and 46 of these By-Laws, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) that the claimant has not met such applicable standard of conduct shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. 52. Nonexclusivity of Indemnification and Advancement of Expenses. The rights to indemnification by these By-Laws shall be construed so as to mandate indemnification to the fullest extent permitted by applicable law (including without limitation, Section 145 of the Delaware General Corporation Law, as amended) and shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under the Certificate of Incorporation, as amended or restated, any law (common or statutory), agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity 16 while holding office or while employed by or acting as an agent for the Corporation, and shall continue as to a person who has ceased to be a director, officer, employee, fiduciary, trustee or agent, and shall inure to the benefit of the estate, heirs, executors and administrators of such person. All rights to indemnification and advances under these By-Laws shall be deemed to be a contract between the Corporation and each director, officer, employee, fiduciary, trustee or agent of the Corporation who serves or served in such capacity at any time while these indemnification provisions of the By-Laws are in effect. Any repeal or modification of these indemnification provisions of the By-Laws or any repeal or modification of relevant provisions of the Delaware General Corporation law or any other applicable laws shall not, to the extent permitted by applicable law, in any way diminish any rights to indemnification and/or advances of such director, officer, employee, fiduciary, trustee or agent or the obligations of the Corporation arising hereunder for said person's conduct prior to such appeal or modification. 53. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director, officer, employee, fiduciary, trustee or agent of the Corporation, or is or was serving at the guest of the Corporation, as a director, officer, employee, fiduciary, trustee or agent of another corporation, joint ventures trust, pension plan, employee benefit or other similar plan or other enterprise against any liability asserted against said person and incurred by said person or on said person's behalf in any such capacity, or arising out of said person's status as such, whether or not the Corporation would have the power or the obligation to indemnify said person against such liability under the provisions of these By- Laws. 54. Validity. If these indemnification provisions of the By-Laws or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify and provide advances to each director, officer, employee, fiduciary, trustee and agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines, penalties, excise taxes and amounts paid in settlement with respect to any action, suit, investigation or proceeding whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of these By-Laws that shall not have been invalidated and to the full extent permitted by applicable law. 55. Limitations on Indemnification. Notwithstanding any other provision of these By-Laws, the Corporation shall not be required to indemnify any person for any costs, charges, expenses (including attorneys' fees), judgments, fines, penalties, excise taxes and amounts paid in settlement incurred in any action, suit, investigation or proceeding (which shall not be deemed to include counterclaims or affirmative defenses) 17 initiated by or participated in as an interferon or amicus curiae by the person seeking indemnification unless the initiation of or participation in such action, suit, investigation or proceeding is authorized, either before or after its commencement, by the Board of Directors. This Section 55 does not apply to reimbursement of expenses incurred in successfully prosecuting or defending the right to indemnification granted by or pursuant to these By-Laws. 56. Certain Definitions. For purposes of these Sections 46 through 56, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as it director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of these Sections 56 through 56 with respect to the resulting or surviving corporation as said person would have with respect to such constituent Corporation if its separate existence had continued. For purposes of these Sections 46 through 56, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner said person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the Corporation" as referred to in these Sections 46 through 56. AMENDMENTS ---------- 57. Amendment. These By-Laws may be altered, amended or repealed, in whole or in part, or new By-Laws may be adopted by the stockholders or by the Board of Directors; provided, however, that notice of such alternation, amended, repeal or adoption of new By-Laws be contained in the notice of such meeting of stockholders or Board of Directors as the case may be. All such amendments must be approved by either the holders of a majority of the voting power of the outstanding capital stock entitled to vote thereon or by a majority of the entire Board of Directors. The stockholders may adopt a 18 By-Law or By-Laws by the vote of the holders of a majority of the voting power of the outstanding capital stock entitled to vote thereon at any such annual or special meeting, and any By-Law so adopted may contain the provision that it is not subject to amendment or repeal by the Board of Directors. 58. Entire Board of Directors. As used in these By-Laws generally, the term "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies. 19 EX-10.R 3 FORM OF INFORMATION AGREEMENT Exhibit 10-R INDEMNIFICATION AGREEMENT ------------------------- AGREEMENT, effective as of ___________ between National Steel Corporation, a Delaware corporation (the "Company"), and _______________ (the "Indemnitee"). WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available; WHEREAS, Indemnitee is a director and/or officer of the Company; WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public companies in today's environment; WHEREAS, the By-laws of the Company require the Company to indemnify and advance expenses to its directors and officers to the full extent permitted by law and the Indemnitee has been serving and continues to serve as a director and/or officer of the Company in part in reliance on such By-laws; WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Company in an effective manner, and in part to provide Indemnitee with specific contractual assurance that the protection promised by the aforesaid By- laws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such By-laws or any change in the composition of the Company's Board of Directors or acquisition transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete) permitted by law and as set forth in this Agreement and, to the extent insurance is obtained, for the continued coverage of Indemnitee under the Company's directors' and officers' liability insurance policies; NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing to serve the Company directly or, at its request, another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Certain Definitions: (a) Change in Control: shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes after the effectiveness of the Company's initial public offering of equity securities in 1993 the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 20% or more of the total voting power represented by the Company's then outstanding Voting Securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two- thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all the Company's assets. (b) Claim: any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation, whether instituted by the Company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, suit or proceeding, whether civil, criminal, administrative, investigative or other. (c) Expenses: include attorneys' fees and all other costs, expenses and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any Claim relating to any Indemnifiable Event. (d) Indemnifiable Event: any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. (e) Independent Legal Counsel: An attorney or firm of attorneys, selected in accordance with the provisions of Section 3, who shall not have otherwise performed services for the Company or Indemnitee within the last five years (other than with respect to matters concerning the rights of Indemnitee under this Agreement or of other indemnities under similar indemnity agreements). 2 (f) Reviewing Party: (i) the Board of Directors by a quorum consisting of directors who were not parties to such Claim or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by Independent Legal Counsel. (g) Voting Securities: any securities of the Company which vote generally in the election of directors. 2. Basic Indemnification Arrangement. (a) In the event Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest extent permitted by law as soon as practicable but in any event no later than thirty days after written demand is presented to the Company, against any and all Expenses, judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of such Claim. Notwithstanding anything in this Agreement to the contrary, prior to a Change in Control Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee unless the Board of Directors has authorized or consented to the initiation of such Claim. If so requested by Indemnitee, the Company shall advance (within two business days of such request) any and all Expenses to Indemnitee (an "Expense Advance"). (b) Notwithstanding the foregoing, (i) the obligations of the Company under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 3 hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law and (ii) the obligation of the Company to make an Expense Advance pursuant to Section 2(a) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). If there has not been a Change in Control, the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control, the Reviewing Party shall be the Independent Legal Counsel referred to in Section 3 hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation in any court in the State of Delaware having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or 3 challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. 3. Change in Control. The Company agrees that if there is a Change in Control of the Company, then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any other agreement or Company By-law now or hereafter in effect relating to Claims for Indemnifiable Events, the Company shall seek legal advice only from Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent the Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all Expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. 4. Indemnification for Additional Expenses. The Company shall indemnify Indemnitee against any and all expenses (including attorneys' fees) and, if requested by Indemnitee, shall (within two business days of such request) advance such expenses to Indemnitee which are incurred by Indemnitee in connection with any action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the Company under this Agreement or any other agreement or Company By-law now or hereafter in effect relating to Claims for Indemnifiable Events and/or (ii) recovery under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. 5. Partial Indemnity, Etc. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 6. Burden of Proof. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. 7. No Presumptions. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court 4 approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. 8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company's By-laws or the Delaware General Corporation Law or otherwise. To the extent that a change in the Delaware General Corporation Law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Company's By-laws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. 9. Liability Insurance. To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer. 10. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee or Indemnitee's spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 11. Amendments, Etc. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 12. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 13. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent 5 Indemnitee has otherwise actually received payment (under any insurance policy, By-law or otherwise) of the amounts otherwise indemnifiable hereunder. 14. Binding Effect, Etc. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors; assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company; spouses; heirs; executors and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Company. 15. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable in any respect, and the validity and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired and shall remain enforceable to the fullest extent permitted by law. 16. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first hereinabove set forth. NATIONAL STEEL CORPORATION ______________________________ By:____________________________ Name David A. Pryzbylski Title: Senior Vice President- Administration ------------------------------------- and Secretary ------------- 6 EX-10.GG 4 EMPLOYMENT CONTRACT BETWEEN CO. & R. G. PHEANIS Exhibit 10-GG 11-20-96 AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is dated and effective as of the 11th day of December, 1996 ("Effective Date"), and is by and between National Steel Corporation, a Delaware corporation (the "Company"), and Robert G. Pheanis ("Executive"). In consideration of the mutual covenants contained herein, and other good and valuable consideration (including the Termination Benefits and the Special Termination Benefits) the receipt and adequacy of which the Company and Executive each hereby acknowledge, the Company and Executive hereby agree as follows: 1. Employment and Term Executive is or may be employed by the Company pursuant to one or more contracts or letter agreements (the "Prior Agreement"). The Company hereby agrees to employ Executive as a Vice President of the Company and Executive hereby agrees to accept such employment and serve in such capacity on a full- time basis during the Term and upon the terms and conditions set forth in this Amended and Restated Employment Agreement (this "Agreement"). Executive shall report to an officer of the Company designated by the Company's Chief Executive Officer and Executive will have such responsibilities, duties and authorities as are determined by the officer to whom Executive reports. The term of employment of Executive under this Agreement shall be the period commencing on the Effective Date and terminating on January 31, 1998 (the "Term"). The respective rights and obligations of the parties hereunder shall survive any termination of employment to the extent necessary to achieve the intended preservation of rights and obligations. 2. Salary and Annual Incentive Compensation. Executive's annual base salary as in effect on the Effective Date shall be the Executive's annual base salary hereunder as of the Effective Date, payable in consecutive equal monthly installments. The term "base salary" as utilized in this Agreement shall refer to the then current base salary as adjusted from time to time. Executive shall also be eligible to receive annual incentive compensation pursuant to the Company's Management Incentive Compensation Program or any successor plan (the "MICP") during the Term and as determined in accordance with the terms and conditions of the MICP. Executive's MICP target annual incentive compensation for 1996 shall be 35% of base salary. The Company will maintain in effect, for each year during the Term, the MICP or an equivalent plan under which Executive will be eligible for an award not less than the prior year opportunity level available to Executive. Any such annual incentive compensation payable to Executive shall be paid in accordance with the Company's usual practices with respect to payment of incentive compensation of senior executives. -1- 3. Benefit and Compensation Plans. (a) Executive shall be entitled during the Term to participate in all executive compensation plans, and other employee and executive benefits, practices, policies and programs of the Company, as presently in effect or as they may be modified or added to by the Company from time to time ("Benefit Plans"); and during the Term, the Company will pay the cost of financial and tax planning services, up to a maximum amount in effect on the Effective Date of this Agreement. Such services shall be furnished by a provider selected by Executive. (b) During the Term, the Company will provide Executive with coverage by long-term disability insurance and benefits; and group or individual life insurance or a combination thereof, all in accordance with the plans, policies, programs and arrangements as presently in effect or as they may be modified or added to by the Company from time to time. (c) During the Term, Executive will participate in the Company's Executive Deferred Compensation Plan, ERISA Parity Plan, and any other supplemental retirement plans, benefits, practices, programs, or policies of the Company, as in effect on the Effective Date or as they may be modified or added to by the Company from time to time ("Compensation Plans"). 4. Non-Compete Agreement Executive hereby agrees that if Executive terminates his employment with the Company without Good Reason, then for a period of two (2) years after the Date of Termination, but in any event only as long as the Company satisfies its obligations under this Agreement, (the "Restricted Period"), Executive will not engage (either as owner, investor, partner, stockholder, employer, employee, consultant, advisor or director) in any "Competitive Business" in the continental United States (the "Territory"). The term "Competitive Business" means the making, producing, manufacturing or finishing of steel products which products are in direct competition with steel products that are made, produced, manufactured or finished by the Company on the Date of Termination. It is agreed that the ownership of not more than one percent of the equity securities of any company having securities listed on an exchange or regularly traded in the over-the-counter market shall not be deemed inconsistent with this Section 4. If any court of competent jurisdiction shall deem any obligation of this Section 4 too lengthy or the Territory too extensive, the other provisions of this Section shall nevertheless stand, the Restricted Period shall be deemed to be the longest period such court deems not to be too lengthy and the Territory shall be deemed to comprise the portion of the United States east of the Mississippi River (or such other portion of the United States that such court deems not to be too extensive). -2- 5. Non-Inducement Executive hereby agrees that for a period commencing with the Date of Termination and ending on the second anniversary of the Date of Termination, Executive shall not induce, or attempt to influence, any employee of the Company who reports either directly to the Company's Chief Executive Officer or to another employee who reports directly to the Company's Chief Executive Officer, to terminate his employment with the Company. 6. Non-Disclosure For a period commencing on the Date of Termination and ending on the fifth anniversary of the Date of Termination, Executive shall keep secret and retain in strictest confidence, and shall not furnish, make available or disclose to any third party or use for the benefit of himself or any third party, any Confidential Information. As used in this Section, "Confidential Information" shall mean any information relating to the business or affairs of the Company, including but not limited to information relating to financial statements, customer identities, customer needs, potential customers, employees, suppliers, servicing methods, equipment, programs, strategies and information, analyses, profit margins or other proprietary information used by the Company in connection with its business; provided, however, that Confidential Information shall not include any information which is in the public domain or becomes known in the industry through no wrongful act on the part of Executive. Executive acknowledges that the Confidential Information is vital, sensitive, confidential and proprietary to the Company. 7. No Unfavorable Publicity Subsequent to Executive's Date of Termination, Executive agrees not to make statements or communications and not to issue any written communications or release any other written materials which would likely be materially damaging to the Company's reputation or standing, whether in the investor or financial community, the steel industry or otherwise. 8. Cooperation With the Company Executive agrees to cooperate with the Company for a reasonable period of time after the Term of this Agreement by making himself available to testify on behalf of the Company, in any action, suit, or proceeding. In addition, for a reasonable period of time, Executive agrees to be available at reasonable times to meet and consult with the Company on matters reasonably within the scope of his prior duties with the Company so as to facilitate a transition to his successor. The Company agrees to reimburse Executive, on an after-tax basis, for all expenses actually incurred in connection with his provision of testimony or consulting assistance. -3- 9. Release of Employment Claims Executive and the Company agree that in the event Executive receives Special Termination Benefits (as defined in Section 11(e)), he and the Company will execute a mutual release agreement releasing any and all claims which either of them have or may have against the other arising out of Executive's employment (other than enforcement of this Agreement). The Executive agrees that in the event the Executive's employment with the Company terminates or is terminated, the Executive's sole and exclusive remedy shall be, and the Company's liability shall be limited to, damages equal to the payments and benefits to be provided by the Company hereunder and to payment or reimbursement of Executive's costs and expenses in accordance with Section 13(b). 10. Remedies Executive acknowledges and agrees that the covenants set forth in Sections 4 through 8 will continue to apply and be applicable regardless of whether the termination of Executive's employment with the Company occurs during the Term or following expiration of the Term. Executive also agrees that such covenants are reasonable and necessary for the protection of the Company's business interests, that irreparable injury will result to the Company if Executive breaches any of the terms of such covenants, and that in the event of Executive's actual or threatened breach of any such covenants, the Company will have no adequate remedy at law. Executive accordingly agrees that in the event of any actual or threatened breach by him of any of such covenants, the Company shall be entitled to immediate temporary injunctive and other equitable relief, without the necessity of showing actual monetary damages, subject to hearing as soon thereafter as possible. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of any damages which it is able to prove. 11. Termination of Employment. (a) Termination During the Term Due to Death or Disability. Upon an Executive's Date of Termination during the Term due to death or disability, the Company will pay Executive (or his beneficiaries, dependents or estate), and Executive (or his beneficiaries, dependents or estate) will be entitled to receive, the Termination Benefits (as defined in Section 11(d)). -4- (b) Termination During or After the Term by the Company for Cause and Termination by Executive During the Term without Good Reason. Upon Executive's Date of Termination (i) during or after the Term by the Company for Cause, or (ii) by Executive during the Term without Good Reason the Company shall pay Executive (or his beneficiaries, dependents or estate), and Executive (or his beneficiaries, dependents or estate) shall be entitled to receive, the Termination Benefits (as defined in Section 11(d)), except that, in the event of termination of Executive's employment by the Company for Cause or by Executive without Good Reason, no amount shall be paid and no right accrued in respect of Executive under Section 11(d)(i)(B). (c) Termination During the Term by the Company Without Cause and Termination by Executive for Good Reason. Upon Executive's Date of Termination during the Term either by the Company without Cause or by Executive for Good Reason the Company shall pay Executive (or his beneficiaries, dependents or estate), and Executive (or his beneficiaries, dependents or estate) shall be entitled to receive, the Termination Benefits (as defined in Section 11(d)) and the Special Termination Benefits (as defined in Section 11(e)), except that in the event Executive is age 64 or older on the Date of Termination, the "two times" multipliers set forth in Section 11(e)(i) shall be reduced in accordance with the schedule set forth below: Age Multiplier --- ---------- 64 One times 65 or older Zero (cc) Termination Following Expiration of the Term. Upon termination of employment following expiration of the Term, whether by the Executive with or without Good Reason, or by the Company, without Cause: (i) the Company shall pay Executive (or his beneficiaries, dependents, or estate), and Executive (or his beneficiaries, dependents, or estate) shall be entitled to receive, the Termination Benefits (as defined in Section 11(d)); except that no amount shall be paid and no right accrued in respect of Executive under Section 11(d)(i)(B), and a lump sum severance payment in an amount equal to Executive's then current annual base salary; and (ii) Executive shall be eligible to receive incentive compensation based on the Company's performance for the preceding year (to the extent not previously paid), if and when any such incentive compensation for such year is paid to eligible employees generally pursuant to the Company's MICP. Amounts payable to Executive under this Section 11(cc) are in lieu of, and not in addition to, amounts described in Sections 11(d) and 11(e) of this Agreement. (d) "Termination Benefits". "Termination Benefits" means the aggregate of all of the following: (i) A single sum cash payment by the Company to Executive within thirty (30) days after the Date of Termination of -5- (A) Executive's then current annual base salary pro rata through the Date of Termination to the extent not theretofore paid; (B) the product of (y) the greater of (aa) the average annual incentive compensation paid to Executive in the three fiscal years immediately preceding the fiscal year of the Date of Termination (or all fiscal years Executive was employed if less than three, and annualized in the event Executive was not employed by the Company for the whole of any such fiscal year), and (bb) Executive's target incentive compensation percentage payable under the MICP multiplied by Executive's then current base salary and (z) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365; and (C) any accrued vacation pay to the extent not theretofore paid. (ii) All vested amounts owing or accrued at the Date of Termination under any compensation and benefit plans, programs, and arrangements set forth or referred to in this Agreement, including, but not limited to, Sections 2 and 3 hereof; and if the Date of Termination is due to Disability or death, Executive or his estate or other beneficiaries shall receive the Disability or death benefits described in Section 3(b); (iii) Reasonable business expenses and disbursements incurred by Executive prior to such Date of Termination will be fully reimbursed within ten (10) days after the Date of Termination. (e) "Special Termination Benefits". "Special Termination Benefits" means the aggregate of all of the following: (i) The Company shall pay to Executive, in a single sum in cash within thirty (30) days after the Date of Termination, an amount equal to (y) two times the Executive's annual base salary (immediately preceding the Date of Termination), plus (z) in the event a Change of Control has previously occurred, an additional amount equal to two times the greater of (aa) the average annual incentive compensation paid to Executive in the three fiscal years immediately preceding the fiscal year of the Date of Termination (or all fiscal years Executive was employed if less than three, and annualized in the event Executive was not employed by the Company for the whole of any such fiscal year), or (bb) Executive's most recent target incentive compensation percentage payable under the MICP multiplied by his then current base salary; provided, however, that notwithstanding the foregoing, in the event a Change of Control has previously occurred, the maximum aggregate amount payable under this Section 11(e)(i) shall not exceed three times the Executive's annual base salary (immediately preceding the Date of Termination). (ii) For two years after Executive's Date of Termination, if Executive is less than age 64 on his Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, arrangement, practice or policy, the Company shall continue benefits to Executive and/or Executive's dependents at least equal to those which would have been provided to them in accordance with the Benefit Plans or this Agreement if Executive's employment had not been terminated -6- or, if more favorable to Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and their dependents; provided, however, that if Executive is eligible to receive health benefits under another employer-provided plan, the health benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and provided, further, that if Executive shall later become ineligible for health benefits under another employer-provided plan, the health benefits provided by the Company shall be primary. If Executive is age 64 or older on his Date of Termination, the period of "two years" in the first line of this Section 11(e)(ii) shall be reduced to the period set forth below: Age Period --- ------ 64 One year 65 or older Zero For purposes of determining vesting, eligibility and benefit accrual (for both age and service but not the time of commencement of benefits) of Executive for retiree benefits pursuant to such Benefit Plans, Executive shall be considered to have remained employed until the lesser of (a) two years after the Date of Termination or (b) age 65, and to have retired on the last day of such period. If such Benefit Plans do not allow Executive's continued participation, Executive shall be paid within thirty (30) days after the Date of Termination a cash payment actuarially equivalent on an after-tax basis to the value of the additional benefits which Executive would have received under such employee benefit plans, programs, and arrangements in which Executive was participating immediately prior to the Date of Termination, as if Executive had received credit under such plans, programs, and arrangements for service, age and compensation with the Company during the periods previously described following Executive's Date of Termination, with such benefits payable by the Company at the same times and in the same manner as such benefits would have been received by Executive under such plans, programs and arrangements. The value of any insurance-provided benefits will be based on the premium cost to Executive, which shall not exceed the highest risk premium charged by a carrier having an investment grade or better credit rating. (iii) Outplacement services, the scope and provider of which shall be selected by Executive in his sole discretion, provided by the Company at its sole expense as incurred. (iv) Stock options held by Executive as of the date of this Agreement will continue to vest as if Executive had remained an employee of the Company and shall remain fully exercisable for the lesser of (a) the entire period that would have been available for exercise had Executive continued in the employ of the Company through the original option term or (b) two years; such stock options shall otherwise be governed by the plans and programs (and the agreements and other documents thereunder) pursuant to which such stock options were granted. -7- 12. Special Provisions on Change of Control. In the event of a Change of Control, the provisions of this Section shall apply, and the Agreement shall be interpreted and applied consistently with the provisions of this Section. (a) Benefit and Compensation Plans. In no event shall Benefit Plans or Compensation Plans provide Executive with benefits or compensation, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company for Executive under Benefit Plans or Compensation Plans as in effect at any time during the 120-day period immediately preceding the Change of Control or if more favorable to Executive, those provided generally at any time after the Change of Control to other peer executives of the Company. If after a Change of Control (i) Executive terminates his employment with the Company with Good Reason, or (ii) Executive's employment with the Company is terminated without Cause, the actuarially equivalent value of nonqualified unfunded retirement benefits under any plan, program or arrangement of the Company shall be paid to Executive in a single sum within thirty (30) days after Executive is no longer employed by the Company. (b) Tax Matters. If Executive becomes entitled to one or more payments (with a "payment" including, without limitation, any Termination Benefits, Special Termination Benefits, the vesting of an option or other cash or non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, program, policy, practice, arrangement, or agreement with the Company (the "Benefit Payments"), which are or may become subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed) (the "Excise Tax"), the Company shall indemnify and hold the Executive harmless on an after-tax basis from the Excise Tax and any additional federal, state, and local income tax, employment tax and penalties and interest thereon, and the Company shall pay to Executive at the time of the Benefit Payments (or at the time the Excise Tax is imposed, if earlier) an additional amount which shall equal and include the Excise Tax, reimbursement for any penalties and interest that may accrue in respect of any Excise Tax (including any penalties or interest thereon) and any federal, state and local income or employment tax and Excise Tax on such additional amount, including any penalties or interest thereon (collectively, the "Additional Amounts"), but before reduction for any federal, state, or local income or employment tax on the Benefit Payments, so that after payment of the previously mentioned taxes (including penalties and interest thereon) Executive retains an amount equal to the sum of (a) the Benefit Payments, and (b) an amount equal to the product of any deductions disallowed for federal, state, or local income tax purposes because of the inclusion of the Additional Amounts in Executive's adjusted gross income multiplied by the highest applicable marginal rate of federal, state, or local income taxation, respectively, for the calendar year in which payment of the Additional Amounts is to be made. The Benefit Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" -8- within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless, and except to the extent independent legal counsel or independent compensation consultants or independent certified public accountants of nationally recognized standing mutually selected by the Company and Executive ("Independent Advisors") provide a written opinion acceptable to Executive that the Benefit Payments (in whole or in part) are not subject to Excise Tax because they do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code or are otherwise not subject to the Excise Tax; For purposes of determining the amount of the Additional Amounts, Executive shall be deemed (A) to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the payment of the Additional Amounts is to be made; (B) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the payment of the Additional Amounts is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of Executive's adjusted gross income); and (C) to have otherwise allowable deductions for federal, state, and local income tax purposes at least equal to those disallowed because of the inclusion of the Additional Amounts in Executive's adjusted gross income. The Company shall have the right to contest any claim by the Internal Revenue Service relating to the Excise Tax; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax, federal, state and local income or employment tax (including interest and penalties with respect thereto) imposed and payment of costs and expenses. The Company shall bear all of its own expenses and the expense of the Independent Advisors, and the legal, consulting and accounting expenses of Executive incurred by Executive for any reason under or with respect to this Section. 13. Governing Law; Disputes; Arbitration. (a) Governing Law. This Agreement is governed by and is to be construed, administered, and enforced in accordance with the laws of the State of Indiana, without regard to Indiana conflicts of law principles, except insofar as the Delaware General Corporation Law and federal laws and regulations may be applicable. If under the governing law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation, ordinance, or other principle of law, such portion shall be deemed to be modified or altered to the extent necessary to conform thereto or, if that is not possible, to be omitted from this Agreement. The -9- invalidity of any such portion shall not affect the force, effect, and validity of the remaining portion hereof. (b) Reimbursement of Expenses in Enforcing Rights. All costs and expenses (including, without limitation, fees and disbursements of actuaries, accountants and counsel) incurred by Executive in seeking in good faith to enforce rights pursuant to this Agreement shall be paid on behalf of or reimbursed to Executive promptly by the Company, whether or not Executive is successful in asserting such rights. If there shall be any dispute between the Company and Executive, the Company shall pay or provide, as applicable, all undisputed amounts or benefits as are then payable to Executive or Executive's beneficiaries or dependents pursuant to this Agreement. Any amounts that have become payable pursuant to the terms of this Agreement or any decision by arbitrators or judgment by a court of law, but which are not timely paid shall bear interest, payable by the Company, at the lower of (A) the highest lawful rate or (B) the prime rate in effect at the time such payment first becomes payable, as quoted by The Wall Street Journal. (c) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois, in accordance with the rules of the American Arbitration Association in effect at the time of submission to arbitration, by three (3) arbitrators, one of which shall be chosen by the Company, one of which shall be chosen by Executive, and one of which shall be chosen by the arbitrators chosen by Company and Executive. Judgment may be entered on the arbitrators' award in any court having jurisdiction. For purposes of entering any judgment upon an award rendered by the arbitrators, the Company and Executive hereby consent to the jurisdiction of any or all of the following courts: (i) the United States District Court for the Northern District of Indiana; (ii) any of the courts of the State of Indiana, or (iii) any other court having jurisdiction. The Company and Executive further agree that any service of process or notice requirements in any such proceeding shall be satisfied if the rules of such court relating thereto have been substantially satisfied. The Company and Executive hereby waive, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to such jurisdiction and any defense of inconvenient forum. The Company and Executive hereby agree that a judgment upon an award rendered by the arbitrators may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding. Notwithstanding any provision in this Section 13(c), Executive shall be entitled to seek specific performance of Executive's right to be paid during the pendency of any dispute or controversy arising under or in connection with this Agreement. 14. Definitions Certain terms in this Agreement are defined the first time they appear; other terms which are capitalized are not defined the first time they appear, but unless the context indicates otherwise, have the meanings set forth below: -10- (a) "Cause". For purposes of this Agreement, "Cause" shall mean Executive's gross misconduct (as defined herein) or willful and material breach of this Agreement. For purposes of this definition, "gross misconduct" shall mean (A) a felony conviction or a plea of nolo contendere to a felony charge in a court of law under applicable federal or state laws which results in material damage to the Company, or (B) willfully engaging in one or more acts which is demonstrably and materially damaging to the Company. Notwithstanding the foregoing, Executive may not be terminated for Cause unless and until there shall have been delivered to him, within six months after the Board (A) had knowledge of conduct or an event allegedly constituting Cause and (B) had reason to believe that such conduct or event could be grounds for Cause, a copy of a resolution duly adopted by a majority affirmative vote of the entire membership of the Company's Board of Directors (excluding Executive if a member of Company's Board of Directors), at a meeting of the Board called and held for such purpose (after giving Executive reasonable notice specifying the nature of the grounds for such termination and not less than 30 days to correct the acts or omissions complained of, if correctable, and affording Executive the opportunity, together with his counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above in this Section 14(a). (b) "Change of Control". For the purpose of this Agreement, a "Change of Control" shall mean: (i) (A) If any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") acquires (by purchase, tender offer or otherwise) or becomes the "beneficial owner" (as defined in rule 13d-3 under the Exchange Act) of thirty percent (30%) or more of the combined voting power of the then- outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") and (B) NKK Corporation ceases to be the beneficial owner, directly or indirectly, of more than fifty percent (50%) of the total voting power of all the then Outstanding Company Voting Securities; provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (1) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company, or (2) any acquisition by any entity pursuant to a transaction which complies with each of clauses (A), (B) and (C) of subsection (iii) of this paragraph (b). (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or -11- threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; (iii) Consummation of a reorganization, recapitalization, merger, acquisition of securities or assets by the Company or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) the individuals and entities who were the beneficial owners, respectively, of the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of, respectively, the then-outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, the Company or a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be and (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, thirty percent (30%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least two-thirds of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (c) "Date of Termination". "Date of Termination" means (i) if Executive's employment is terminated by the Company for Cause, or by Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; (ii) if Executive's employment is terminated by the Company without Cause, the Date of Termination shall be the date on which the Company notifies Executive of such Date of Termination; and (iii) if Executive's employment is terminated by reason of death or Disability, or is terminated by Executive without Good Reason, the Date of Termination shall be the date of death of Executive, the Disability Effective Date, or the date Executive notifies the Company that Executive's employment will terminate, as the case may be. If the Company determines in good faith that the Disability of Executive has occurred during the Term of the Agreement (pursuant to the definition of Disability set forth in Section 14(d)), it may give to Executive written notice in accordance with Section -12- 14(f) of this Agreement of its intention to terminate Executive's employment. In such event, Executive's Date of Termination is effective on the date that is six months after receipt of such notice by Executive (the "Disability Effective Date"), provided that, within such six month period, Executive shall not have returned to full-time performance of Executive's duties. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 14(f) of this Agreement. (d) "Disability". "Disability" means the failure of Executive to render and perform the services required of him under this Agreement, for a total of 180 days or more during any consecutive 12 month period, because of any physical or mental incapacity or disability as determined by a physician or physicians selected by the Company and reasonably acceptable to Executive, unless, within six (6) months after Executive has received written notice from the Company of a proposed Date of Termination due to such absence, Executive shall have returned to the full performance of his duties hereunder and shall have presented to the Company a written certificate of Executive's good health prepared by a physician selected by Executive and reasonably acceptable to the Company. (e) "Good Reason". For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following, without Executive's prior written consent: (i) any reduction in Executive's then current base salary or in Executive's then current target incentive compensation opportunity under the MICP; (ii) any reduction in benefits under the Retirement Plan, the Retirement Equalization Benefit, the ERISA Parity Plan or the Supplemental Pension payable to Executive under the Company's Executive Deferred Compensation Plan unless such reduction under any tax-qualified employee benefit plan is required by law; provided, further, that if any such reduction is required by law, "Good Reason" shall still exist unless the Company promptly makes Executive whole for any such reduction through equal accruals under a non-tax qualified plan; (iii) any failure other than provided in Section 14(e)(ii) by the Company to comply with any of the provisions of this Agreement, including but not limited to Sections 2 and 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (iv) any failure by the Company to perform any obligation under, or breach by the Company of any provision of, this Agreement; (v) any purported termination by the Company of Executive's employment otherwise than as expressly permitted by this Agreement; or -13- (vi) any failure by the Company to comply with and satisfy Section 15(c) of this Agreement. -14- (f) "Notice of Termination". "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination is other than the date of receipt of such notice, specifies the Date of Termination. The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. (g) "Board" or "Board of Directors". "Board" or "Board of Directors" means the full board of directors of the Company as it may be constituted in accordance with applicable law from time to time, and any committee of the board shall not be deemed to be the Board or Board of Directors for purposes of this Agreement. 15. Miscellaneous. (a) Integration. This Agreement modifies and supersedes any and all prior employment agreements (including but not limited to the Prior Agreement, if any). This Agreement constitutes the entire agreement among the parties with respect to the matters herein provided, and no modification or waiver of any provision hereof shall be effective unless in writing and signed by the parties hereto. Notwithstanding the foregoing, all stock options granted to Executive pursuant to such Prior Agreement shall remain outstanding, and to the extent applicable, Section 11(e)(iv) shall apply to such stock options and shall also apply to such other stock options granted to Executive prior to the Effective Date of this Agreement. (b) Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which Executive may qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. In the event of any conflict between the terms and provisions of this Agreement and any of the Company's plans, policies, practices, programs, contracts or agreements, the terms and provisions of whichever is more favorable to the Executive shall prevail. (c) Non-Transferability. Neither this Agreement nor the rights or obligations hereunder of the parties hereto shall be transferable or assignable by Executive, -15- except in accordance with the laws of descent and distribution or as specified in Section 15(d). The Company may, but only with the consent of Executive, assign this Agreement and the Company's rights and obligations hereunder, and the Company shall, as a condition of the succession, require such Successor to assume (jointly and severally with the Company) the Company's obligations and be bound by this Agreement. Any such assignment shall not release the Company of any of its obligations under this Agreement. For purposes of this Agreement, "Successor" shall mean any person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's voting securities or all or substantially all of its assets, or otherwise. (d) Beneficiaries. Executive shall be entitled to designate (and change, to the extent permitted under applicable law) a beneficiary or beneficiaries to receive any compensation or benefits payable hereunder following Executive's death. If Executive should die while any amount would still be payable to him hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. (e) Notices. Whenever under this Agreement it becomes necessary to give notice, such notice shall be in writing, signed by the party or parties giving or making the same, and shall be served on the person or persons for whom it is intended or who should be advised or notified, by overnight courier service or by certified or registered mail, return receipt requested, postage prepaid and addressed to such party at the address set forth below or at such other address as may be designated by such party by like notice: If to the Company: With copies to: Senior Vice President - Administration Senior Vice President & National Steel Corporation General Counsel 4100 Edison Lakes Parkway National Steel Corporation Mishawaka, Indiana 46545-3440 4100 Edison Lakes Parkway Mishawaka, Indiana 46545-3440 If to Executive at his then current address reflected in the Company's records. If the parties by mutual agreement supply each other with telecopier numbers for the purposes of providing notice by facsimile, such notice shall also be proper notice under this Agreement when sent. In the case of overnight courier service, such notice or advice shall be effective when sent, and, in the cases of certified or registered mail, shall be effective 2 days after deposit into the mails by delivery to the U.S. Post Office. If the person to receive the notice (or a copy thereof) for the Company is Executive, then notice to the Company shall be sent to the Chief Executive Officer of the Company at the above address rather than to the officer previously named. -16- (f) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. (g) No General Waivers. The failure of any party at any time to require performance by any other party of any provision hereof or to resort to any remedy provided herein or at law or in equity shall in no way affect the right of such party to require such performance or to resort to such remedy at any time thereafter, nor shall the waiver by any party of a breach of any of the provisions hereof be deemed to be a waiver of any subsequent breach of such provisions. No such waiver shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. (h) No Obligation To Mitigate. Executive shall not be required to seek other employment or otherwise to mitigate Executive's damages on or after Executive's Date of Termination, and the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation or benefits earned by Executive as the result of employment by another employer or by retirement benefits; provided, however, that, the health benefits that Executive is entitled to receive after the Date of Termination may be reduced in accordance with the terms of Section 11(e)(ii). (i) Offsets; Withholding. The amounts required to be paid by the Company to Executive pursuant to this Agreement shall not be subject to offset. The foregoing and other provisions of this Agreement notwithstanding, all payments to be made to Executive under this Agreement, including under Sections 11 and 12, or otherwise by the Company, will be subject to required withholding taxes and other required deductions. (j) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of Executive, his heirs, executors, administrators and beneficiaries, and shall be binding upon and inure to the benefit of the Company and its permitted successors and assigns as provided in Section 15(c). This Agreement is a personal contract and the rights and interests of Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. (k) Actuarially Equivalent Value Calculation. For the purpose of determining an actuarially equivalent value under the terms of this Agreement, the interest rate specified in Section 417(e)(3) of the Internal Revenue Code of 1986, or any successor section thereto, as of the date of such determination, and the 1994 Group Annuitants Mortality Table, shall be used and for purposes of determining present -17- value under the terms of this Agreement, the interest rate specified immediately above shall be used. All calculations shall be made at the expense of the Company, by the independent auditors of the Company. As soon as practicable after the need for such calculation arises, the Company shall provide to its auditors all information needed to perform such calculations. IN WITNESS WHEREOF, Executive has hereunto set his hand and the Company has caused this instrument to be duly executed as of the day and year first above written. NATIONAL STEEL CORPORATION By: /s/ Osamu Sawaragi --------------------------------- Name: Osamu Sawaragi Title: Chairman of the Board and Chief Executive Officer /s/ Robert G. Pheanis --------------------------------------- Robert G. Pheanis -18- EX-10.MM 5 EMPLOYMENT AGREEMENT BETWEEN CO. & OSAMU SAWARAGI Exhibit 10-MM 11-20-96 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is dated and effective as of the 11th day of December, 1996 ("Effective Date"), and is by and between National Steel Corporation, a Delaware corporation (the "Company"), and Osamu Sawaragi ("Executive"). In consideration of the mutual covenants contained herein, and other good and valuable consideration (including the Termination Benefits and the Special Termination Benefits) the receipt and adequacy of which the Company and Executive each hereby acknowledge, the Company and Executive hereby agree as follows: 1. Employment and Term. The Company hereby agrees to employ Executive as the Chief Executive Officer of the Company and Executive hereby agrees to accept such employment and serve in such capacity on a full-time basis during the Term and upon the terms and conditions set forth in this Employment Agreement (this "Agreement"). Executive shall report solely to the Company's Board of Directors, and will have such responsibilities, duties and authorities as are customary for such positions in a publicly held company of the size, type and nature of the Company as they may exist from time to time. The term of employment of Executive under this Agreement shall be the period commencing on the Effective Date and terminating on October 5, 1998 (the "Term"). The respective rights and obligations of the parties hereunder shall survive any termination of employment to the extent necessary to achieve the intended preservation of rights and obligations. 2. Salary and Annual Incentive Compensation. Executive's annual base salary as in effect on the Effective Date shall be the Executive's annual base salary hereunder as of the Effective Date, payable in consecutive equal monthly installments. The term "base salary" as utilized in this Agreement shall refer to the then current base salary as adjusted from time to time. Executive shall also be eligible to receive annual incentive compensation pursuant to the Company's Management Incentive Compensation Program or any successor plan (the "MICP") during the Term and as determined in accordance with the terms and conditions of the MICP. Executive's MICP target annual incentive -1- compensation for 1996 shall be 50% of base salary, multiplied by a fraction, the numerator of which shall be the number of days employed by the Company in 1996, and the denominator of which shall be 365. The Company will maintain in effect, for each year during the Term, the MICP or an equivalent plan under which Executive will be eligible for an award not less than the prior year opportunity level available to Executive. Any such annual incentive compensation payable to Executive shall be paid in accordance with the Company's usual practices with respect to payment of incentive compensation of senior executives. 3. Benefit and Compensation Plans. (a) Executive shall be entitled during the Term to participate in all executive compensation plans, and other employee and executive benefits, practices, policies and programs of the Company, as presently in effect or as they may be modified or added to by the Company from time to time ("Benefit Plans"). (b) During the Term, the Company will provide Executive with coverage by Company-paid group or individual life insurance or a combination thereof, all in accordance with the plans, policies, programs and arrangements as presently in effect or as they may be modified or added to by the Company from time to time. (c) During the Term, Executive will participate in the Company's Executive Deferred Compensation Plan, and any supplemental retirement plans, benefits, practices, programs, or policies of the Company, as in effect on the Effective Date or as they may be modified or added to by the Company from time to time ("Compensation Plans"). 4. Non-Compete Agreement. Executive hereby agrees that if Executive terminates his employment with the Company without Good Reason, then for a period of two (2) years after the Date of Termination, but in any event only as long as the Company satisfies its obligations under this Agreement, (the "Restricted Period"), Executive will not engage (either as owner, investor, partner, stockholder, employer, employee, consultant, advisor or director) in any "Competitive Business" in the continental United States (the "Territory"). The term "Competitive Business" means the making, producing, manufacturing or finishing of steel products which products are in direct competition with steel products that are made, produced, -2- manufactured or finished by the Company on the Date of Termination. It is agreed that the ownership of not more than one percent of the equity securities of any company having securities listed on an exchange or regularly traded in the over-the-counter market shall not be deemed inconsistent with this Section 4. If any court of competent jurisdiction shall deem any obligation of this Section 4 too lengthy or the Territory too extensive, the other provisions of this Section shall nevertheless stand, the Restricted Period shall be deemed to be the longest period such court deems not to be too lengthy and the Territory shall be deemed to comprise the portion of the United States east of the Mississippi River (or such other portion of the United States that such court deems not to be too extensive). 5. Non-Inducement. Executive hereby agrees that for a period commencing with the Date of Termination and ending on the second anniversary of the Date of Termination, Executive shall not induce, or attempt to influence, any employee of the Company who reports either directly to the Company's Chief Executive Officer, President, Chief Operating Officer or Acting Chief Operating Officer or to another employee who reports directly to the Company's Chief Executive Officer, President, Chief Operating Officer or Acting Chief Operating Officer to terminate his employment with the Company. 6. Non-Disclosure. For a period commencing on the Date of Termination and ending on the fifth anniversary of the Date of Termination, Executive shall keep secret and retain in strictest confidence, and shall not furnish, make available or disclose to any third party or use for the benefit of himself or any third party, any Confidential Information. As used in this Section, "Confidential Information" shall mean any information relating to the business or affairs of the Company, including but not limited to information relating to financial statements, customer identities, customer needs, potential customers, employees, suppliers, servicing methods, equipment, programs, strategies and information, analyses, profit margins or other proprietary information used by the Company in connection with its business; provided, however, that Confidential Information shall not include any information which is in the public domain or becomes known in the industry through no wrongful act on the part of Executive. Executive acknowledges that the -3- Confidential Information is vital, sensitive, confidential and proprietary to the Company. 7. No Unfavorable Publicity. Subsequent to Executive's Date of Termination, Executive agrees not to make statements or communications and not to issue any written communications or release any other written materials which would likely be materially damaging to the Company's reputation or standing, whether in the investor or financial community, the steel industry or otherwise. 8. Cooperation With the Company. Executive agrees to cooperate with the Company for a reasonable period of time after the Term of this Agreement by making himself available to testify on behalf of the Company, in any action, suit, or proceeding. In addition, for a reasonable period of time, Executive agrees to be available at reasonable times to meet and consult with the Company on matters reasonably within the scope of his prior duties with the Company so as to facilitate a transition to his successor. The Company agrees to reimburse Executive, on an after-tax basis, for all expenses actually incurred in connection with his provision of testimony or consulting assistance. 9. Release of Employment Claims. Executive and the Company agree that in the event Executive receives Special Termination Benefits (as defined in Section 11(e)), he and the Company will execute a mutual release agreement releasing any and all claims which either of them have or may have against the other arising out of Executive's employment (other than enforcement of this Agreement). The Executive agrees that in the event the Executive's employment with the Company terminates or is terminated, the Executive's sole and exclusive remedy shall be, and the Company's liability shall be limited to, damages equal to the payments and benefits to be provided by the Company hereunder and to payment or reimbursement of Executive's costs and expenses in accordance with Section 12(b). 10. Remedies. Executive acknowledges and agrees that the covenants set forth in Sections 4 through 8 are reasonable and necessary for the -4- protection of the Company's business interests, that irreparable injury will result to the Company if Executive breaches any of the terms of such covenants, and that in the event of Executive's actual or threatened breach of any such covenants, the Company will have no adequate remedy at law. Executive accordingly agrees that in the event of any actual or threatened breach by him of any of such covenants, the Company shall be entitled to immediate temporary injunctive and other equitable relief, without the necessity of showing actual monetary damages, subject to hearing as soon thereafter as possible. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of any damages which it is able to prove. 11. Termination of Employment. (a) Termination Due to Death or Disability. Upon an Executive's Date of Termination during the Term due to death or Disability, the Company will pay Executive (or his beneficiaries, dependents or estate), and Executive (or his beneficiaries, dependents or estate) will be entitled to receive, the Termination Benefits (as defined in Section 11(d)). (b) Termination by the Company for Cause and Termination by Executive without Good Reason. Upon Executive's Date of Termination during the Term by the Company for Cause or by Executive without Good Reason the Company shall pay Executive (or his beneficiaries, dependents or estate), and Executive (or his beneficiaries, dependents or estate) shall be entitled to receive, the Termination Benefits (as defined in Section 11(d)), except that no amount shall be paid and no right accrued in respect of Executive under Section 11(d)(i)(B). (c) Termination by the Company Without Cause and Termination by Executive for Good Reason. Upon Executive's Date of Termination during the Term by the Company without Cause or by Executive for Good Reason the Company shall pay Executive (or his beneficiaries, dependents or estate), and Executive (or his beneficiaries, dependents or estate) shall be entitled to receive, the Termination Benefits (as defined in Section 11(d)) and the Special Termination Benefits (as defined in Section 11(e)). (cc) Termination Following Expiration of the Term. Upon termination of employment following expiration of the Term, whether by the Executive with or without Good Reason, or by the -5- Company, without Cause, the Company shall pay Executive (or his beneficiaries, dependents, or estate), and Executive (or his beneficiaries, dependents, or estate) shall be entitled to receive, the Termination Benefits (as defined in Section 11(d)) and the Special Termination Benefits (as defined in Section 11(e)). (d) "Termination Benefits". "Termination Benefits" means the aggregate of all of the following: (i) a single sum cash payment by the Company to Executive within thirty (30) days after the Date of Termination of (A) Executive's then current annual base salary pro rata through the Date of Termination to the extent not theretofore paid; (B) the product of (y) the greater of (aa) the average annual incentive compensation paid to Executive in the three fiscal years immediately preceding the fiscal year of the Date of Termination (or all fiscal years Executive was employed if less than three, and annualized in the event Executive was not employed by the Company for the whole of any such fiscal year), and (bb) Executive's target incentive compensation percentage payable under the MICP multiplied by Executive's then current base salary and (z) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365; and (C) any accrued vacation pay to the extent not theretofore paid. (ii) All vested amounts owing or accrued at the Date of Termination under any compensation and benefit plans, programs, and arrangements set forth or referred to in this Agreement, including, but not limited to, Sections 2 and 3 hereof; and if the Date of Termination is due to death, Executive's estate or other beneficiaries shall receive the death benefits described in Section 3(b). (iii) Reasonable business expenses and disbursements incurred by Executive prior to such Date of Termination will be fully reimbursed within ten (10) days after the Date of Termination. (e) "Special Termination Benefits". "Special Termination Benefits" means the aggregate of all of the following: (i) The Company shall pay to Executive, in a single sum in cash within thirty (30) days after the Date of Termination, an -6- amount equal to fifty percent of Executive's annual base salary (immediately preceding the Date of Termination). (ii) For two years after Executive's Date of Termination, if Executive is less than age 69 on his Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, arrangement, practice or policy, the Company shall continue benefits to Executive and/or Executive's dependents at least equal to those which would have been provided to them in accordance with the Benefits Plans or this Agreement if Executive's employment had not been terminated or, if more favorable to Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and their dependents; provided, however, that notwithstanding anything in this Agreement to the contrary, if Executive is eligible to receive health benefits or other benefits under an NKK Corporation sponsored plan or arrangement, or any Japanese government plan or arrangement, or under any other plan or arrangement, the health benefits and other benefits described herein shall be secondary to those provided under such other plan or arrangement during such applicable period of eligibility; and provided, further, that if Executive shall later become ineligible for health benefits or other benefits under such other plans and arrangements, the health benefits or other benefits provided by the Company shall be primary. If Executive is age 69 or older on his Date of Termination, the period of "two years" in the first line of this Section 11(e)(ii) shall be reduced to the period set forth below: Age Period --- ------ 69 One Year 70 or older Zero (iii) Stock options held by Executive as of the date of this Agreement were granted pursuant to the 1993 National Steel Corporation Non-Employee Directors' Stock Option Plan and shall continue to be governed by the terms and conditions of said Non-Employee Directors' Stock Option Plan. Stock options granted to Executive after the date of this Agreement shall be issued pursuant to the 1993 National Steel Corporation Long Term Incentive Plan and shall continue to vest as if Executive had remained an employee of the Company and shall remain fully exercisable for the lesser of (a) the entire period that would have been available for exercise had Executive continued in the -7- employ of the Company through the original option term or (b) five years; such stock options shall otherwise be governed by the terms and conditions of said Long Term Incentive Plan (and the agreements and other documents thereunder) pursuant to which such stock options were granted. 12. Governing Law; Disputes; Arbitration. (a) Governing Law. This Agreement is governed by and is to be construed, administered, and enforced in accordance with the laws of the State of Indiana, without regard to Indiana conflicts of law principles, except insofar as the Delaware General Corporation Law and federal laws and regulations may be applicable. If under the governing law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation, ordinance, or other principle of law, such portion shall be deemed to be modified or altered to the extent necessary to conform thereto or, if that is not possible, to be omitted from this Agreement. The invalidity of any such portion shall not affect the force, effect, and validity of the remaining portion hereof. (b) Reimbursement of Expenses in Enforcing Rights. All costs and expenses (including, without limitation, fees and disbursements of actuaries, accountants and counsel) incurred by Executive in seeking in good faith to enforce rights pursuant to this Agreement shall be paid on behalf of or reimbursed to Executive promptly by the Company, whether or not Executive is successful in asserting such rights. If there shall be any dispute between the Company and Executive, the Company shall pay or provide, as applicable, all undisputed amounts or benefits as are then payable to Executive or Executive's beneficiaries or dependents pursuant to this Agreement. Any amounts that have become payable pursuant to the terms of this Agreement or any decision by arbitrators or judgment by a court of law, but which are not timely paid shall bear interest, payable by the Company, at the lower of (A) the highest lawful rate or (B) the prime rate in effect at the time such payment first becomes payable, as quoted by The Wall Street Journal. (c) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois, in accordance with the rules of the American Arbitration Association in effect at the time of submission to arbitration, by three (3) arbitrators, one of which -8- shall be chosen by the Company, one of which shall be chosen by Executive, and one of which shall be chosen by the arbitrators chosen by Company and Executive. Judgment may be entered on the arbitrators' award in any court having jurisdiction. For purposes of entering any judgment upon an award rendered by the arbitrators, the Company and Executive hereby consent to the jurisdiction of any or all of the following courts: (i) the United States District Court for the Northern District of Indiana; (ii) any of the courts of the State of Indiana, or (iii) any other court having jurisdiction. The Company and Executive further agree that any service of process or notice requirements in any such proceeding shall be satisfied if the rules of such court relating thereto have been substantially satisfied. The Company and Executive hereby waive, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to such jurisdiction and any defense of inconvenient forum. The Company and Executive hereby agree that a judgment upon an award rendered by the arbitrators may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding. Notwithstanding any provision in this Section 12(c), Executive shall be entitled to seek specific performance of Executive's right to be paid during the pendency of any dispute or controversy arising under or in connection with this Agreement. 13. Definitions. Certain terms in this Agreement are defined the first time they appear; other terms which are capitalized are not defined the first time they appear, but unless the context indicates otherwise, have the meanings set forth below: (a) "Cause". For purposes of this Agreement, "Cause" shall mean Executive's gross misconduct (as defined herein) or willful and material breach of this Agreement. For purposes of this definition, "gross misconduct" shall mean (A) a felony conviction or a plea of nolo contendere to a felony charge in a court of law under applicable federal or state laws which results in material damage to the Company, or (B) willfully engaging in one or more acts which is demonstrably and materially damaging to the Company. Notwithstanding the foregoing, Executive may not be terminated for Cause unless and until there shall have been delivered to him, within six months after the Board (A) had knowledge of conduct or an event allegedly constituting Cause and (B) had reason to -9- believe that such conduct or event could be grounds for Cause, a copy of a resolution duly adopted by a majority affirmative vote of the entire membership of the Company's Board of Directors (excluding Executive if a member of Company's Board of Directors), at a meeting of the Board called and held for such purpose (after giving Executive reasonable notice specifying the nature of the grounds for such termination and not less than 30 days to correct the acts or omissions complained of, if correctable, and affording Executive the opportunity, together with his counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, Executive was guilty of conduct set forth above in this Section 13(a). (b) "Date of Termination". "Date of Termination" means (i) if Executive's employment is terminated by the Company for Cause or by Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; (ii) if Executive's employment is terminated by the Company without Cause, the Date of Termination shall be the date on which the Company notifies Executive of such Date of Termination, and (iii) if Executive's employment is terminated by reason of death or Disability, or is terminated by Executive without Good Reason, the Date of Termination shall be the date of death of Executive, the Disability Effective Date, or the date Executive notifies the Company that Executive's employment will terminate, as the case may be. If the Company determines in good faith that the Disability of Executive has occurred during the Term of the Agreement (pursuant to the definition of Disability set forth in Section 13(c)), it may give to Executive written notice in accordance with Section 13(e) of this Agreement of its intention to terminate Executive's employment. In such event, Executive's Date of Termination is effective on the date that is six months after receipt of such notice by Executive (the "Disability Effective Date"), provided that, within such six month period, Executive shall not have returned to full-time performance of Executive's duties. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e) of this Agreement. (c) "Disability". "Disability" means the failure of Executive to render and perform the services required of him under this Agreement, for a total of 180 days or more during any consecutive 12 month period, because of any physical or mental incapacity or disability as determined by a physician or -10- physicians selected by the Company and reasonably acceptable to Executive, unless, within six (6) months after Executive has received written notice from the Company of a proposed Date of Termination due to such absence, Executive shall have returned to the full performance of his duties hereunder and shall have presented to the Company a written certificate of Executive's good health prepared by a physician selected by Executive and reasonably acceptable to the Company. (d) "Good Reason". For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following events set forth in paragraphs (i) through (vii) below, without Executive's prior written consent: (i) the diminution of Executive's status, titles, positions, duties, offices, authorities, responsibilities, assignments or reporting relationships, or removal from Executive of any status, titles, positions, duties, offices, authorities, responsibilities, assignments or reporting relationships, which is inconsistent in any respect with Executive's status, titles, positions, duties, offices, authorities, responsibilities, assignments or reporting relationships, as contemplated by Section 1 of this Agreement, excluding for this purpose (a) any removal of the title "Chairman of the Board," the removal of Executive from the Board, or any failure to elect or re-elect, or nominate Executive to the Board, (b) any search for a new Chief Executive Officer, or transition or succession planning regarding a Chief Executive Officer, (c) any announcement of an appointment of a new Chief Executive Officer, with an effective date after the Term hereof, or (d) an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (ii) any reduction in Executive's then current base salary or in Executive's then current target incentive compensation opportunity under the MICP; (iii) any failure by the Company to comply with any of the provisions of this Agreement, including but not limited to Sections 2 and 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; -11- (iv) any failure by the Company to perform any obligation under, or breach by the Company of any provision of, this Agreement; (v) any purported termination by the Company of Executive's employment otherwise than as expressly permitted by this Agreement; or (vi) any failure by the Company to comply with and satisfy Section 14(c) of this Agreement. (vii) voluntary termination of employment by Executive with the prior approval of a simple majority of the Board. (e) "Notice of Termination". "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination is other than the date of receipt of such notice, specifies the Date of Termination. The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. (f) "Board" or "Board of Directors". "Board" or "Board of Directors" means the full board of directors of the Company as it may be constituted in accordance with applicable law from time to time, and any committee of the board shall not be deemed to be the Board or Board of Directors for purposes of this Agreement. 14. Miscellaneous. (a) Integration. This Agreement modifies and supersedes any and all prior employment agreements. This Agreement constitutes the entire agreement among the parties with respect to the matters herein provided, and no modification or waiver of any provision hereof shall be effective unless in writing and signed by the parties hereto. -12- (b) Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any plan, program, policy or practice provided by the Company during the Term of this Agreement and for which Executive may qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. In the event of any conflict between the terms and provisions of this Agreement and any of the Company's plans, policies, practices, programs, contracts or agreements, the terms and provisions of whichever is more favorable to the Executive shall prevail. (c) Non-Transferability. Neither this Agreement nor the rights or obligations hereunder of the parties hereto shall be transferable or assignable by Executive, except in accordance with the laws of descent and distribution or as specified in Section 14(d). The Company may, but only with the consent of Executive, assign this Agreement and the Company's rights and obligations hereunder, and the Company shall, as a condition of the succession, require such Successor to assume (jointly and severally with the Company) the Company's obligations and be bound by this Agreement. Any such assignment shall not release the Company of any of its obligations under this Agreement. For purposes of this Agreement, "Successor" shall mean any person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's voting securities or all or substantially all of its assets, or otherwise. (d) Beneficiaries. Executive shall be entitled to designate (and change, to the extent permitted under applicable law) a beneficiary or beneficiaries to receive any compensation or benefits payable hereunder following Executive's death. If Executive should die while any amount would still be payable to him hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. -13- (e) Notices. Whenever under this Agreement it becomes necessary to give notice, such notice shall be in writing, signed by the party or parties giving or making the same, and shall be served on the person or persons for whom it is intended or who should be advised or notified, by overnight courier service or by certified or registered mail, return receipt requested, postage prepaid and addressed to such party at the address set forth below or at such other address as may be designated by such party by like notice: If to the Company: With copies to: Sr. Vice President-Administration Sr. Vice President & Gen. Counsel National Steel Corporation National Steel Corporation 4100 Edison Lakes Parkway 100 Edison Lakes Parkway Mishawaka, Indiana 46545-3440 Mishawaka, Indiana 46545-3440 If to Executive at his then current address reflected in the Company's records. If the parties by mutual agreement supply each other with telecopier numbers for the purposes of providing notice by facsimile, such notice shall also be proper notice under this Agreement when sent. In the case of overnight courier service, such notice or advice shall be effective when sent, and, in the cases of certified or registered mail, shall be effective 2 days after deposit into the mails by delivery to the U.S. Post Office. (f) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. (g) No General Waivers. The failure of any party at any time to require performance by any other party of any provision hereof or to resort to any remedy provided herein or at law or in equity shall in no way affect the right of such party to require such performance or to resort to such remedy at any time thereafter, nor shall the waiver by any party of a breach of any of the provisions hereof be deemed to be a waiver of any subsequent breach of such provisions. No such waiver shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. -14- (h) No Obligation To Mitigate. Executive shall not be required to seek other employment or otherwise to mitigate Executive's damages on or after Executive's Date of Termination, and the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation or benefits earned by Executive as the result of employment by another employer or by retirement benefits; provided, however, that, the health benefits or other benefits that Executive is entitled to receive after the Date of Termination may be reduced in accordance with the terms of Section 11(e)(ii). (i) Offsets; Withholding. The amounts required to be paid by the Company to Executive pursuant to this Agreement shall not be subject to offset. The foregoing and other provisions of this Agreement notwithstanding, all payments to be made to Executive under this Agreement, including under Section 11, or otherwise by the Company, will be subject to required withholding taxes and other required deductions. (j) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of Executive, his heirs, executors, administrators and beneficiaries, and shall be binding upon and inure to the benefit of the Company and its permitted successors and assigns as provided in Section 14(c). This Agreement is a personal contract and the rights and interests of Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. (k) Actuarially Equivalent Value Calculation. For the purpose of determining an actuarially equivalent value under the terms of this Agreement, the interest rate specified in Section 417(e)(3) of the Internal Revenue Code of 1986, or any successor section thereto, as of the date of such determination, and the 1994 Group Annuitants Mortality Table, shall be used and for purposes of determining present value under the terms of this Agreement, the interest rate specified immediately above shall be used. All calculations shall be made at the expense of the Company, by the independent auditors of the Company. As soon as practicable after the need for such calculation arises, the -15- Company shall provide to its auditors all information needed to perform such calculations. IN WITNESS WHEREOF, Executive has hereunto set his hand and the Company has caused this instrument to be duly executed as of the day and year first above written. NATIONAL STEEL CORPORATION By: /s/ David A. Pryzbylski ----------------------- Name: David A. Pryzbylski Title: Senior Vice President, Administration and Secretary /s/ Osamu Sawaragi -------------------------------- Osamu Sawaragi -16- EX-10.NN 6 AMEND. #1 TO AGREEMENT FOR TRANSFER OF EMPLOYEES EXHIBIT 10-NN AMENDMENT NO. 1 TO THE ---------------------- AGREEMENT FOR THE TRANSFER OF EMPLOYEES --------------------------------------- THIS AGREEMENT, by and between NKK CORPORATION, a Japanese corporation, having its main office at 1-1-2, Marunouchi, Chiyoda-ku, Tokyo, Japan (herein called "NKK") and NATIONAL STEEL CORPORATION, a Delaware corporation having its principal office at 4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440, U.S.A. (herein called "NSC"), is made effective December 10, 1996. WITNESSETH: WHEREAS, NKK and NSC entered into an Agreement for the Transfer of Employees dated as of May 1, 1995 (the "Agreement"), pursuant to which certain employees have been transferred from NKK to NSC for the purpose of providing technical assistance, consulting services and business assistance to NSC; and WHEREAS, NKK and NSC desire to extend the term of the Agreement for an additional year, through 1997. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Capitalized terms as used herein and not defined herein shall have the same meaning as set forth in the Agreement. 2. In accordance with Paragraph 15 of the Agreement, the term of the Agreement is hereby extended for an additional Contract Year, from January 1, 1997 through December 31, 1997 (the "1997 Contract Year"). 3. The Reimbursable Expenses Cap for the 1997 Contract Year shall be Seven Million Dollars ($7,000,000). 4. Each party represents and warrants to the other that it has the requisite power and authority to extend the Agreement, including, without limitation, that all necessary corporate proceedings have been duly taken as required under Paragraph 15 of the Agreement. 5. Except as amended hereby, all of the terms of the Agreement shall remain in full force and effect. NATIONAL STEEL CORPORATION NKK CORPORATION By:___________________________ By:______________________________ Title:________________________ Title:___________________________ Date:_________________________ Date:____________________________ EX-13 7 PORTIONS OF 1996 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13
National Steel Corporation Financial Report - -------------------------------------------------------------------------------- Five Year Selected Financial and Operating Information............................ 16 Management's Discussion and Analysis.............. 17 Statements of Consolidated Income................. 22 Consolidated Balance Sheets....................... 23 Statements of Consolidated Cash Flows............. 24 Statements of Changes in Consolidated Stockholders' Equity and Redeemable Preferred Stock--Series B............. 25 Notes to Consolidated Financial Statements........ 26 Report of Ernst & Young LLP Independent Auditors.. 40 Management's Responsibility for Financial Statements......................... 40
- -------------------------------------------------------------------------------- FIVE YEAR SELECTED FINANCIAL AND OPERATING INFORMATION Dollars in Millions, Except Per Share Data
- ---------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Net sales $ 2,955 $ 2,954 $ 2,700 $ 2,419 $ 2,373 Cost of products sold 2,619 2,528 2,354 2,254 2,107 Depreciation, depletion and amortization 144 145 142 137 115 - ---------------------------------------------------------------------------------------------------------- Gross profit 191 281 204 27 152 Selling, general and administrative 139 154 138 137 133 Unusual charges (credits) -- 5 (25) 111 37 Income (loss) from operations 61 131 97 (218) (12) Financing costs (net) 36 39 56 62 62 Income (loss) before income taxes, extraordinary items and cumulative effect of accounting changes 29 92 152 (280) (75) Extraordinary items -- 5 -- -- (50) Cumulative effect of accounting changes -- -- -- (16) 76 Net income (loss) applicable to common stock 34 100 157 (272) (66) Per share data applicable to common stock: Income (loss) before extraordinary items and cumulative effect of accounting changes .78 2.21 4.33 (7.55) (3.61) Net income (loss) .78 2.34 4.33 (8.04) (2.58) Cash dividends -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Cash and cash equivalents 109 128 162 5 55 Working capital 251 224 225 27 74 Net property, plant and equipment 1,456 1,469 1,394 1,399 1,395 Total assets 2,547 2,668 2,499 2,304 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 592 557 354 190 327 - ---------------------------------------------------------------------------------------------------------- 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 49.1% 52.0% 68.6% 80.2% 71.8% Common shares outstanding at year end (in thousands) 43,288 43,288 36,376 36,361 25,500 - ----------------------------------------------------------------------------------------------------------
16 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 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 rec-ord 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 $91.9 million, or 3.6%, 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 $138.6 million in 1996 represents a $15.1 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 $5.2 million and $8.6 million of federal income tax expense and $.7 million and $6.4 million of state income tax expense, respectively. The Company's effective tax rate was lower than the federal statutory rate primarily because of the continued utilization of available operating loss carryforwards. As such, the Company's effective alternative minimum tax rate was 18.0% and 4.0% 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 Plan Pace Performance Pride ----------- 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 During the third quarter of 1996, the Company changed the measurement date for pensions and other postretirement benefit obligations ("OPEB") from December 31 to September 30 in order to provide for more timely information. The change in measurement date had no effect on 1996 expense and had an immaterial impact on the funded status of the plans at December 31, 1996. 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 $108.8 million to $14.4 million at September 30, 1996, and at the same time resulted in a $1.8 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 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT 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 87.2% 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 Plan Pace Performance Pride 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 49.1% as compared to 52.0% 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 $162.6 million, a decrease of $102.5 million compared to 1995. This decrease is primarily attributable to the $66.2 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 at 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 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT 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 Plan Pace Performance Pride ----------- National Steel Corporation and Subsidiaries Statements of Consolidated Income
- --------------------------------------------------------------------------------------------------------------- Dollars in Thousands, Except Per Share Amounts Years Ended December 31, 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- Net Sales $2,954,033 $2,954,218 $2,700,273 Cost of products sold 2,619,469 2,527,521 2,353,970 Selling, general and administrative 138,568 153,690 138,223 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 61,346 130,986 96,563 - --------------------------------------------------------------------------------------------------------------- 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 and Extraordinary Item 28,829 91,772 151,836 - --------------------------------------------------------------------------------------------------------------- Income tax credit (15,728) (13,651) (16,676) - --------------------------------------------------------------------------------------------------------------- Income before Extraordinary Item 44,557 105,423 168,512 Extraordinary item ---------- 5,373 -------- - --------------------------------------------------------------------------------------------------------------- Net Income 44,557 110,796 168,512 Less preferred stock dividends 10,959 10,958 11,038 - --------------------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 33,598 $ 99,838 $ 157,474 =============================================================================================================== Per Share Data Applicable to Common Stock - --------------------------------------------------------------------------------------------------------------- Income before Extraordinary Item $ .78 $ 2.21 $ 4.33 Extraordinary Item ---------- .13 ---------- - --------------------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ .78 $ 2.34 $ 4.33 =============================================================================================================== Weighted average shares outstanding (in thousands) 43,288 42,707 36,367 ===============================================================================================================
See notes to consolidated financial statements. 22 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------
National Steel Corporation and Subsidiaries Consolidated Balance Sheets - --------------------------------------------------------------------------------------------------------------- Dollars in Thousands, Except Per Share Amounts December 31, 1996 1995 - --------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 109,041 $ 127,616 Receivables, less allowances (1996--$21,320; 1995--$19,986) 279,889 316,662 Inventories 435,961 412,014 - --------------------------------------------------------------------------------------------------------------- Total current assets 824,891 856,292 - --------------------------------------------------------------------------------------------------------------- Investments in affiliated companies 65,399 59,885 Property, plant and equipment Land and land improvements 241,576 234,693 Buildings 263,301 259,391 Machinery and equipment 3,159,720 3,046,130 - --------------------------------------------------------------------------------------------------------------- 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 14,409 108,822 Other assets 35,338 44,277 - --------------------------------------------------------------------------------------------------------------- Total Assets $ 2,547,055 $ 2,667,879 =============================================================================================================== LIABILITIES, Current liabilities REDEEMABLE Accounts payable $ 234,892 $ 255,574 PREFERRED Salaries and wages 69,764 89,987 STOCK AND Withheld and accrued taxes 86,079 82,076 STOCKHOLDERS' Pension and other employee benefits 79,808 96,894 EQUITY Other accrued liabilities 63,101 68,373 Income taxes 2,424 3,912 Current portion of long term obligations 37,731 35,750 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 573,799 632,566 - --------------------------------------------------------------------------------------------------------------- Long term obligations 323,550 339,613 Long term obligations to related parties 146,744 161,912 Long term pension liabilities 248,403 326,151 Postretirement benefits other than pensions 249,771 221,627 Other long term liabilities 349,338 364,423 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 89,478 54,115 - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity 591,920 556,557 - --------------------------------------------------------------------------------------------------------------- Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity $ 2,547,055 $ 2,667,879 ===============================================================================================================
See notes to consolidated financial statements. 23 Plan Pace Performance Pride ----------- National Steel Corporation and Subsidiaries Statements of Consolidated Cash Flows
- ----------------------------------------------------------------------------------------------- Dollars in Thousands YEARS ENDED DECEMBER 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net Income $ 44,557 $ 110,796 $ 168,512 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 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 28,145 42,120 22,072 Extraordinary item -- (5,373) -- Deferred income taxes (21,600) (28,600) (20,700) Changes in working capital items: Receivables 36,773 (23,793) (68,160) Inventories (23,947) (44,002) 3,085 Accounts payable (20,682) (17,012) 30,292 Accrued liabilities (40,426) 50,936 (28,441) Other (20,023) (12,063) 6,481 - ----------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 162,637 265,096 316,842 - ----------------------------------------------------------------------------------------------- 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 Cash Used in Investing Activities (124,503) (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 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------- 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 January 1, 1994 $221 $143 $36,650 $360,314 $(207,366) $189,962 $68,030 Net Income 168,512 168,512 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 (43,958) 353,581 66,530 1994 Net Income 110,796 110,796 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 54,115 556,557 65,030 1995 Net Income 44,557 44,557 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 1,765 1,765 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, $221 $212 $36,650 $465,359 $ 89,478 $591,920 $63,530 1996 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 25 Plan Pace Performance Pride ----------- 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 Dollars in thousands - -------------------------------------------------- Finished and semi-finished $387,216 $368,623 Raw materials and supplies 183,184 180,757 - -------------------------------------------------- 570,400 549,380 Less LIFO reserve 134,439 137,366 - -------------------------------------------------- $435,961 $412,014 ==================================================
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 M-- 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 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------ 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 -- 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 Plan Pace Performance Pride ----------- 6 NKK to purchase the Company's preferred stock dividend and redemption obligations. The Series B Redeemable Preferred Stock is nontransferable and nonvoting. (See Note H--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 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------ Note C--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 Plan Pace Performance Pride - ----------- $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 $2.5 million, respectively, as of December 31, 1996 and 1995. (See Note I--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 $124.7 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 D--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 . In 1996, the Company elected to change the measurement date for pension from December 31 to September 30, in order to provide for more timely information. The change in measurement date no effect on 1996 expense and had an immaterial impact on the funded status of the plans at December 31, 1996. Pension expense and related actuarial assumptions utilized are summarized below: - -------------------------------------------------------------------------------- 1996 1995 1994 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 11,364 110,683 104,320 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 Special termination credits -- -- (17,372) - -------------------------------------------------------------------------------- TOTAL PENSION EXPENSE $ 61,921 $ 64,790 $ 48,046 ================================================================================ 30 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------- 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 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 (47,334) (56,770) Unrecognized net gain (loss) 115,603 (16,613) Unrecognized prior service cost (95,556) (106,694) Pension contributions October through December 1996 (7,321) -- Adjustment required to recognize minimum pension liability 14,409 110,587 - ------------------------------------------------------------------------------------------------------------------ Accrued pension liability 262,337 356,486 Less pension liability due within one year 13,934 30,335 - ------------------------------------------------------------------------------------------------------------------ Long term pension liability at December 31 $ 248,403 $ 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 $14.4 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 E--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. In 1996, the Company elected to change the measurement date for OPEB from December 31 to September 30, in order to provide for more timely information. The change in measurement date had no effect on 1996 expense and had an immaterial impact on the funded status of the plan at December 31, 1996. - -------------------------------------------------------------------------------- 31 Plan Pace Performance Pride ----------- The components of postretirement benefit cost and related actuarial assumptions were as follows: - -------------------------------------------------------------------------------- 1996 1995 1994 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 46,241 52,700 53,577 Amortization of transition obligation 26,274 26,274 26,510 Other (4,887) (5,003) (2,162) - -------------------------------------------------------------------------------- Net periodic benefit cost 80,174 84,544 91,662 Special termination credits ------ ------ (4,081) - -------------------------------------------------------------------------------- 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 Dollars in thousands - -------------------------------------------------------------------------------- Assumptions: Discount rate 8.00% 7.25% Health care trend rate 6.60% 7.20% Accumulated postretirement benefit obligation ("APBO") Retirees $408,228 $ 525,567 Fully eligible active participants 76,945 85,871 Other active participants 108,823 107,388 - -------------------------------------------------------------------------------- Total 593,996 718,826 Plan assets at fair value 48,287 33,201 - -------------------------------------------------------------------------------- APBO in excess of plan assets 545,709 685,625 Unrecognized transition obligation (420,381) (446,654) Unrecognized net gain (loss) 148,583 (7,344) Claims and contributions October through December 1996 (14,140) ------- - -------------------------------------------------------------------------------- Accrued postretirement liability 259,771 231,627 Less postretirement benefit liability due within one year 10,000 10,000 - -------------------------------------------------------------------------------- Long term postretirement benefit liability at December 31 $249,771 $ 221,627 - -------------------------------------------------------------------------------- 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 5.0% in 2002 and thereafter. A 1.0% 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 F--Other Long Term Liabilities Other long term liabilities at December 31 consisted of the following: - -------------------------------------------------------------------------------- 1996 1995 Dollars in thousands - -------------------------------------------------------------------------------- Deferred gain on sale leasebacks $ 21,503 $ 24,179 Insurance and employee benefits (excluding pensions and OPEB) 132,599 128,179 Plant Closings 52,681 61,521 Released Weirton Benefit Liabilities 122,697 121,373 Other 19,858 29,171 - -------------------------------------------------------------------------------- Total other long term liabilities $349,338 $364,423 - -------------------------------------------------------------------------------- 32 [LOGO OF N NATIONAL STEEL] 1996 ANNUAL REPORT --------------------------------- Note G--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 Dollars in thousands - -------------------------------------------------------------------------------- Deferred tax assets Reserves $152,000 $156,900 Employee benefits 209,500 198,400 Net operating loss ("NOL") carryforwards 70,600 67,100 Leases 12,700 17,500 Federal tax credits 26,800 13,100 Other 28,000 22,600 - -------------------------------------------------------------------------------- Total deferred tax assets 499,600 475,600 Valuation allowance (125,500) (159,400) - ------------------------------------------------------------------- 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 Dollars in thousands - -------------------------------------------------------------------------------- Current taxes payable: Federal (alternative minimum tax) $ 5,200 $ 8,584 $ 4,016 State and foreign 672 6,365 8 Deferred taxes (21,600) (28,600) (20,700) - -------------------------------------------------------------------------------- Total tax credit $(15,728) $(13,651) $(16,676) ================================================================================
The reconciliation of income tax computed at the federal statutory tax rates to the recorded total tax credit is as follows: - -------------------------------------------------------------------------------- 1996 1995 1994 Dollars in thousands - -------------------------------------------------------------------------------- Tax at federal statutory rates $ 10,100 $ 32,100 $ 53,100 Benefits of operating loss carryforward Temporary deductible ( 6,000) (58,400) (84,100) differences for which (benefit) no benefit was recognized (net) (27,800) 9,700 20,600 Depletion (1,900) (4,300) ------ Dividend exclusion (1,200) (1,800) (1,600) Alternative minimum tax 5,200 8,584 4,016 Other 5,872 465 (8,692) - -------------------------------------------------------------------------------- Total tax credit $(15,728) $(13,651) $(16,676) ================================================================================
At December 3, 1996, the Company had unused NOL carryforwards of approximately $196.7 million, which expire as follows: $79.7 million in 2007 and $117.0 million in 2008. At December 31, 1996, the Company had unused alternative minimum tax credit carryforwards of approximately $17.9 million which may be applied to offset its future regular federal income tax liabilities. These tax credits may be carried forward indefinitely. 33 Plan Pace Performance Pride - ----------- Note H--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 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------ Note 1--Nonrecurring and Extraordinary Items 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 J--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 C--Long Term Obligations and Note I--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 L--Other Commitments and Contingencies and Note M--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 K--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 H--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 informatio 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 L--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 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------ 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 M-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 M--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 L--Other Commitments and Contingencies). 37 Plan Pace Performance Pride ----------- Note N--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 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT ------------------------------------ Note O--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 I--Nonrecurring and Extraordinary Items concerning adjustments affecting the first and third quarters of 1995.
- ------------------------------------------------------------------------------------------------ 1996 - ------------------------------------------------------------------------------------------------ Three Months Ended, March 31 June 30 September 30 December 31 ---------------------------------------------------------- Dollars in thousands, except per share amounts - ------------------------------------------------------------------------------------------------ Net Sales $682,143 $769,481 $735,858 $766,551 Gross Profit 16,935 45,405 62,351 65,460 Net Income (loss) (15,575) 10,391 24,289 25,452 - ------------------------------------------------------------------------------------------------ Per share earnings applicable to Common Stock Net Income (loss) $ (.42) $ .18 $ .50 $ .52 ================================================================================================
- ----------------------------------------------------------------------------------------------- 1995 - ----------------------------------------------------------------------------------------------- Three Months Ended, March 31 June 30 September 30 December 31 ---------------------------------------------------------- Dollars in thousands, except per share amounts - ------------------------------------------------------------------------------------------------ Net Sales $752,676 $736,611 $724,798 $740,133 Gross Profit 97,127 80,459 53,632 50,027 Unusual charges 5,336 -------- -------- -------- Income before extraordinary item 44,694 30,317 15,608 14,804 Extraordinary item -------- -------- 5,373 -------- Net Income 44,694 30,317 20,981 14,804 - ------------------------------------------------------------------------------------------------ Per share earnings applicable to Common Stock Income before extraordinary item $ 1.02 $ .64 $ .30 $ .28 Extraordinary item -------- -------- .12 -------- - ------------------------------------------------------------------------------------------------ Net Income $ 1.02 $ .64 $ .42 $ .28 ================================================================================================
39 Plan Pace Performance Pride - ----------- 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. Fort Wayne, Indiana January 23, 1997, except for Note M, as to which the date is January 31, 1997. Management's Responsibility for Financial Statements Management is responsible for the reliability of the consolidated financial statements and related notes, which have been prepared in conformity with generally accepted accounting principles and include amounts based upon our estimates and judgments, as required. 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. We believe the representations made to the independent auditors were valid and appropriate. National Steel Corporation maintains a system of internal accounting controls 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 takes appropriate action 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 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 Company's financial statements, for reviewing with the Company's internal auditors the scope of the plan of audit, for meeting with the independent auditors and the Company's internal auditors to review the results of their audits and the Company's internal accounting controls, and for reviewing other professional services being performed for the Company by the independent auditors. Both the independent auditors and the Company's internal auditors have free access to the Audit Committee. Management believes the system of internal accounting controls provides reasonable assurance that business activities are conducted in a manner consistent with the Company's high standards of business conduct, and the Company's financial accounting system contains the integrity and objectivity necessary to maintain accountability for assets and to prepare National Steel Corporation's financial statements in accordance with generally accepted accounting principles. OSAMU SAWARAGI WILLIAM E. MCDONOUGH Chairman of the Board and Acting Chief Financial Chief Executive Officer Officer and Treasurer 40 [LOGO NATIONAL STEEL] 1996 ANNUAL REPORT -------------------------------------- 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 B--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 $124.7 million was free of such limitations at December 31, 1996. - -------------------------------------------------------------------------------- EX-21 8 LIST OF SUBSIDIARIES OF THE COMPANY Exhibit 21 NATIONAL STEEL CORPORATION SUBSIDIARIES
Jurisdiction Percentage of Outstanding Name Incorporation Stock Owned ---- ------------- ----------- American Steel Corporation Michigan 100% Delray Connecting Railroad Company Michigan 100% D. W. Pipeline Company Michigan 100% Granite City Steel Company Illinois 100% Granite Intake Corporation Delaware 100% Granite Office Building Corporation Illinois 100% Great Lakes Steel Corporation Delaware 100% The Hanna Furnace Corporation New York 100% Hanna Ore Mining Company Minnesota 100% Ingleside PT Corporation Texas 100% Liberty Pipe and Tube, Inc. Texas 100% Mathies Coal Company Pennsylvania 86.67% Mid-Coast Minerals Corporation Delaware 100% Midwest Steel Corporation Pennsylvania 100% Natcoal, Inc. Delaware 100% National Acquisition Corporation Delaware 100% National Caster Acquisition Corporation Delaware 100% National Caster Operating Corporation Delaware 100% National Casting Corporation Delaware 100% National Coal Mining Company Delaware 100% National Coating Limited Corporation Delaware 100% National Coating Line Corporation Delaware 100% National Materials Procurement Corporation Illinois 100% National Mines Corporation Pennsylvania 100% National Ontario Corporation Delaware 100% National Ontario II, Limited Delaware 100% National Pickle Line Corporation Delaware 100% National Steel Corporation (New York) New York 100% National Steel Funding Corporation Delaware 100% National Steel Pallet Company Delaware 100% Natland Corporation Delaware 100% National Steel Foreign Sales Corporation Barbados 100% NS Holdings Corporation Delaware 100% NS Land Company New Jersey 100% NSC Realty Corporation Delaware 100% NSL, Inc. Delaware 100% Peter White Coal Mining Corporation West Virginia 100% Puritan Mining Company Michigan 100% Rostraver Corporation Delaware 100% Skar-Ore Steamship Corporation Delaware 100% The Teal Lake Iron Mining Company Michigan 100%
EX-23 9 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of National Steel Corporation and Subsidiaries (the "Company") of our report dated January 23, 1997 (except Note M, as to which the date is January 31, 1997), included in the 1996 Annual Report to Shareholders of the Company. Our audit also included the financial statement schedule 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 1993 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. 33-51087 pertaining to the National Steel Retirement Savings Plan and National Steel Represented Employee Retirement Savings Plan; of our report dated January 23, 1997, (except Note M, as to which the date is January 31, 1997), with respect to the consolidated financial statements and schedule of the Company included in this Annual Report (Form 10-K) for the year ended December 31, 1996. Ernst & Young LLP Fort Wayne, Indiana March 14, 1997 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 109,041 0 301,209 21,320 435,961 824,891 3,664,597 2,209,079 2,547,055 573,799 470,294 433 63,530 36,650 681,398 2,547,055 2,954,033 2,954,033 2,619,469 2,619,469 268,152 1,334 36,249 28,829 (15,728) 44,557 0 0 0 44,557 0.78 0.78
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