-----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, BT1C/zhWAxUAOqgIS5Y272EE3wcsp+vS/FjwUHutqhbWkYqqhKycDGWk8CdcjANZ OOcFktX8/PeixBmWsmX+Sg== 0000950131-98-002062.txt : 19980330 0000950131-98-002062.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950131-98-002062 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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-K405 SEC ACT: SEC FILE NUMBER: 001-00983 FILM NUMBER: 98576102 BUSINESS ADDRESS: STREET 1: 4100 EDISON LAKES PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 46545-3440 BUSINESS PHONE: 2192737000 MAIL ADDRESS: STREET 1: 4100 EDISON LAKE PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 46545-3440 10-K405 1 FORM 10-K 1 9 9 7 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 1 0 - 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, 1997 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 of incorporation or organization) (I.R.S. Employer 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% Series due 2006 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] At February 27, 1998, there were 43,288,240 shares of the registrant's common stock outstanding. Aggregate market value of voting stock held by non-affiliates: $328,286,621 The amount shown is based on the closing price of National Steel Corporation's Common Stock on the New York Stock Exchange on February 27, 1998. 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, 1997 are incorporated by reference into Part II and IV of this Report on Form 10-K. Selected portions of the 1998 Proxy Statement of National Steel Corporation are incorporated by reference into Part III of this Report on Form 10-K. PART I ITEM 1. BUSINESS Introduction National Steel Corporation, a Delaware corporation, (together with 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. The Company's principal executive offices are located at 4100 Edison Lakes Parkway, Mishawaka, Indiana 46545-3440; telephone (219) 273-7000. 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 subsequently changed its name to FoxMeyer Health Corporation and then to Avatex Corporation and is hereinafter referred to as "Avatex"). 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 Avatex. In connection with this purchase, Avatex agreed to indemnify the Company for (i) certain environmental liabilities related to the Company's former Weirton Steel Division and the Company's subsidiary, Hanna Furnace Corporation and (ii) certain pension and employee benefit liabilities related to the Weirton Steel Division (together, the "Indemnification Obligations"). On June 26, 1990, NKK purchased an additional 20% equity interest in the Company from Avatex. In connection with this purchase, Avatex was issued shares of the Company's Series B Redeemable Preferred Stock and NKK was issued shares of the Company's Series A Preferred Stock. In April 1993, the Company completed an initial public offering of its Class B Common Stock. In October 1993, Avatex 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 a 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 that transaction, NKK's voting interest decreased to 67.6%. Significant Developments in Company's Business During 1997 During 1997, the following significant developments in the Company's business took place: Sale of the Great Lakes Division No. 5 Coke Battery. On June 12, 1997, the Company sold the machinery, equipment, improvements and other personal property and fixtures constituting the Great Lakes Division No. 5 coke battery, together with the related coal inventories, to a subsidiary of DTE Energy Company, and received proceeds (net of taxes and expenses) of approximately $234 million. The Company will continue to operate and maintain the coke battery on a contract basis and will purchase the majority of the coke produced from the battery under a requirements contract, with the price being adjusted during the term of the contract, primarily to reflect changes in production costs. The Company utilized a portion of the sale proceeds to prepay the $154.3 million remaining balance of the indebtedness owed by the Company to an affiliate of NKK with respect to the coke battery. Sale of Shares of Iron Ore Company of Canada. In April of 1997, the Company sold its 21.7% minority equity interest in Iron Ore Company of Canada ("IOC") to North Limited and received proceeds (net of taxes and expenses) of approximately $75.3 million. The Company will continue to purchase iron ore pellets at fair market value from IOC pursuant to long term supply agreements. 2 Redemption of Series B Preferred Stock and Other Related Transactions. In November of 1997, the Company entered into an agreement with Avatex to redeem all of the Series B Redeemable Preferred Stock held by Avatex and to release Avatex from the Indemnification Obligations. Under this agreement, the Company paid to Avatex approximately $59.0 million and agreed to pay an additional $10.0 million, without interest, in installments of $2.5 million each in the first and second quarters of 1998 and a third installment of $5.0 million in November of 1998. In addition, under this agreement, the entire proceeds of approximately $13.6 million (net of taxes and expenses) from the litigation brought by the Company and Avatex against certain insurance carriers seeking coverage under their comprehensive general liability insurance policies for environmental liabilities were agreed to be paid to the Company, and Avatex agreed to release all restrictions on the balance remaining of Avatex's $10 million prepayment to the Company for environmental claims (approximately $9.2 million). [See "Environmental Matters" in Item 1 "Business".] Redemption of Series A Preferred Stock. In December 1997, the Company completed the redemption of the Series A Preferred Stock held by NKK for a redemption price of $36.7 million, plus accrued dividends of approximately $0.6 million. Following this transaction, and the settlement with Avatex described above, the Company no longer has any preferred stock outstanding. 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. 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 "DNN Galvanizing Limited Partnership" and "Double G Coatings, L.P." in Item 2 "Properties."] During the first quarter of 1996, the Company completed construction of an additional coating line at the Granite City Division which serves the construction market. A second line, currently under construction at the Midwest Division, is scheduled to be completed during the second quarter of 1998. In addition, during 1997, the Company completed an expansion of the 72" galvanizing line at the Midwest Division to further enable it to more effectively compete in the automotive market for critical exposed applications. 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. The Company is installing a predictive maintenance program designed to maximize production and equipment life while minimizing unscheduled equipment outages. This program 3 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 eighth 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 34 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 with NKK Corporation entered into by the Company and NKK effective as of May 1, 1995 (superseding a prior arrangement). The agreement was unanimously approved by all directors of the Company who were not then, and never have been, employees of NKK. Pursuant to the terms of this agreement, technical and business advice is provided through NKK employees who are transferred to the employ of the Company. The agreement further provides that the initial term can be extended from year to year after expiration of the initial term, if approved by NKK and a majority of the directors of the Company who were not then, and never have been, employees of NKK. The agreement has been extended through the calendar year 1998 in accordance with this provision. Pursuant to the terms of the agreement, the Company is obligated to reimburse NKK for the costs and expenses incurred by NKK in connection with the transfer of these employees, subject to an agreed upon cap. The cap was $11.7 million during the initial term and $7 million during each of 1997 and 1998. The Company expensed $5.4 million and $4.2 million under this agreement, and for various other engineering services provide by NKK, during 1997 and 1996, respectively. 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 further differentiate the Company's products and to promote 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 Company employs approximately 55 chemists, physicists, metallurgists and engineers in connection with its research activities. 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 $10.9 million, $11.1 million and $9.6 million for research and development in 1997, 1996 and 1995, 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 $2.6 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 4 initiatives is to more effectively utilize these substantial capital improvements. Major projects have included an electrolytic galvanizing line, a continuous caster, a ladle metallurgy station, a vacuum degasser, a complete rebuild of the No. 5 coke battery 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 1997 and 1996 were $151.8 million and $128.6 million, respectively. Capital investments for 1998 are expected to total approximately $222.0 million. Customers Automotive. 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. Construction. 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. Container. 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. Pipe and Tube. The Company supplies the pipe and tube market 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. The Company also supplies the service center market with hot rolled, cold rolled and coated sheet. Service centers generally purchase steel coils from the Company and may process them further or sell them directly to third parties without further processing. The following table sets forth the percentage of the Company's revenues from various markets for the past five years.
1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Automotive 27.0% 27.6% 27.8% 28.5% 28.9% Construction 24.8 21.6 20.5 18.3 16.8 Containers 11.0 10.6 11.3 13.2 13.3 Pipe and Tube 7.3 6.5 7.4 6.9 8.2 Service Centers 21.3 20.2 15.4 17.9 15.5 All Other 8.6 13.5 17.6 15.2 17.3 ----- ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
No customer accounted for more than 10% of net sales in 1997, 1996 or 1995. Export sales accounted for approximately 0.3% of revenues in 1997, 0.5% in 1996 and 2.6% in 1995. 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. 5 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 consolidation enhances the ability of the Company to monitor its costs and utilize its resources, thereby allowing 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. 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 1997 6,800 6,527 96.0 100.0 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 Domestic Steel Industry* 1997 121,400 107,488 88.5 94.7 1996 116,100 105,309 90.7 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
* Information as reported by the AISI. The 1997 industry information is preliminary. Effective capacity in 1997 was lowered from 1996 to reflect more realistic operating levels based on the Company's operating practices in 1996. 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 improved operating efficiencies, primarily at the Great Lakes Division. 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. 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"), has reserves of iron ore adequate to produce approximately 357 million gross tons of iron ore pellets. The Company's iron ore reserves are located in Minnesota and Michigan. Excluding the effects of the thirteen month period from August 1, 1993 through 6 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 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 and outside suppliers are expected to be sufficient to meet the Company's total iron ore requirements at competitive market prices for the foreseeable future. The Company previously owned a minority equity interest in Iron Ore Company of Canada ("IOC"). On April 1, 1997, the Company completed the sale of that equity interest to North Limited. The Company plans to continue to purchase iron ore at fair market value from IOC pursuant to long-term supply agreements. Coal. In 1992, the Company decided to exit the coal mining business and sell or dispose of its coal reserves and related assets. The remaining coal assets constitute less than 0.4% of the Company's total assets. The Company believes that supplies of coal, adequate to meet the Company's needs, are readily available from third parties at competitive market prices. Coke. On June 12, 1997, the Company sold the machinery, equipment, improvements and other personal property and fixtures constituting the Great Lakes Division No. 5 coke battery, together with the related coal inventories, to a subsidiary of DTE Energy Company, and received proceeds (net of taxes and expenses) of approximately $234 million. The Company will continue to operate and maintain the coke battery on a contract basis and will purchase the majority of the coke produced from the battery under a requirements contract, with the price being adjusted during the term of the contract, primarily to reflect changes in production costs. The Company also operates two efficient coke batteries servicing the Granite City Division. Approximately 60% of the Company's annual coke requirements can be supplied by the Great Lakes and Granite City Coke batteries. The remaining coke requirements are met through competitive market purchases. The Company has also implemented a pulverized coal injection process at its blast furnaces at the Great Lakes Division, which should further reduce the Company's dependency on outside coke supplies. Limestone. An affiliated company in which the Company holds a minority equity interest has limestone reserves of approximately 72 million gross tons located in Michigan. During the last five years, approximately 70% 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, 1997, the Company employed 9,417 people. The Company has labor agreements with the United Steelworkers of America ("USWA"), the International Chemical Workers Council of the United Food and Commercial Workers and other labor organizations which collectively represent approximately 82.3% of the Company's employees. In 1993, the Company entered into labor agreements, which expire in 1999, with these various labor organizations ("1993 Settlement Agreement"). Scheduled negotiations reopened in 1996 and were ultimately resolved utilizing the arbitration provisions provided for in the 1993 Settlement Agreement, without any disruption to the Company's operations. 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 7 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. 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 57% of the Company's shipments in 1997. 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. 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 $9.5 million and $25.8 million for 1998 and 1999, respectively. Major capital projects in 1999 will be for air pollution control equipment at the Great Lakes Division and the NSPC plant. In addition, the Company expects to record expenses for environmental compliance, including depreciation, of approximately $62 million and $60 million for 1998 and 1999, 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 changes in circumstances or regulatory requirements, 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. 8 In 1990, the United States Environmental Protection Agency ("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 an aggregate liability of approximately $2.0 million at December 31, 1997 for 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. This is a decrease of approximately $10.1 million from December 31, 1996. Approximately $8.0 million of the decrease is the result of the sale of a coal property in the third quarter of 1997, where the buyer assumed the reclamation obligation. 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 potentially responsible parties ("PRPs") in a number of off-site CERCLA or state superfund site proceedings. [See Item 3, "Legal Proceedings" for a discussion of these sites.] With respect to those sites, the Company has accrued an aggregate liability of $2.3 million as of December 31, 1997. Avatex had previously agreed to indemnify the Company for liabilities incurred by the Company at certain environmental sites. [These sites are discussed under the caption "Former Avatex Sites" in Item 3, "Legal Proceedings".] In addition, in January 1994, the Company received $10.0 million from Avatex 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 was required to repay Avatex portions of the $10.0 million to the extent the Company's expenditures for such environmental liabilities did not meet specified levels by certain dates over a twenty year period. In connection with the redemption of the Series B Preferred Stock and other related transactions with Avatex in November 1997, Avatex was released from this indemnity obligation, and the Company was authorized to retain the remaining balance of the prepayment in the amount of $9.2 million. As a result of this settlement, the Company has recorded an aggregate liability of $10.0 million as of December 31, 1997 with respect to those sites as to which Avatex was released from its indemnity obligation. [See the discussion under the caption "Redemption of Series B Preferred Stock and Other Related Transactions" in Item 1 "Business".] During 1997, the Company settled substantially all of the claims it had previously filed against certain of its insurance carriers seeking coverage under its comprehensive general liability insurance policies for its environmental liabilities. In connection with the transactions with Avatex referred to above, it was agreed that all insurance proceeds from this litigation would be paid to the Company, and the Company recognized insurance proceeds (net of taxes and expenses) aggregating approximately $13.6 million. The settlement with the insurance carriers also included an agreement by certain carriers to provide partial insurance coverage for certain existing and future major environmental liabilities. Forward Looking Statements Statements made by the Company in this Form 10-K that are not historical facts constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements, by their nature, involve risk and uncertainty. A variety of factors could cause business conditions and the Company's actual results and experience to differ materially from those expected by the Company or expressed in the Company's forward looking statements. These factors include, but are not limited to, (1) changes in market prices and market demand for the Company's products; (2) changes in the costs or availability of raw materials and other supplies used by the Company in the manufacture of its products; (3) equipment failures or outages at the Company's steelmaking, mining and processing facilities; (4) losses of customers; (5) changes in the levels of the Company's operating costs and expenses; (6) collective bargaining agreement negotiations, strikes, labor stoppages or other labor difficulties; (7) actions by the 9 Company's competitors, including domestic integrated steel producers, foreign competitors, mini-mills and manufacturers of steel substitutes such as plastics, aluminum, ceramics, glass, wood and concrete; (8) changes in industry capacity; (9) changes in economic conditions in the United States and other major international economies, including rates of economic growth and inflation; (10) worldwide changes in trade, monetary or fiscal policies, including changes in interest rates; (11) changes in the legal and regulatory requirements applicable to the Company; and (12) the effects of extreme weather conditions. 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 three hot dip galvanizing lines. Construction of the third hot dip galvanizing line, a 270,000 ton coating facility to serve the construction market, was completed in 1996. This facility, known as Triple G, cost approximately $85.0 million. The Granite City Division ships approximately 12% of its total production to the Midwest Division for finishing. Principal products of the Granite City Division include hot rolled, hot dipped galvanized and Galvalume(R) steel, grain bin and high strength, low alloy steels. The Granite City Division is located on 1,540 acres and employs 3,111 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 3.8 million tons. All steel at this Division is produced by continuous casting. The Division's ironmaking facilities consist of three blast furnaces, and a rebuilt 85-oven coke battery which was sold in 1997 to a subsidiary of DTE Energy Company. [See the discussion under the caption "Significant Developments in the Company's Business During 1997" in Item 1, "Business".] 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 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 44% 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 3,746 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 1997, the Company completed an expansion of the 72" galvanizing line. Principal products of the 10 Midwest Division include tin mill products, hot dipped galvanized and Galvalume(R) steel, cold rolled, and electrical lamination steels. The Midwest Division is located on 1,100 acres and employs 1,526 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. Joint Ventures and Equity Investments 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 Bethlehem Steel Corporation 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 Division. ProCoil Corporation. ProCoil Corporation ("ProCoil") is a joint venture between the Company and Marubeni Corporation, located in Canton, Michigan. ProCoil operates a steel processing facility which began operations in 1988 and a warehousing facility which began operations in 1992. The Company owns a 56% equity interest in ProCoil, and Marubeni Corporation owns the remaining 44%. 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. Effective as of May 31, 1997, the consolidated financial statements of the Company include the accounts of ProCoil. Tinplate Holdings, Inc. In April 1997, a wholly owned subsidiary of the Company purchased 25% of the outstanding common stock of Tinplate Holdings, Inc. ("Tinplate"). Tinplate operates a tin mill service center in Gary, Indiana. In connection with this transaction, the Company also entered into a supply agreement pursuant to which Tinplate will purchase certain minimum quantities of tin mill products from the Company through 2001. National Robinson LLC. In February 1998, the Company entered into an agreement with Robinson Steel Co., Inc. ("Robinson") to form a joint venture company, named National Robinson LLC. This new company 11 will operate a temper mill, leveler and cut to length facility in Granite City, Illinois to produce cut to length steel plates and sheets with superior quality, flatness and dimensional tolerances. National Robinson LLC is expected to process approximately 200,000 tons of hot rolled steel supplied by the Company. Construction of the new facility is expected to be completed in early 1999. Other Information With Respect to the Company's Properties In addition to the properties described above, the Company owns its corporate headquarters facility in Mishawaka, Indiana. Generally, the Company's properties are well maintained, considered adequate and being utilized for their intended purposes. The Company's steel production facilities are owned in fee by the Company except for (i) a continuous caster and related ladle metallurgy facility which service the Great Lakes Division, (ii) an electrolytic galvanizing line, which services the Great Lakes Division, and (iii) a portion of the coke battery, which services the Granite City Division, each of which are owned by third parties and leased to the Company pursuant to the terms of operating leases. 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. Substantially all of the 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 Company's First Mortgage Bonds, 8-3/8% Series due 2006 ("First Mortgage Bonds"). Included among the items which are not subject to this lien are a vacuum degassing facility and a pickle line which service the Great Lakes Division and a continuous caster facility which services the Granite City Division; however, each of these items is subject to a mortgage granted to the respective lender who financed the construction of the facility. The Company has also agreed to grant to the Voluntary Employee Benefit Association Trust ("VEBA Trust") a second mortgage on that portion of the property which is covered by the lien securing the First Mortgage Bonds and which is located at the Great Lakes Division. The VEBA Trust was established in connection with the 1993 Settlement Agreement for the purpose of prefunding certain postretirement benefit obligations for USWA represented employees. For a description of certain properties related to the Company's production of raw materials, see the discussion under the caption "Raw Materials" in Item 1, "Business". ITEM 3. LEGAL PROCEEDINGS In addition to the 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. Securities and Exchange Commission Investigation In the third quarter of 1997, the Audit Committee of the Company's Board of Directors was informed of allegations about managed earnings, including excess reserves and the accretion of such reserves to income over multiple periods, as well as allegations about deficiencies in the Company's system of internal controls. The Audit Committee engaged legal counsel who, with the assistance of an accounting firm, inquired into these matters. Based upon this inquiry, the Company determined the need to restate its financial statements for certain prior periods, On January 29, 1998, the Company filed an amended Form 10-K for 1996 and amended Forms 10-Q for the first, second and third quarters of 1997 reflecting the restatements. On December 15, 1997, the Board of Directors approved the termination of the Company's Vice President - Finance in connection with the Audit Committee inquiry. During January 1998, legal counsel to the Audit Committee issued its report to the Audit Committee, and the Audit Committee approved the report and concluded its inquiry. On January 21, 1998, the Board of Directors accepted the report and approved the recommendations, except for the recommendation to revise the Audit Committee Charter, which was approved on February 9, 1998. The report found certain misapplications of generally accepted accounting principles and accounting errors, including excess reserves, which have been corrected by the restatements referred to above. The report found that the accretion of excess reserves to income during the first, second and third quarters of 1997, as described in the amended Forms 10-Q for 12 those quarters, may have had the effect of management of earnings as the result of errors in judgment and misapplication of generally accepted accounting principles. However, these errors do not appear to have involved the intentional misstatement of the Company's accounts. The report also found weaknesses in internal controls and recommended various improvements in the Company's system of internal control, a comprehensive review of such controls, a restructuring of the Company's finance and accounting department, and expansion of the role of the internal audit function, as well as corrective measures to be taken related to the specific causes of the accounting errors. The Company has begun to implement these recommendations with the involvement of the Audit Committee. The Securities and Exchange Commission ("Commission") has authorized an investigation pursuant to a formal order of investigation relating to the matters described above. The Company has been cooperating with the Staff of the Commission and intends to continue to do so. 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 CERCLA and state superfund 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: Ilada Energy Company Site. The Company and certain other PRPs have performed a removal action pursuant to an order issued by the U.S. 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 sixty-three PRPs identified at this site. Pursuant to an Administrative Order of 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 the 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 sustained by both the EPA and the IEPA, is that this material is bulk aviation fuel and is not considered to be a hazardous substance as defined under CERCLA. To date, the Company has paid approximately $2 million for work and oversight costs. Buck Mine Complex. This is a proceeding involving a large site in Iron County, 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. A subsidiary of the Company 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 an RI/FS, 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. By letter dated April 29, 1997, the MDEQ advised the Company that it had selected a remedy for the acid mine drainage and offered the Company the opportunity to perform the work to implement the remedy. This letter was also sent to other PRPs, none of whom responded. Informally, the MDEQ has advised that it believes that the cost of the remedy, including past costs, as well as future operating and maintenance costs, but excluding natural resource 13 damages, will be approximately $750,000, which cost will be allocated among the parties ultimately held responsible. The Company has advised the MDEQ that it is interested in pursuing a "cash-out" settlement of this matter; however, the MDEQ has advised that it is not prepared to discuss settlement at this time. 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 near the Port of Monroe in 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 have sufficient information 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. 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 the site and reimbursement of past response costs to the EPA. The Company's share of costs under the AOCs was $48,000. Additionally, in response to a demand letter from the MDEQ, 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. A proposed amendment to the Record of Decision (the "ROD") has been submitted to the EPA which would allow greater post-remediation concentrations of PCBs to remain in the subsurface soil. If approved by the EPA, the cost range for implementation of the final remedy would decrease to between $3.3 million and $12.2 million. In December 1997, the Company executed a Consent Decree for the Remedial Design and Remedial Action ("RD/RA") at the site. At the same time, the Company also executed a Settlement Agreement among the PRPs pursuant to which another PRP agreed to perform the RD/RA, and the Company agreed to pay approximately $126,000 in full satisfaction of its share of the RD/RA costs. Both the Consent Decree and Settlement Agreement are contingent upon EPA's approval of the above-mentioned amendment to the ROD. The Company's commitment to perform the RD/RA work is also contingent upon execution of the Consent Decree by EPA and the other PRPs party thereto. 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 is estimated to be $443,000. To date, the Company has paid approximately $275,000 of that amount. Iron River (Dober Mine) Site. On July 15, 1994, the State of Michigan served M. A. Hanna Company ("Hanna") with a complaint 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 to the Iron and Brule Rivers of acid mine drainage from the Dober Mine in Iron County, Michigan. The State subsequently increased its response costs claim to 14 approximately $487,000 and its natural resources damages claim to $4.6 million. Under the applicable statute, the State is also entitled to recover its attorneys' fees and litigation costs if it prevails. Hanna operated the Dober Mine pursuant to a management agreement with the Company. 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 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 State and the Company engage in settlement negotiations. Additionally, settlement discussions with some of the third party defendants are ongoing. Other Sites. The Company has been notified that it may be a PRP at five other CERCLA or state superfund sites. At these sites, either (i) 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 or (ii) the Company's liability is not expected to be material. Former Avatex Sites The Company is a PRP at certain other sites, primarily associated with the Company's former Weirton Steel Division, as to which the Company had the right to seek indemnification from Avatex. In connection with a redemption of the Series B Preferred Stock and other related transactions entered into with Avatex in November 1997, the Company released Avatex from its obligation to indemnify the Company for any liabilities with respect to these sites. [See the discussion under the caption "Redemption of Series B Preferred Stock and Other Related Transactions" in Item 1 "Business".] Accordingly, the Company will now be responsible for payment of any liabilities imposed on the Company in connection with these sites, without any right to indemnification from Avatex. A description of each of these sites follows: Buckeye Site. Effective as of February 10, 1992, the Company and thirteen other PRPs entered into an AOC with the EPA to perform the remedial design at the Buckeye site located in Belmont County, Ohio. In March 1994, the Company was served with a copy of a complaint filed 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 Consolidation Coal Company and certain of the other industrial PRPs (collectively, the "Settling Parties") which resolved the litigation brought by Consolidation Coal Company. Under the terms of the settlement, the Company has agreed to pay 2.8 percent of the response costs associated with the site. The Settlement Agreement was contingent upon the Court's approval and entry of a Consent Decree with EPA. The Company and the Settling Parties signed the Consent Decree with EPA on June 18, 1997. Non-settling parties continue to take discovery in the Consolidation Coal Company litigation, including discovery directed to the Company. Total response costs for the Buckeye site are estimated to be approximately $35.0 million. Approximately $10.0 million of that total has already been paid by the settling PRPs, with the Company having paid approximately $200,000. The Company's share of the projected future costs is expected to be approximately $700,000, which amount is expected to be paid by the Company over the next two to three years. Weirton Steel - Brown's Island. In January 1993, the Company was notified that the West Virginia Division of Environmental Projection ("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 Company ("Weirton Steel"). The WVDEP alleged that samples taken from four groundwater monitoring wells located at this site contained elevated levels of contamination. WVDEP informed Weirton Steel that additional investigation, possible groundwater and soil remediation, 15 and on-site housecleaning were required at the site. Weirton Steel has spent approximately $210,000 to date on remediation of an emergency wastewater lagoon located on Brown's Island. The Company has reimbursed Weirton Steel for that amount pursuant to certain indemnity provisions contained in the agreements between Weirton Steel and the Company which were entered into at the time that the Company sold the assets of its former Weirton Steel Division to Weirton Steel ("Weirton Indemnification"). It is likely that Weirton Steel will seek reimbursement of any additional investigation and remediation costs involving this lagoon from the Company pursuant to the Weirton Indemnification. The Company can not yet determine whether WVDEP will require any additional investigation or remediation at the Brown's Island facility. Weirton Steel agreed to a three-year groundwater monitoring program at the facility; however, no groundwater remediation has been required to date. Weirton Steel - EPA Order. On September 16, 1996, EPA issued a unilateral administrative order under the Resource Conservation and Recovery Act ("RCRA"), requiring Weirton Steel to undertake certain investigative activities with regard to cleanup of possible environmental contamination on Weirton Steel property. Weirton Steel 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 Weirton Steel considers these areas to be within the scope of the Weirton Indemnification. Weirton Steel has forwarded to the Company an initial claim for reimbursement of costs which it incurred in the remediation of environmental hazards during the demolition of the Mainland Coke Plant and by-products area totaling $1.812 million. The Company is currently evaluating the documentation submitted by Weirton Steel in support of this claim. Additional costs are likely to be incurred by Weirton Steel as a result of the unilateral administrative order under RCRA. In that event, it is also likely that Weirton Steel will make additional claims against the Company for reimbursement pursuant to the Weirton Indemnification. Tex-Tin Site. On or about August 12, 1996, Amoco Chemical Company ("Amoco") filed a cost recovery and contribution suit pursuant to (S)107 and (S)113(f) of CERCLA in the United States District Court for the Southern District of Texas. Amoco has been involved in investigations of the contamination at the Tex-Tin Superfund Site in Texas City, Texas, pursuant to an AOC entered into with the EPA. In its suit, Amoco alleges that the Company is one of approximately 100 defendants jointly and severally liable under (S)107 of CERCLA for Amoco's costs of those investigations and future response costs. Amoco has spent approximately $12 million pursuant to the AOC at the Tex-Tin 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 one percent of waste identified at the site. Donner Hanna Coke Plant. The Donner Hanna coke plant consisted of six batteries of coke ovens that were used to convert coal to metallurgical grade coke. A by- product portion of the plant removed useful, resalable organic by-products from the gases produced by the coke ovens. The plant was operated from approximately 1920 to 1982, and for the majority of that time was a part of a joint venture between the Company and LTV Steel Company (or its predecessor). In 1989 and 1990, the plant was demolished. The City of Buffalo, in partnership with the City of Lackawanna, Erie County and the Erie County Industrial Development Agency, has developed a conceptual plan for redevelopment of over 1,200 acres of inactive industrial properties in South Buffalo, including the Donner Hanna coke plant. The Company, through its subsidiary, The Hanna Furnace Corporation, is participating in a voluntary effort with LTV to perform a site assessment and cleanup at Donner Hanna, with a goal of eventually transferring ownership of the property to either the City of Buffalo or a third party. Preliminary cost estimates for the voluntary site assessment and cleanup are approximately $12.0 million over a two year period. Hanna Furnace's share of these costs would be approximately $6.0 million, as a result of LTV's equal contribution to the costs of the cleanup. Other Sites. The Company has been notified that it may be a PRP at three other CERCLA or state superfund sites as to which the Company previously had the right to seek indemnification from Avatex. At these sites, either (i) 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 or (ii) the Company's liability is not expected to be material. As a result of the release of Avatex described above, the Company will now be responsible for payment of any liabilities imposed on the Company in connection with these sites, without any right to indemnification from Avatex. 16 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. 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. The Company has agreed to a settlement of this matter pursuant to which it would pay a civil penalty of $546,700, perform a paving program for the control of fugitive dust at a cost of approximately $2,340,000 and contribute $50,000 toward a household hazardous waste reduction program. Great Lakes Division - Federal Clean Air Act FOV. On or about February 18, 1997, the EPA issued an FOV under the Clean Air Act alleging violations of certain monitoring and performance standards at the Company's Great Lakes Division By-Products Recovery Plant. An informal conference was held on March 20, 1997 at which the EPA requested certain information, which has since been provided by the Company. The Company believes it is currently in full compliance with all regulations cited in the FOV. The EPA has not made a demand for penalties. Some, but not all, of these violations were included within the scope of the settlement of the Great Lakes Division Multimedia Inspection referred to below. 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. On September 24, 1997, the EPA filed a complaint against the Company alleging air, release reporting, hazardous waste, underground storage tank and PCB violations found during the multimedia inspection. An initial civil penalty assessment of approximately $270,000 was proposed. Following settlement negotiations, the EPA has agreed on a preliminary basis to settle this matter for a total penalty amount of $215,767, consisting of payment by the Company of a cash penalty of $53,942 and the performance by the Company of supplemental environmental projects which are valued, for settlement purposes, at $161,825. Great Lakes Division - Opacity NOV. 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 alleged violations set forth in the NOV were incorporated by reference into a Consent Order which the Company entered into with Wayne County dated December 15, 1996. While the EPA was not a signatory to that Consent Order, it has indicated that it will accept this settlement as a resolution of the matters covered by 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 will not exceed $500,000. 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. By letter of May 28, 1996, the 17 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 that meeting, the MDEQ made an initial penalty demand of $350,000. The MDEQ has since provided the Company with a revised draft AOC which included, among other things, a proposed $200,000 civil penalty and a demand for $16,664 to cover MDEQ costs. The parties are currently engaged in discussions concerning what the triggering events would be for the mandatory implementation of enhanced controls to address future oil discharges should they occur. On February 5, 1997, the State of Michigan filed a complaint in state court against the Company's Great Lakes Division, alleging approximately 75 violations of limitations contained in two National Pollutant Discharge Elimination System ("NPDES") water discharge permits covering the Zug Island and main plant facilities. The parties have executed a Consent Decree pursuant to which the Company paid $45,000 in settlement of all reported violations through October 1997 for the two facilities. Great Lakes Division - Wayne County Air Pollution Control Department Proceeding. During 1997, the Wayne County Air Quality Management Division ("Wayne County") issued a total of 28 NOVs to the Company's Great Lakes Division. Wayne County made an initial demand for penalties in the amount of $1,542,000, and the Company made a counteroffer of $200,000. Wayne County subsequently reduced its penalty demand to $950,000. Settlement discussions are ongoing. Great Lakes Division - Particulate Standards NOV. On March 9, 1998, the Company's Great Lakes Division received an NOV from the EPA which alleged eight days on which the particulate standards at the No. 2 Basic Oxygen Furnace Shop and the D-4 Blast Furnace Casthouse were exceeded. Six of the days on which exceedances allegedly occurred are covered by the Wayne County NOVs described immediately above. EPA has provided an opportunity for a conference to discuss this NOV, and the Company intends to request such a conference. 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 Protection ("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 operate the Isabella Mine at a profit and subsequently defaulted on its agreements with 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 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 - IEPA Violation Notice. On October 18, 1996, the IEPA issued a Violation Notice alleging (1) releases to the environment between 1990 and 1996; (2) violations of solid waste requirements; and (3) violations of the 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, 18 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 with IEPA are ongoing. Granite City Division - IEPA NOV - Beaching of Iron. On or about April 24, 1997, the Company's Granite City Division received an NOV from the IEPA in which it is alleged that the Company poured molten iron into a "beaching pit" at least 34 times in 1996, allegedly in violation of various state air pollution requirements related to particulate matter emissions and permitting. The Company has responded to the NOV by agreeing to minimize the beaching of iron and requesting a modification to its blast furnace operating permits that would recognize beaching as a malfunction under certain circumstances. 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 1997. 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 69, 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 56, 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 USS/Kobe Steel Company as Vice President of Operations and has more than 31 years of broad based experience in the steel industry. 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 52, 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 48, 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. David L. Peterson, Group Vice President - Regional Operations. Mr. Peterson, age 48, 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. 19 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 64, 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 59, 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 50, 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. Carole J. Corey, Vice President, Marketing and Sales. Ms. Corey, age 55, joined the Company as General Manger - Sheet Sales in June 1996. She was appointed to her present position in March 1997. Prior to joining the Company, she held numerous senior marketing and sales positions with U.S. Steel, serving as General Manager Tin Mill Products from January 1993 to March 1996. William E. McDonough, Treasurer. Mr. McDonough, age 39, 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. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is included on page 50 of the Company's Annual Report to the Shareholders for the fiscal year ended December 31, 1997 and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included on page 17 of the Company's Annual Report to the Shareholders for the fiscal year ended December 31, 1997 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 18 through 26 of the Company's Annual Report to the Shareholders for the fiscal year ended December 31, 1997 and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included on pages 27 through 49 of the Company's Annual Report to the Shareholders for the fiscal year ended December 31, 1997 and is incorporated herein by reference. 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the 1998 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/SAR Tables", "Option/SAR Grants in 1997", "Aggregated Option/SAR Exercises in 1997 and December 31, 1997 Option/SAR Values", "Pension Plans", "Pension Plan Table", "Employment Contracts" and "Compensation of Directors" in the Company's Proxy Statement for the 1998 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 1998 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 1998 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. 21 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, schedules 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, 1997, 1996 and 1995 .......................................................................... * Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 ......... * Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 .......................................................................... * Consolidated Statements of Shareholders' Equity and Redeemable Preferred Stock - Series B for the years ended December 31, 1997, 1996 and 1995 ..................... * 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, 1997, 1996 and 1995 .................................................. F-1
*Incorporated in Item 8 of this Report by reference from pages 27 to 49 inclusive, of the Company's 1997 Annual Report to Stockholders, which pages are filed with this Report as Exhibit 13. With the exception of those pages, the 1997 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 1997 Annual Report to Stockholders. Schedules not included have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. Separate financial statements of subsidiaries not consolidated and 50 percent or less owned persons accounted for by the equity method have been omitted because considered in the aggregate as a single subsidiary they do not constitute a significant subsidiary. (3) Exhibits See the attached Exhibit Index. Items 10-S through 10-FF are management contracts or compensatory plans or arrangements. 22 (b) Reports on Form 8-K: During the quarter ended December 31, 1997, the Company filed the following reports on Form 8-K: (i) The Company filed a Form 8-K dated December 1, 1997, reporting on Item 5, Other Events, and Item 7, Financial Statements and Exhibits. (ii) The Company filed a Form 8-K dated December 18, 1997, reporting on Item 5, Other Events, and Item 7, Financial Statements and Exhibits. (iii) The Company filed a Form 8-K dated December 22, 1997, reporting on Item 5, Other Events, and Item 7, Financial Statements and Exhibits. (iv) The Company filed a Form 8-K dated December 30, 1997, reporting on Item 5, Other Events, and Item 7, Financial Statements and Exhibits. 23 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 23, 1997. NATIONAL STEEL CORPORATION By: /s/ John A. Maczuzak ------------------------------ John A. Maczuzak President and Chief Operating Officer 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 23, 1998. Name Title ---- ----- /s/ Osamu Sawaragi Director; Chairman of the Board and ------------------------ Chief Executive Officer Osamu Sawaragi /s/ Charles A. Bowsher Director ------------------------ Charles A. Bowsher /s/ Frank J. Lucchino Director ------------------------ Frank J. Lucchino /s/ Bruce K. MacLaury Director ------------------------ Bruce K. MacLaury /s/ Yoshinosuke Noma Director ------------------------ Yoshinosuke Noma /s/ Yoshiharu Onuma Director ------------------------ Yoshiharu Onuma /s/ Keiichiro Sakata Director ------------------------ Keiichiro Sakata /s/ Mineo Shimura Director ------------------------ Mineo Shimura /s/ Michael D. Gibbons Acting Chief Financial Officer ------------------------ Michael D. Gibbons 24 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, 1997 - ------------------------------------ RESERVES DEDUCTED FROM ASSETS Allowances and discounts on trade notes and accounts receivable $ 19,320 $29,363 (1) $ -- $31,039 (3) $ 17,644 Valuation allowance on deferred tax assets 106,200 -- (22,900) (2) -- 83,300 Year Ended December 31, 1996 - ---------------------------- RESERVES DEDUCTED FROM ASSETS Allowances and discounts on trade notes and accounts receivable $ 19,986 $21,560 (1) $ -- $22,226 (3) $ 19,320 Valuation allowance on deferred tax assets 135,600 -- (29,400) (2) -- 106,200 Year Ended December 31, 1995 - ---------------------------- RESERVES DEDUCTED FROM ASSETS Allowances and discounts on trade notes and accounts receivable $ 15,185 $21,046 (1) $ -- $16,245 (3) $ 19,986 Valuation allowance on deferred tax assets 189,500 -- (53,900) (2) -- 135,600
NOTE 1 - Provision for doubtful accounts of $963, $748 and $4,854 for 1997, 1996 and 1995, 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. F-1 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. 2-E Stock Purchase Agreement dated as of January 31, 1997 among the Company, North Limited, NS Holdings Corporation, Bethlehem Steel Corporation and Bethlehem Steel International Corporation filed as Exhibit 2-A to the quarterly report of the Company on Form 10-Q for the quarter ended June 30, 1997, is incorporated herein by reference. 2-F Asset Purchase Agreement dated as of June 6, 1997 between EES Coke Battery Company, Inc. and the Company, filed as Exhibit 2.1 to the Report on Form 8-K of the Company dated June 12, 1997, is incorporated herein by reference. 2-G Coal Inventory Purchase Agreement dated as of June 6, 1997 between DTE Coal Services, Inc. and the Company, filed as Exhibit 2.2 to the Report on Form 8-K of the Company dated June 12, 1997, 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 filed as Exhibit 3-B to the annual report of the Company on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 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 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 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-G Form of Indemnification Agreement filed as Exhibit 10-R to the Annual Report of the Company on Form 10-K for the year ended December 31, 1996 is incorporated herein by reference. 10-H 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-I 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-J 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-K 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-L 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-M 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-N 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-O 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-P Amendment No. 1 to Agreement for the Transfer of Employees by and between the Company and NKK Corporation filed as Exhibit 10-NN to the annual report of the Company on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10-Q Amendment No. 2 to Agreement for the Transfer of Employees by and between the Company and NKK Corporation. 10-R Agreement dated as of November 25, 1997 among Avatex Corporation, National Steel Corporation, NKK Corporation and NKK U.S.A. Corporation 10-S 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-T 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-U Amendment Number One to the 1993 National Steel Corporation Non-Employee Directors' Stock Option Plan, filed as Exhibit 10-A to the quarterly report of the Company on Form 10-Q for the quarter ended June 30, 1997, is incorporated herein by reference. 10-V Amendment Number Two to the 1993 National Steel Corporation Non-Employee Directors' Stock Option Plan 10-W 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-X 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-Y 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-Z 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-AA 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-BB 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-CC Amended and Restated Employment Agreement dated as of February 1, 1998 between National Steel Corporation and Robert G. Pheanis. 10-DD 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-EE 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. 10-FF Employment contract dated December 11, 1996 between National Steel Corporation and Osamu Sawaragi filed as Exhibit 10-MM to the annual report of the Company on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 13 Portions of the Company's 1997 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.
EX-2.D 2 AMENDMENT TO STOCK PURCHASE & RECAPITALIZATION AGREEMENT EXHIBIT 2-D AMENDMENT TO STOCK PURCHASE AND ------------------------------- RECAPITALIZATION AGREEMENT -------------------------- Amendment to Stock Purchase and Recapitalization Agreement, dated as of July 31, 1991 ("Amendment to the Agreement") by and among, NATIONAL INTERGROUP, INC. ("NII"), NII CAPITAL CORPORATION ("NCC"), NKK CORPORATION ("NKK"), NKK U.S.A. CORPORATION ("NAC") AND NATIONAL STEEL CORPORATION ("NSC"). WHEREAS, NII, NCC, NKK, NAC and NSC entered into the Stock Purchase and Recapitalization Agreement dated June 26, 1990 (the " Agreement"); and WHEREAS, NII, NCC and NSC entered into the Amended and Restated Weirton Liabilities Agreement dated June 26, 1990 (the "Weirton Liabilities Agreement"); and WHEREAS, pursuant to the Weirton Liabilities Agreement, NII and NCC, as of the date hereof, have an obligation to reimburse NSC for $131,307.64, representing the amounts paid by NSC with respect to certain obligations of NSC to pay supplemental pensions to certain individuals; and WHEREAS, NII, NCC and NSC desire to provide that, subject to the applicable provisions of the Internal Revenue Code of 1986, as amended and the Employee Retirement Income Security Act of 1974, as amended, pension contributions to Plan 056 shall be reduced by such amount of supplemental pensions and by the amount of such payments made after the date hereof; and WHEREAS, Section 10.09 permits the Agreement to be modified by a written instrument duly executed by each party; and WHEREAS, the parties have agreed to amend the Agreement in order to modify the manner in which NII and NCC satisfy their obligation to reimburse NSC with respect to such supplemental pensions. NOW THEREFORE, the parties hereto agree to amend the Agreement as follows: Article I of the Agreement is amended by restating the definition of "Weirton Benefit Liabilities" in its entirety to read as follows: "Weirton Benefit Liabilities" means (i) the liabilities of the Company described in and/or arising pursuant to the Benefits Agreement and (ii) with respect to the various "supplemental pensions" that are payable to the individuals listed on Appendix I hereto, that portion of such supplemental pensions that became or will become due and payable to such individuals at any time on or after June 26, 1990." IN WITNESS WHEREOF, the undersigned have caused this Amendment to the Agreement to be executed by their duly authorized officers as of the 31st day of July, 1991. NATIONAL INTERGROUP, INC. ---------------------------- By: Title: NII CAPITAL CORPORATION ---------------------------- By: Title: NKK CORPORATION ---------------------------- By: Title: NKK U.S.A. CORPORATION ---------------------------- By: Title: NATIONAL STEEL CORPORATION ---------------------------- By: Title: APPENDIX I Baird, Alex Berwinkle, M. J. Cutcher, J. N. Donley, W. B. Grimes, W. D. Harper, W. T. Harris, G. N. Hartford, Martha B. Jones, Doris C. Larkin, T. J. Long, William B. Losey, Charles H. Lowry, Wayne L. Mahlie, Joe C. Malin, A. J. Martt, Judson W. McDonnell Jr., Henry E. Miller Jr., R. H. Morrow, Harry Newman, Anastasia G. Parsons, Earl G. Pettit, A. W. Redline, John G. Roberts, Jesse E. Rogalski, Genevieve Ross, Virginia Seaman, D. E. Steffin, Ralph J. Stewart, Vernard W. Strick, J. F. Tattan, J. R. Tournay, Helen M. Warren, E. R. Werner, Fred O. EX-10.Q 3 AMENDMENT #2 TO AGREEMENT FOR THE TRANSFER OF EMPLOYEES EXHIBIT 10-Q AMENDMENT NO. 2 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 16, 1997. 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 1998. 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, 1998 through December 31, 1998 (the "1998 Contract Year"). 3. The Reimbursable Expenses Cap for the 1998 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-10.R 4 AMENDMENT DATED NOV. 25, 1997 EXHIBIT 10-R ----------------------- AGREEMENT ----------------------- BY AND AMONG AVATEX CORPORATION, NKK CORPORATION, NKK U.S.A. CORPORATION and NATIONAL STEEL CORPORATION ----------------------- Dated as of November 25, 1997 ----------------------- AGREEMENT (this "Agreement"), dated as of November 25, 1997, by and among AVATEX CORPORATION, a corporation organized and existing under the laws of the State of Delaware ("Avatex"), NKK CORPORATION, a corporation organized and existing under the laws of Japan ("NKK"), NKK U.S.A. CORPORATION, a wholly owned subsidiary of NKK organized and existing under the laws of the State of Delaware ("NAC"), and NATIONAL STEEL CORPORATION, a corporation organized and existing under the laws of the State of Delaware ("NSC"), W I T N E S S E T H T H A T ----------------------------- WHEREAS, 1. Pursuant to a Stock Purchase Agreement and related documents dated as of August 22, 1984 (the "1984 Stock Purchase Agreement"), NKK Corporation ("NKK") acquired 50% of the outstanding capital stock of National Steel Corporation ("NSC") from National Intergroup, Inc. ("NII"). As a condition to such purchase, NKK required NII to indemnify it and NSC and hold it and NSC harmless against certain existing and contingent obligations and liabilities of NSC relating to NSC's former Weirton Steel Division ("Weirton") which had been sold by NSC (the "Weirton Sale") prior thereto and certain other liabilities of NSC not related to its ongoing business. Accordingly, pursuant to the 1984 Stock Purchase Agreement and the Weirton Liabilities Agreement (the "Weirton Liabilities Agreement") dated as of August 22, 1984 and entered into by and between NSC and NII, NII agreed to indemnify and hold NKK and NSC harmless from and against these liabilities (the "Weirton Liabilities") which consist of, among other things, pension, life, health insurance and other benefits for employees and former employees of Weirton (the "Weirton Employee Related Liabilities") as more specifically described in the Weirton Liabilities Agreements (as defined herein) and certain environmental liabilities (the "Indemnified Environmental Liabilities") as more specifically described in the Weirton Liabilities Agreements. 2. NII established, and on December 24, 1985 transferred to, NII Capital Corporation, a wholly-owned subsidiary of NII ("NCC"), its 50% interest in the then outstanding capital stock of NSC and as a condition to such transfer, NII and NCC entered into, with NKK and NSC, the NSC Stock Transfer Agreement dated as of December 24, 1985 (the "Stock Transfer Agreement"), pursuant to which NII and NCC agreed to be jointly and severally liable for the Weirton Liabilities. 2 3. NII, NCC, NKK, NAC and NSC entered into the Stock Purchase and Recapitalization Agreement dated June 26, 1990 (the "1990 Stock Purchase Agreement"). Pursuant thereto, among other things, ( NSC released NII from indemnification of $146.6 million aggregate present value (the "Notional Amount") of certain Weirton Employee Related Liabilities, ( NII exchanged a portion of its NSC Common Stock for a new issue of Series B Preferred Stock (the "B Preferred Stock"), (iii) the parties thereto agreed that, under the circumstances and at the time specified therein either (a) NSC would pay to NCC an amount equal to the excess, if any, of (i) the excess, if any, of (A) the Notional Amount (adjusted as set forth in the 1990 Stock Purchase Agreement) (as so adjusted, the "Adjusted Notional Amount") over (B) the then present value (determined under the 1990 Stock Purchase Agreement) of certain amounts paid by NSC in respect of the Weirton Employee Related Liabilities (the "Employee Related Liabilities Payments") over (ii) the amount determined in accordance with the 1990 Stock Purchase Agreement to be the then present value of the remaining Weirton Employee Related Liabilities (the "Remaining Employee Related Liabilities") or (b) NII and NCC would pay to NSC an amount equal to the excess, if any, of (i) the Remaining Employee Related Liabilities over (ii) the excess, if any, of (A) the Adjusted Notional Amount over (B) the Employee Related Liabilities Payments and (iv) NII, NCC and NSC entered into the Amended and Restated Weirton Liabilities Agreement and NCC, NAC and NSC entered into a put agreement (the "Put Agreement"). The amount determined pursuant to clause (iii)(a) or (iii)(b) of the preceding sentence is hereinafter referred to as the RRCEO. 4. In 1993, NSC effected an initial public offering of its equity securities (the "IPO"). Prior thereto, NII, NCC, NSC, NKK and NAC entered into an agreement, dated February 3, 1993 (the "1993 Agreement"), pursuant to which, among other things, NCC paid to NSC $10 million as a prepayment for the Indemnified Environmental Liabilities. NSC also contributed approximately $68 million of the IPO proceeds to Plan 056 (as defined in the Weirton Liabilities Agreement), thereby reducing the underfunding of Plan 056 and causing a portion of NII's and NCC's indemnity obligations, in the amount of $68 million, to become due and owing. NSC then redeemed 50% of the B Preferred Stock held by NCC and paid the re- 3 demption amount in the form of a release of NII and NCC from $68 million of their indemnity obligations to NSC in respect of the Weirton Employee Related Liabilities. 5. On October 28, 1993, NCC merged with NII, with NII being the surviving entity. On October 12, 1994, NII changed its name to FoxMeyer Health Corporation ("FoxMeyer"). 6. On January 31, 1997, FoxMeyer changed its name to Avatex Corporation ("Avatex"). 7. The Parties desire to provide for the resolution of all claims against each other arising from the ownership by Avatex of the B Preferred Stock, the Weirton Liabilities and the Indemnified Environmental Liabilities on the terms and conditions hereinafter set forth, and deem such settlement to be fair, reasonable and adequate and in the best interests of the Parties. NOW, THEREFORE, on the basis of the representations, warranties, covenants and agreements contained in this Agreement, and subject to the terms and conditions of this agreement, it is hereby agreed as follows: 1. Definitions Unless the context otherwise requires and unless otherwise defined herein, terms used herein which are defined in the Weirton Liabilities Agreements are used herein with the meanings therein described. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural number the singular. "Agreement" shall mean this Settlement Agreement as the same may from time to time hereafter be modified, supplemented or amended. "Avatex" shall mean Avatex Corporation, a Delaware corporation. 4 "Avatex Group" shall mean (i) Avatex, (ii) Bull Moose Tube Company and other former Subsidiaries of NSC which became Avatex's (but not NSC's) Subsidiaries in the reorganization pursuant to which Avatex (then known as NII) became the parent of NSC and (iii) any of Avatex's current Subsidiaries. "Avatex Release" shall have the meaning set forth in Section 2.4 of this Agreement. "Avatex Releasees" shall have the meaning set forth in Section 2.4 of this Agreement. "Business Day" shall mean any day excluding Saturday, Sunday and any day which shall be in New York City a legal holiday or a day on which banking institutions are authorized or required by law or other government actions to close. "Claims" shall have the meaning set forth in Section 2.4 of this Agreement. "Closing" shall have the meaning set forth in Section 6 of this Agreement. "Closing Date" shall be the date of this Agreement. "Consolidated Net Worth" shall mean, at any time, the sum of the amount by which the total consolidated assets of Avatex and its Subsidiaries exceeds the total consolidated liabilities of Avatex and its Subsidiaries at such time, as determined in accordance with GAAP; it being agreed that the First Series Cumulative Convertible Preferred Stock, stated price per share $50 (the "First Series Preferred Stock"), and the Cumulative Exchangeable Series A Preferred Stock, par value $5 per share (the "Series A Preferred Stock"), of Avatex and all accrued dividends thereon shall not be deemed liabilities for purposes of this definition. "Damages" shall have the meaning set forth in Section 2.6(a) of this Agreement. "Environmental Insurance Claims" shall have the meaning set forth in Section 2.5(a) of this Agreement. 5 "Financial Advisor" shall mean The Gordian Group, L.P. "GAAP" shall mean United States generally accepted accounting principles as in effect on the date hereof. "Indemnifiable Claims" shall have the meaning set forth in Section 2.6(a). "Indemnified Party" shall have the meaning set forth in Section 2.6(b). "Indemnified Environmental Liabilities" shall have the meaning set forth in the whereas clause, paragraph one, of this Agreement. "Material Adverse Effect" shall mean a material adverse effect upon (i) the business, operations, properties, assets, prospects or condition (financial or otherwise) of Avatex and its Subsidiaries, taken as a whole, or (ii) the ability of Avatex to perform any of its obligations hereunder as they become due. "NAC" shall mean NKK U.S.A. Corporation, a Delaware corporation. "NKK" shall mean NKK Corporation, a Japan corporation. "NSC" shall mean National Steel Corporation, a Delaware corporation. "NKK, NAC, NSC Release" shall have the meaning set forth in Section 2.4 of this Agreement. "NSC Releasees" shall have the meaning set forth in Section 2.4 of this Agreement. "Person" shall mean and include any individual, partnership, joint venture, firm, corporation, association, trust or other enterprise or any government or political subdivision or agency, department or instrumentality thereof. 6 "Released Avatex Liabilities" shall have the meaning set forth in Section 2.4 of this Agreement. "Subsidiary" of any Person shall mean and include (i) any corporation 50% or more of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (ii) any partnership, association, joint venture or other entity in which such Person, directly or indirectly through Subsidiaries, is either a general partner or has a 50% or more equity interest at the time; provided, however, that Riverside Insurance Company Ltd. ("Riverside") shall not be considered a Subsidiary of Avatex. "Weirton Liabilities Agreements" shall mean the 1984 Stock Purchase Agreement, the Weirton Liabilities Agreement, the 1990 Stock Purchase Agreement, the Amended and Restated Weirton Liabilities Agreement, the Stock Transfer Agreement, the Put Agreement, the 1993 Agreement and all other agreements entered into between one or more of the parties hereto in connection therewith. 2. Agreements ---------- 2.1. Notwithstanding any contrary provision in the Certificate of Designation of the B Preferred Stock ("Certificate of Designation"), NSC shall redeem, and Avatex shall surrender to NSC, on the Closing Date, all B Preferred Stock held by Avatex at such place as is designated by NSC, and Avatex shall not be entitled to, as of or following the Closing Date, any dividends on the B Preferred Stock, declared, accrued or otherwise, or any other payment in respect of the redemption other than the Settlement Payment. 2.2. On the terms and subject to the conditions hereof, (i) at the Closing, NSC shall pay to Avatex $59 million in cash payable by wire transfer or delivery of other immediately available funds, and (ii) on each of the same day as the Closing Date in the 3rd, 6th and 12th month after the Closing Date (if not a Business Day, the 7 immediately following day which is a Business Day) (each, a "Payment Date"), NSC shall pay to Avatex an additional $2.5 million on the Payment Date in the 3rd and 6th months after the Closing Date and $5 million on the Payment Date in the 12th month after the Closing Date (each, an "Additional Payment" and, together with the $59 million payment, the "Settlement Payment"), in cash by wire transfer or delivery of other immediately available funds. If Avatex is in breach of its obligations set forth in Section 5.2 below and such breach shall remain uncured for 30 days from the date such breach occurs, the Additional Payments shall be reduced to $5,000,000 (the "Reduction") and, if all the Additional Payments have been paid, Avatex shall pay to NSC in cash by wire transfer or delivery of other immediately available funds on such 30th day $5,000,000 (together with the Reduction, "Liquidated Damages"). The parties acknowledge that if Avatex breaches Section 5.2 below, it would be difficult, if not impossible to prove the amount of the damages to NSC and the parties hereto agree that the Liquidated Damages constitute a fair and reasonable amount of compensation, and is agreed to as a reasonable forecast of probable or actual loss and not as a penalty. 2.3. At the Closing, NSC, Avatex and NAC agree that a number of Put Consideration Shares (as defined in the Put Agreement) as calculated pursuant to Section 3(d) of the Put Agreement shall be deemed to have been transferred, in turn, from NSC to NAC to Avatex, and from Avatex to NSC for retirement in partial consideration for the Settlement Payment. 2.4. At the Closing, in consideration of the Settlement Payment, Avatex shall execute a release in the form annexed hereto as Exhibit A ("NKK, NAC, NSC Release"), pursuant to which it shall release NKK, NAC, NSC and their respective Subsidiaries, officers, directors and employees (the "NSC Releasees") from any and all claims, causes of action or obligations (collectively, "Claims") owed to Avatex by the NSC Releasees, whether known or presently unknown, foreseen or presently unforeseen, asserted or not yet asserted, of any kind or character, including and not limited to any Claims relating to the ownership by Avatex of any securities of NSC or the Weirton Liabilities Agreements, including the RRCEO, the Weirton Liabilities and any amounts that have or may 8 become payable to Avatex pursuant to the 1993 Agreement in connection with NSC's Recapitalization (as defined therein); provided, however, that NSC shall not be released from the claims identified in Schedule 1 to Exhibit A hereto. NKK, NAC and NSC shall execute a release in the form annexed hereto as Exhibit B (the "Avatex Release"), pursuant to which they shall release Avatex, its Subsidiaries, officers, directors and employees (the "Avatex Releasees") from any and all obligations (the "Released Avatex Liabilities"), owed by the Avatex Releasees to NKK, NAC and NSC, whether known or presently unknown, foreseen or presently unforeseen, asserted or not yet asserted, of any kind or character, including and not limited to any and all Claims arising out of the ownership by NKK and/or NAC of any securities of NSC or the Weirton Liabilities Agreements, including the RRCEO, the Weirton Liabilities and the Indemnified Environmental Liabilities other than obligations identified in the Avatex Release. Notwithstanding the foregoing, Avatex shall not be released from any claims against Avatex and its Subsidiaries for contribution or joint liability that (a) arise not from contract but from federal, state or local environmental laws and regulations, (b) do not relate to an Indemnified Environmental Liability and (c) relate to: (i) any site that is or was owned or operated by any member of the Avatex Group or (ii) any off-site disposal by any member of the Avatex Group of materials at any site owned or operated by a third party. 2.5. (a) Avatex hereby surrenders and assigns to NSC all rights it has under any insurance policy incepting prior to January 1, 1987 with respect to Environmental Insurance Claims. Environmental Insurance Claims shall mean claims made under any such insurance policy, including but not limited to the Indemnified Environmental Liabilities, for property damage or personal injury caused or allegedly caused by the discharge of pollutants. (b) (1) Avatex hereby surrenders and assigns to NSC all rights that it may have to settlement proceeds under the Allocation Agreement dated September 26, 1997 (the "Allocation Agreement"), including but not limited to rights to payments under settlements concluded with Continental Casualty Company, Evanston Insurance Company, London Market Insurers, Fireman's Fund Insurance Company, 9 Yasuda Fire & Marine Insurance Company of Europe, Ltd., and Ludgate Insurance Company. Avatex further agrees that to the extent that the Allocation Agreement calls for certain settlement funds received from insurance carriers to be paid into a joint escrow account for the benefit of NSC and Avatex, that any such funds received after the Closing Date shall be paid directly to NSC. Nothing in this agreement shall affect any rights that Southwire Company ("Southwire") may have under the Allocation Agreement or under any individual settlement agreement with an insurance carrier. (2) Avatex hereby surrenders and assigns to NSC all rights that it may have to funds placed in an escrow account (the "Escrow Account") under the Escrow Agreement dated August 20, 1997 (the "Escrow Agreement"), except that NSC agrees that Avatex may authorize the payment of all of Avatex's outstanding legal fees, disbursements, expert witness fees and other professional service fees incurred in connection with National Steel Corp. v. Continental Casualty Co., 95-C-52W (Circuit Court of Hancock County, West Virginia) (the "WVA Litigation"), as of the Closing Date, from the Escrow Account in accordance with paragraph 3 of the Escrow Agreement. After the Closing Date, NSC shall be solely responsible for any outstanding WVA Litigation Expenses and Avatex and NSC hereby authorize Weil, Gotshal & Manges LLP, as escrow agent, to pay the balance of the Escrow Account to NSC. (3) NSC hereby agrees that as of the Closing Date, Avatex shall have no further obligation to pay legal and other expenses in connection with the WVA Litigation. NSC shall assume Avatex's obligations to pay the legal and other expenses of the action under cost sharing arrangements with LTV Steel Company and with Southwire. Avatex shall remain a plaintiff in the action and shall cooperate with NSC in the prosecution of the lawsuit. (4) NSC, Avatex, and Southwire are in the process of negotiating a settlement agreement with Insurance Company of North America ("INA") a/k/a The Cigna Companies. Under the terms of the proposed settlement agreement, INA would make two initial payments and would make certain additional payments thereafter up to a limited amount, contingent upon certain events, and may agree to reimburse Riverside, an Avatex subsidiary, those 10 amounts which Riverside had paid to INA. In the event INA does not agree to so reimburse Riverside, Avatex shall not make any claim to the monies otherwise payable by INA under the proposed or any other settlement agreement (the "INA Agreement"). Avatex hereby surrenders and assigns to NSC its rights to payment under the INA Agreement (other than any reimbursement monies to Riverside) which does not increase in any material respect the liabilities of Avatex hereunder. Avatex also will sign the INA Agreement negotiated with INA and release all Environmental Insurance Claims against INA under policies incepting prior to January 1, 1987. (5) NSC, Avatex and Southwire are in the process of negotiating a settlement agreement with Everest Reinsurance Company ("Everest"). Avatex hereby surrenders and assigns to NSC its rights to payment under the proposed or any other settlement agreement (the "Everest Agreement") which does not increase in any material respect the liabilities of Avatex hereunder. Avatex also will sign the Everest Agreement negotiated with Everest and release all claims with respect to policies issued by Prudential Reinsurance Company (Everest's predecessor in interest) to NSC in 1978 and 1979. (6) NSC, Avatex and Southwire are in the process of negotiating a settlement agreement with Lexington Insurance Company ("Lexington"). Avatex hereby surrenders and assigns to NSC its rights to payment under the proposed or any other settlement agreement (the "Lexington Agreement") which does not increase in any material respect the liabilities of Avatex hereunder. Avatex also will sign the Lexington Agreement negotiated with Lexington and release all claims with respect to policies issued by Lexington to Avatex or NSC prior to January 1, 1987. (7) NSC, Avatex and Southwire are in the process of negotiating a settlement agreement with International Insurance Company ("International"). Avatex hereby agrees to surrender and assign to NSC its rights to payment under the proposed or any other settlement agreement (the "International Agreement") which does not increase in any material respect the liabilities of Avatex hereunder. Avatex also will sign the International Agreement negotiated with International and release all claims with respect to policies issued by International to Avatex prior to January 1, 1987. 11 (8) NSC, Avatex and Southwire are in the process of negotiating a settlement agreement with National Union Fire Insurance Company ("National Union"). Avatex hereby surrenders and assigns to NSC its rights to payment under the proposed or any other settlement agreement (the "National Union Agreement") which does not increase in any material respect the liabilities of Avatex hereunder. Avatex also will sign the National Union Agreement negotiated with National Union and release Environmental Insurance Claims against National Union with respect to a specific excess policy issued to Avatex in 1984. (9) Avatex shall cooperate with NSC in NSC's efforts to negotiate settlements of Environmental Insurance Claims with the outstanding defendants in the WVA Litigation, and with any excess insurance carriers. Avatex will sign all necessary settlement agreements and release all carriers from Environmental Insurance Claims, as may be reasonably requested by NSC. NSC agrees that if NSC (i) asserts any environmental or related claim against any insurer which has a potential reinsurance claim against Riverside and (ii) recovers any amounts on such claim, whether by settlement, judgment or otherwise, then (x) if such recovery is obtained through settlement or other consensual means, NSC shall obtain the insurer's agreement to waive any reinsurance claim against Riverside or pay through Avatex to Riverside Sufficient funds with which to pay the reinsurance claim, or (y) if such recovery is otherwise obtained, NSC shall pay through Avatex to Riverside sufficient funds with which to pay the reinsurance claim. (c) As between Avatex and NSC, NSC shall be solely responsible for payment and discharge for: (i) any claims made by any insurer for indemnification pursuant to indemnities made by NSC and Avatex in the settlement agreements referenced in Section 2.5(b) above or in any future settlement agreements with insurers regarding Environmental Insurance Claims, except for indemnification claims relating to Bull Moose Tube Company, for which Avatex shall be solely responsible; (ii) any claims against NSC for breach of any provision of the settlement 12 agreements referenced in Section 2.5(b) above or any future settlement agreements with insurers regarding Environmental Insurance Claims; and (iii) any counterclaims, arising out of acts or omissions of NSC, asserted against NSC or Avatex in any action in or relating to the WVA Litigation or any action to enforce any of the settlement agreements referenced in Section 2.5(b) above or any future settlement agreements with insurers regarding Environmental Insurance Claims; provided, however, with respect to each of Section 2.5(c)(i) and (ii), NSC shall be liable only to the extent of any net proceeds received under such settlement agreements. (d) NSC acknowledges that, as between Avatex and NSC, NSC and its Subsidiaries will be solely liable for paying and discharging any environmental claims in connection with (i) any of the Indemnified Environmental Liabilities, (ii) any site owned or operated by NSC, which has not been owned or operated by any member of the Avatex Group, or (iii) any site receiving any off-site disposal of materials from NSC, but in the case of subsection (iii) only with respect to off-site disposal of materials received by such site from NSC. NSC will support the dismissal of Avatex and its Subsidiaries from any legal action involving any of the Indemnified Environmental Liabilities or any of the sites described in clauses (i) or (ii) above except with respect to a site at which Avatex or its Subsidiaries has disposed materials. For the purpose of the foregoing two sentences, NSC shall mean NSC and its Subsidiaries, other than any member of the Avatex Group. 2.6. (a) NSC shall in accordance with the provisions of this Section 2.6, indemnify and hold harmless Avatex, against any and all losses, liabilities, damages, demands, claims, actions, judgments or causes of action, assessments, costs and expenses, including, without limitation, interest, penalties and reasonable attorneys' fees (collectively, "Damages"), asserted against, resulting to, imposed upon or incurred or suffered by Avatex (whether originally asserted against or imposed on Avatex, by a third party or originally resulting to, incurred or suffered by NSC, and asserted by NSC directly against Avatex), if such Damages arise by reason of a breach by NSC of the agreements made by it in Section 2.5 of this Agreement ("Indemnifiable Claims"). 13 (b) Avatex, when seeking indemnification under this Section 2.6 (the "Indemnified Party") with respect to Indemnifiable Claims resulting from the assertion of liability by third parties shall give notice to NSC within 20 days of becoming aware of any such Indemnifiable Claim; provided, however, any delay in such notice shall not release NSC from any of its obligations hereunder, except where failure to give timely notice results in actual prejudice to the rights of NSC hereunder. In case any such liability is asserted against Avatex, and it accordingly notifies NSC thereof, NSC will promptly assume the defense thereof with counsel reasonably satisfactory to Avatex. (c) In the event that NSC, within twenty (20) days after receipt of a notice pursuant to Section 2.6(b) of an Indemnifiable Claim, fails to assume the defense of Avatex against such Indemnified Claim, Avatex shall have the right to undertake the defense, compromise or settlement of such Indemnifiable Claim on behalf of and for the account and risk of NSC. 2.7. Effective as of the Closing Date, Avatex shall cause the members of the Pension Committee and the Investment Committee (as each such term is defined in Section 3 of the Amended and Restated Weirton Liabilities Agreement) under Plan 056 who are appointed by Avatex to resign from such committees. From and after the Closing Date, NSC shall appoint, in its sole discretion, such individuals to the Pension Committee and the Investment Committee as it shall deem appropriate. 2.8. Immediately after the Closing Date, NSC shall pay to Avatex $12,522.54 on account of the legal bills previously paid by Avatex. In addition, NSC shall pay directly, in the ordinary course of NSC's business, any legal bills properly payable for (a) "Weirton Liabilities Monitoring" services performed by Thorp, Reed & Armstrong and (b) "NSC Workers' Compensation" services performed by Frankovitch & Anetakis, whether such services were performed before or after the Closing Date. 3. Representations and Warranties of Avatex 14 Avatex represents and warrants to each of NSC, NKK and NAC as follows: 3.1. Organization. It is a corporation duly organized, validly existing and in good standing, under the laws of Delaware. 3.2. Authority. It has all requisite corporate power and authority to execute, deliver, and perform this Agreement and all other agreements, instruments, and documents being or to be delivered by it hereunder or in connection herewith. All necessary corporate proceedings have been duly taken to authorize the execution, delivery, and performance by it of this Agreement. This Agreement has been duly authorized, executed, and delivered by it and, assuming due execution and delivery by all other parties thereto, upon execution and delivery by it as contemplated hereby, will be its legal, valid, and binding obligation, in each case enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and the availability of equitable remedies (regardless of whether enforcement is sought in a proceeding at law or in equity). 3.3. No Violation. Neither the execution and delivery of this Agreement and all other agreements to be delivered hereunder, nor the consummation of the transactions contemplated hereby nor its compliance with the terms hereof will (i) violate any provision of its certificate of incorporation or bylaws; (ii) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to it, or any of its properties or assets; or (iii) violate, conflict with, result in a breach of any of the provisions of, result in the loss of any material benefit under, constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under or give rise to any right of termination, acceleration or cancellation with respect to, or result in the creation or imposition of any security interest, lien, charge or other encumbrance upon any of its property or assets under, any note, bond, loan, mortgage, indenture, obligation, deed of trust, license, lease, agreement, permit, concession, grant, franchise, judgment, injunction, order, decree or any security issued by it or any other instrument to which it is a party or by which it or any of its properties or assets may be bound or affected either directly or indirectly. 15 3.4. Consents and Approvals of Governmental Authorities. It has complied and will comply with all applicable laws and all applicable rules and regulations of any governmental authority in connection with the execution and delivery of this Agreement and all other agreements to be delivered hereunder. It has obtained all governmental authorizations and approvals required with respect to the execution and delivery of this Agreement and all other agreements to be delivered hereunder and the consummation of the transactions contemplated hereby or thereby. It is not required to submit any notice, report or other filing with any governmental authority or to seek governmental authorization or approval and no consent, approval or authorization of any governmental or regulatory authority is required to be obtained by it, in either case. 3.5. Consents. Other than consents which have been obtained and are in full force and effect, no consent of any Person or any group is necessary to the consummation of the transactions contemplated by this Agreement and all other agreements to be delivered hereunder, including, without limitation, consents from parties to or beneficiaries of, loans, mortgages, notes, indentures, material contracts, loan guarantees, material leases or other material agreements, including pension agreements, collective bargaining agreements and any other material agreements. 3.6. Solvency. Avatex is, and upon and after giving effect to transactions to take place at the Closing shall be, Solvent. "Solvent" means that: (a) Avatex's assets exceed its liabilities, at a fair valuation; it being agreed that the First Series Preferred Stock and the Series A Preferred Stock and all accrued dividends thereon shall not be deemed liabilities for purposes of this section 3.6; (b) the present fair saleable value of Avatex's assets exceeds the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured; (c) Avatex does not have unreasonably small capital for the 16 businesses in which it is engaged; and (d) Avatex has not incurred and does not intend to incur obligations beyond its ability to pay as they mature. 3.7. Financial Statements. (a) Attached hereto as Exhibit C-1 are the following financial statements (collectively the "Financial Statements"): (i) audited consolidated balance sheets for the fiscal years ended March 31, 1996 and 1997 and statements of income, changes in stockholders' equity, and cash flow as of and for the fiscal years ended March 31, 1995, 1996, and 1997 for Avatex and its Subsidiaries; (ii) unaudited consolidated balance sheets and statements of income and cash flow (the "Most Recent Financial Statements") as of and for the six months ended September 30, 1997 (the "Most Recent Fiscal Month End") for Avatex and its Subsidiaries and (iii) a pro forma consolidated balance sheet of Avatex and its Subsidiaries, dated as of September 30, 1997, giving effect to the transactions contemplated hereby and giving effect to the settlement of the claims made against Avatex in the bankruptcy proceeding involving certain Subsidiaries of Avatex, certified by the principal financial officer of Avatex. The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby and present fairly the financial condition of Avatex and its Subsidiaries as of such dates and the results of operations of Avatex and its Subsidiaries for such periods; in the case of the Most Recent Financial Statements, subject to year-end and audit adjustments. (b) Attached hereto as Exhibit C-2 are projections prepared by Avatex demonstrating the projected cash flow of Avatex and its Subsidiaries after giving effect to the transactions contemplated hereby, for the 12 month period subsequent to the Closing Date, which projections are accompanied by a written statement of the assumptions underlying the projections. Such projections have been prepared on the basis of the assumptions accompanying them, and such projections and assumptions, as of the date of preparation and as of the Closing Date, are reasonable and represent Avatex's good faith estimate of its future cash flow, it being understood that nothing contained in this Section 3.7(b) shall be construed as a representation or warranty that such future cash flow will in fact be achieved. 17 3.8. Indebtedness; Liabilities; No Undisclosed Liabilities. Set forth in Schedule 3.8 is a full and complete list of all indebtedness of Avatex for money borrowed. Except as set forth in Schedule 3.8, Avatex is not in default in respect of any agreement or instrument evidencing borrowed money and has not requested any deferral of the payment of interest or principal due in respect thereof. Neither Avatex nor any of its Subsidiaries has any liabilities or obligations (absolute, accrued, contingent or otherwise) as of the date hereof which are required by GAAP to be reflected but which are not reflected in the Financial Statements, except for liabilities and obligations incurred in the ordinary course of business and consistent with past practice. 3.9. Events Subsequent to Most Recent Fiscal Month End. Since September 30, 1997, there has not been any change that has resulted in a Material Adverse Effect compared with the comparable prior period. Without limiting the generality of the foregoing, since that date Avatex has not engaged in any practice, taken any action, or entered into any transaction outside the ordinary course of business. 3.10. Good Title to B Preferred Stock. Upon surrender of the B Preferred Stock by Avatex pursuant to Section 2.1 above, NSC shall have reacquired the B Preferred Stock free and clear of all claims, liens, charges, encumbrances, pledges, options, security interests, shareholders' agreements and voting trusts. 3.11. Absence of Litigation. There is not (i) any preliminary or permanent injunction issued by any federal or state court of competent jurisdiction or by any governmental or other regulatory or administrative agency or commission or (ii) any litigation instituted by any federal agency or administrative authority or any governmental authority which would, if successful, enjoin or prohibit the consummation of the transactions contemplated hereby or require rescission of this Agreement or any such transactions. 18 3.12. Reports. Avatex has filed all required forms, reports and documents with the Securities and Exchange Commission ("SEC") since January 1, 1997, all of which are complete and complied and shall continue to comply in all material respects with applicable requirements of the Securities Act of 1934, as amended (the "1934 Act"). None of such forms, reports or documents, including without limitation any financial statements or schedules included therein, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4. Representations and Warranties of NSC, NAC and NKK Except as to Section 4.6, each of NSC, NAC and NKK represents and warrants to Avatex as follows: 4.1. Organization. It is a corporation duly organized, validly existing and in good standing, under the laws of Delaware, in the case of NSC and NAC, and duly organized and validly existing under the laws of Japan, in the case of NKK. 4.2. Authority. It has all requisite corporate power and authority to execute, deliver, and perform this Agreement and all other agreements, instruments, and documents being or to be delivered by it hereunder or in connection herewith. All necessary corporate proceedings have been duly taken to authorize the execution, delivery, and performance by it of this Agreement. This Agreement has been duly authorized, executed, and delivered by it and, assuming due execution and delivery by all other parties thereto, upon execution and delivery by it as contemplated hereby, will be its legal, valid, and binding obligation, in each case enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and the availability of equitable remedies (regardless of whether enforcement is sought in a proceeding at law or in equity). 4.3. No Violation. Neither the execution and delivery of this Agreement and all other agreements to be 19 delivered hereunder, nor the consummation of the transactions contemplated hereby nor its compliance with the terms hereof will (i) violate any provision of its certificate of incorporation or bylaws, in the case of NSC and NAC, or certificate of incorporation (teikan), in the case of NKK; (ii) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to it, or any of its properties or assets; or (iii) violate, conflict with, result in a breach of any of the provisions of, result in the loss of any material benefit under, constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under or give rise to any right of termination, acceleration or cancellation with respect to, or result in the creation or imposition of any security interest, lien, charge or other encumbrance upon any of its property or assets under any note, bond, loan, mortgage, indenture, obligation, deed of trust, license, lease, agreement, permit, concession, grant, franchise, judgment, injunction, order, decree or any security issued by it or any other instrument to which it is a party or by which it or any of its properties or assets may be bound or affected either directly or indirectly. 4.4. Consents and Approvals of Governmental Authorities. It has complied and will comply with all applicable laws and all applicable rules and regulations of any governmental authority in connection with the execution and delivery of this Agreement and all other agreements to be delivered hereunder. It has obtained all governmental authorizations and approvals required with respect to the execution and delivery of this Agreement and all other agreements to be delivered hereunder and the consummation of the transactions contemplated hereby or thereby. It is not required to submit any notice, report or other filing with any governmental authority or to seek governmental authorization or approval and no consent, approval or authorization of any governmental or regulatory authority is required to be obtained by it, in either case. 4.5. Consents. Other than consents which have been obtained and are in full force and effect, no consent of any Person or any group is necessary to the consummation of the transactions contemplated by this Agreement and all other agreements to be delivered hereunder, 20 including, without limitation, consents from parties to or beneficiaries of, loans, mortgages, notes, indentures, material contracts, loan guarantees, material leases or other material agreements, including pension agreements, collective bargaining agreements and any other material agreements. 4.6. Events Subsequent to Most Recent Fiscal Month End. NSC represents and warrants that since September 30, 1997, there has not been any change that has resulted in a material adverse effect upon (i) the business, operations, properties, assets, prospects or condition (financial or otherwise) of NSC and its Subsidiaries, taken as a whole or (ii) the ability of NSC to perform any of its obligations hereunder as they become due, compared with the comparable prior period. Without limiting the generality of the foregoing, since that date NSC has not engaged in any practice, taken any action, or entered into any transaction outside the ordinary course of business. 4.7. Absence of Litigation. There is not (i) any preliminary or permanent injunction issued by any federal or state court of competent jurisdiction or by any governmental or other regulatory or administrative agency or commission or (ii) any litigation instituted by any federal agency or administrative authority or any governmental authority which would, if successful, enjoin or prohibit the consummation of the transactions contemplated hereby or require rescission of this Agreement or any such transactions. 5. Covenants Avatex covenants and agrees that on and after the Closing Date and until the same day as the day of the Closing Date in the 15th month after the month in which the Closing Date occurs: 5.1. Information Covenants. Avatex will furnish to NSC: (a) Quarterly Financial Statements. Within 45 days after the close of each quarterly accounting period in each fiscal year of Avatex, the consolidated balance sheet of Avatex and its Subsidiaries, as at 21 the end of such quarterly period and the related consolidated statements of income, cash flow and retained earnings for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and in each case setting forth comparative figures for the related periods in the prior fiscal year. (b) Annual Financial Statements. Within 90 days after the close of each fiscal year of Avatex, the consolidated balance sheet of Avatex and its Subsidiaries, as at the end of such fiscal year, and the related consolidated statements of income, cash flow and retained earnings for such fiscal year, setting forth comparative figures for the preceding fiscal year and certified by its independent certified public accountants. (c) Management Letters. Promptly after Avatex's receipt thereof, a copy of any "management letter" or other material report received by Avatex from its certified public accountants. (d) Dividends and Stock Payments. No less than 15 days prior thereto, notification of any action to be voted upon by the Board of Directors of Avatex to declare or pay any cash dividend on or cause to be purchased for cash by Avatex or any of its Subsidiaries any capital stock of Avatex. (e) Officer's Certificates. At the time of the delivery of the financial statements under clauses (a) and (b) above, a certificate of the chief financial officer of Avatex which certifies (x) that such financial statements fairly present the financial condition and the results of operations of Avatex and its Subsidiaries on the dates and for the periods indicated, subject, in the case of interim financial statements, to normally recurring year-end adjustments and (y) that such officer has reviewed the terms of this Agreement and has made, or caused to be made under his or her supervision, a review in reasonable detail of the business and condition of Avatex and its Subsidiaries during the accounting period covered by such financial statements, and that as a result of such review such officer has concluded that no breach of any covenant hereunder has occurred during the 22 period commencing at the beginning of the accounting period covered by the financial statements accompanied by such certificate and ending on the date of such certificate or, if any breach of any covenant hereunder has occurred, specifying the nature and extent thereof and, if continuing, the action Avatex proposes to take in respect thereof. (f) Notice of Breach or Litigation. Promptly and in any event within ten Business Days after Avatex or any of its Subsidiaries obtains knowledge thereof, notice of (i) the occurrence of any breach of this Section 5 and (ii) any litigation or governmental proceeding pending or threatened against Avatex or any of its Subsidiaries which would be likely to result in a Material Adverse Effect. (g) SEC Filings. Promptly upon filing thereof, copies of all regular and periodic financial information, proxy materials and other information and reports, if any, which Avatex shall file with the SEC or any governmental agencies substituted therefor or which Avatex shall send to its stockholders. (h) Other Information. From time to time, such other information or documents (financial or otherwise) as NSC, NKK or NAC may reasonably request. 5.2. Other Covenants Consolidated Net Worth. The Consolidated Net Worth of Avatex shall at all times be greater than or equal to $15,000,000. 6. The Closing 6.1. Obligations of All Parties. Simultaneous with the execution of this Agreement, the following documents were delivered: (a) Solvency Opinion. The solvency opinion by the Financial Advisor, satisfactory to all parties hereto, was duly executed and delivered by the Financial Advisor. 23 (b) Opinions. NSC, NKK and NAC received the written opinion, dated the Closing Date, of Thorp, Reed & Armstrong, special counsel to Avatex, in the form set forth in Exhibit D-1 hereto, and of the general counsel to Avatex, in the form set forth in Exhibit D-2 hereto. (c) Opinions. Avatex received the written opinions, dated the Closing Date, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to NKK and NAC, in the form set forth in Exhibit E hereto, and of general counsel of NSC, in the form set forth in Exhibit F hereto. 7. Miscellaneous. 7.1. Further Actions. At any time and from time to time each party agrees, at its expense, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Agreement. 7.2 Submission to Jurisdiction. Solely for the purposes of disputes among the parties hereto, the parties hereby consent and submit to personal jurisdiction of the Federal District Court in the State of Delaware and of any other court in Delaware having jurisdiction over any controversy, and to service of process upon them in accordance with the rules and statutes governing service of process, solely in connection with actions or proceedings involving the parties to and relating to this Agreement. Each of the parties hereto appoints CT Corporation Systems as its agent for the purpose of receiving and accepting service of process on its behalf. 7.3. Survival. Except for Section 3.10 of this Agreement, which shall survive the Closing Date and continue in full force and effect without time limit, all representations, warranties, covenants and agreements made by the parties hereto shall survive the Closing Date for a period of 15 months. There are no representations, warranties, covenants or agreements by or among the parties and relating to the subject matter of this Agreement, except as contained in this Agreement. 7.4. Entire Agreement; Modification. This Agreement, and the exhibits and schedules hereto, set forth the entire understanding of the parties with 24 respect to the subject matter hereof, supersede all existing agreements and understandings among them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. With respect to the recitals, to the extent that there are inconsistencies between the description of the terms of any of the Weirton Liabilities Agreements with the actual Weirton Liabilities Agreements, the Weirton Liabilities Agreements shall govern. The Weirton Liabilities Agreements shall not survive the execution and delivery of this Agreement. 7.5 Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth below: If to NSC: National Steel Corporation 4100 Edison Lakes Parkway Mishawaka, IN 46545 Attention: Senior Vice President and General Counsel; and Vice President-Finance, Fax: 219-273-7868 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Attention: Edmund C. Duffy, Esq. Fax: 212-735-2000 If to Avatex: Avatex Corporation 5910 North Central Expressway Suite 1780 Dallas, TX 75206 Attention: Senior Vice President, Chief Financial Officer, General Counsel and Secretary Fax: 214-365-7499 25 with a copy to Thorp, Reed & Armstrong One Riverfront Center Pittsburgh, PA 15222 Attn: Joseph Shuman, Esq. Fax: 412-394-2555 If to NKK: NKK Corporation 1-1-2 Marunouchi Chiyoda-ku Tokyo 100, Japan Attention: Assistant General Manager North American Business Steel Division Fax: 011-81-3-3214-8426 with a copy to Skadden, Arps, Slate, Meagher & Flom LLP at the address set forth above If to NAC: NKK U.S.A. Corporation 1013 Centre Road Wilmington, New Castle County DE 19805 Attention: Secretary with a copy to: NKK and Skadden, Arps, Slate, Meagher & Flom LLP at the addresses set forth above 7.6. Waiver. Any waiver by any party of a breach of any provision of this Agreement must be in writing and shall not operate as or be construed to be a waiver of any other breach of such provision or of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 26 7.7. Binding Effect; Assignment. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and the respective successors and assigns of the parties hereto. No party may assign or otherwise transfer any of its rights under this Agreement without the written consent of all other parties hereto. 7.8. No Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement. 7.9. Severability. If any provision of this Agreement is invalid, illegal, or unenforceable, the balance of this Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. 7.10. Headings. The headings in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 7.11. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to its principles of conflict of laws. 7.12. Expenses. Except as otherwise provided herein, each party hereto shall pay its own costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby. 27 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. AVATEX CORPORATION By:___________________________ Name: Title: NKK CORPORATION By:___________________________ Name: Title: NKK U.S.A. CORPORATION By:___________________________ Name: Title: NATIONAL STEEL CORPORATION By:___________________________ Name: Title: 28 EX-10.V 5 AMENDMENT #2 TO NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN EXHIBIT 10-V AMENDMENT NO. TWO TO THE 1993 NATIONAL STEEL CORPORATION NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Amendment made this 9th day of February, 1998, to the 1993 National Steel Corporation Non-Employee Directors' Stock Option Plan (hereinafter called the "Plan"). WITNESSETH WHEREAS, National Steel Corporation, a Delaware corporation (hereinafter called the "Company"), has established the Plan; WHEREAS, the Company maintains the Plan to assist it in attracting and retaining the services of certain non-employee directors by providing such persons with the option to purchase shares (the "Option") of Class B Common Stock of the Company, $.01 par value; WHEREAS, certain non-employee directors have been granted such an option under the Plan, and other such Options may continue to be granted from time to time under the Plan; WHEREAS, the Company wishes to amend the Plan; WHEREAS, the Board (as defined in Section 2.01.3 of the Plan) has the authority under Section 10.01 of the Plan to amend the Plan from time to time. NOW, THEREFORE, the Plan is amended effective as of January 1, 1998, as follows: I. Section 6.01 of the Plan is hereby amended by replacing the current Section 6.01 with the following: 6.01 General. Subject to the terms of the Plan and any applicable Award Agreement, Awards may be issued as set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to the terms of Section 10.01), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event the Participant ceases service as a director of the Company. Except as required by applicable law, Awards shall be granted for no consideration other than prior and future services. II. The introduction of Section 6.02 of the Plan is hereby amended by replacing the current introduction with the following 6.02 Options. The Committee is authorized to grant Options to Participants on the following terms and conditions. III. Sections 6.02(iii) and (iv) of the Plan are hereby amended by replacing the current Sections 6.02(iii) and (iv) with the following: (iii) Exerciseability. The Committee shall determine the time or times at which an Option may be exercised in whole or in part. (iv) Methods of Exercise. The Committee shall determine the methods by which the exercise price of any Option may be paid or deemed to be paid, and the form of such payment, including, without limitation, cash, Shares, or other property (including notes or other contractual obligations of Participants to make payment on a deferred basis to the extent permitted by law) or any combination thereof, having a fair market value equal to the exercise price, IV. Section 10.01 of the Plan is hereby amended by adding the following new sentence at the end thereof: The Committee may waive any conditions or rights under, amend any terms of, or amend, alter, suspend, discontinue or terminate any Award theretofore granted, prospectively or retrospectively; provided, however, that without the consent of a Participant, no amendment, alteration, suspension, discontinuation or termination of any Award may materially and adversely affect the rights of such Participant under any Award theretofore granted to him. EX-10.CC 6 ROBERT G. PHEANIS AMENDED EMPLOYMENT AGREEMENT EXHIBIT 10-CC AMENDED AND RESTATED EMPLOYMENT AGREEMENT ----------------------------------------- THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is dated and effective as of the 1st day of February, 1998 ("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 June 1, 1999, unless extended or unless sooner terminated by the Company or Executive as hereinafter provided (the "Term"). On June 1, 1999, the Term shall be automatically extended on a month to month basis without further action by either party unless either party hereto notifies the other party that such extension shall not occur. In the event either party notifies the other party that such extension shall not occur, or continue to occur, Executive's employment shall terminate automatically at the end of the initial Term or any extended Term, as the case may be. "Term" shall mean the initial term as well as any extension thereof. In the event the Company notifies Executive that the initial Term, or any extended Term, shall not be further extended, such notification shall be deemed to be a termination of Executive's employment without Cause. 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. -1- 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 1998 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. 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 voluntarily terminates his employment with the Company, then for a period of one (1) year after the Date of Termination, but in any event only as long as the Company satisfies its obligations -2- under this Agreement, (the "Restricted Period"), Executive will not engage (either as owner, investor, partner, stockholder, employer, employee or director) in any "Competitive Business" in the continental United States (the "Territory"). The term "Competitive Business" means the making, producing, manufacturing or coating of steel products which products are in direct competition with steel products that are made, produced, manufactured or coated 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 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. -3- 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(d)), 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). Executive agrees that in the event his 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 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, -4- 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(c)). (b) Other Termination. Upon Executive's Date of Termination, either by the Company without Cause, or by Executive for any reason other than death or Disability, 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(c)) and the Special Termination Benefits (as defined in Section 11(d)). (c) "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; (C) any accrued vacation pay to the extent not theretofore paid; and (D) Reimbursement of reasonable business expenses and disbursements incurred by Executive prior to such Date of Termination. (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) Executive shall be eligible to receive incentive compensation based on -5- 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. (d) "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) one 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 one 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(d)(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, the Company shall continue life insurance benefits and financial and tax planning benefits to Executive equal to the life insurance benefits and financial and tax planning benefits that would have been provided to him if Executive's employment had not been terminated. (iii) Stock options and stock appreciation rights held by Executive on his Date of Termination will immediately become fully vested and exercisable and shall remain fully exercisable for a period of two years following his Date of Termination; such stock options and stock appreciation rights shall otherwise be governed by the plans and programs (and the agreements and other documents thereunder) pursuant to which such stock options and stock appreciation rights were granted; provided, however, that notwithstanding the foregoing, no stock options or stock appreciation rights may be exercised until at least six months after the date of grant. (iv) In the event Executive terminates his employment after September 30, 1998, upon at least 30 days' notice, or if his employment is terminated by the Company at any time without Cause, in each case prior to his having at least five years of service for vesting purposes under the National Steel Corporation Retirement Program (including any successor thereto), the Company shall provide Executive the retirement benefits which he would have been entitled to receive pursuant to the Retirement Plan and the Company's ERISA Parity Plan had his employment continued, at the rate of compensation in effect immediately prior to the termination -6- of his employment, until he had five years of service for vesting purposes under the Retirement Plan. Executive's retirement benefit shall be calculated (i) without regard to the limitations on earnings taken into account for purposes of calculation of accrued benefits under section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) without regard to any applicable limitations on maximum benefits under section 415 of the Code. The retirement benefit or its actuarially equivalent value shall be payable beginning as of the first day of the month following the month in which occurs the later of Executive's 65th birthday or termination of employment, in the form of the normal form of benefit under the Retirement Plan or such optional form of benefit as Executive elects from among the forms of payment then available under the Retirement Plan. 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 for any 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 any stock option or stock appreciation right 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, -7- 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" 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) -8- 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 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, -9- 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: (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: -10- (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 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 -11- 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 any reason other than death or Disability, or by Executive for any reason other than death or Disability, the date of receipt of the notice of termination or any later date specified therein, as the case may be; and (ii) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of Executive or the Disability Effective Date, as the case may be. If the Company determines in good faith that the Disability of Executive has occurred pursuant to the definition of Disability set forth in Section 14(d), it may give to Executive written notice 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. (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. 15. Miscellaneous. (a) Integration. This Agreement modifies and supersedes any and all prior -12- 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 and stock appreciation rights granted to Executive pursuant to such Prior Agreement shall remain outstanding, and to the extent applicable, Section 11(d)(iii) shall apply to such stock options and stock appreciation rights and shall also apply to such other stock options and stock appreciation rights now or hereafter granted to Executive. (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, 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 -13- 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. (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. (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 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. -15- 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 -16- EX-13 7 PORTIONS OF 1997 ANNUAL REPORT Exhibit 13 National Steel Corporation Financial Report CONTENTS Five Year Selected Financial and Operating Information 17 Management's Discussion and Analysis 18 Statements of Consolidated Income 27 Consolidated Balance Sheets 28 Statements of Consolidated Cash Flows 29 Statements of Changes in Consolidated Stockholders' Equity and Redeemable Preferred Stock -- Series B 30 Notes to Consolidated Financial Statements 31 Report of Ernst & Young LLP Independent Auditors 49 Five Year Selected Financial and Operating Information
Dollars in millions (except per share amounts) Years Ended December 31, 1997 1996 1995 1994 1993 =============================================================================== Operations Net sales $ 3,140 $ 2,954 $ 2,954 $ 2,700 $ 2,419 Cost of products sold 2,674 2,618 2,529 2,337 2,255 Depreciation 135 144 145 142 137 - ------------------------------------------------------------------------------- Gross margin 331 192 280 221 27 Selling, general and administrative expense 141 137 154 138 137 Unusual charges (credits) ________ ________ 5 (25) 111 Income (loss) from operations 191 65 129 113 (219) Financing costs (net) 15 36 39 56 62 Income (loss) before income taxes, extraordinary items and cumulative effect of accounting change 235 32 90 169 (281) Extraordinary items (5) ________ 5 ________ _________ Cumulative effect of accounting changes ________ 11 ________ ________ (16) Net income (loss) 214 54 108 185 (260) Net income (loss) applicable to common stock 203 43 97 174 (273) Basic earnings per share: Income (loss) before extraordinary items and cumulative effect of accounting change 4.82 .74 2.13 4.79 (7.58) Net income (loss) applicable to common stock 4.70 .99 2.26 4.79 (8.07) Diluted earnings per share applicable to common stock 4.64 .99 2.22 4.70 (7.93) December 31, 1997 1996 1995 1994 1993 =============================================================================== Financial Position Cash and cash equivalents $ 313 $ 109 $ 128 $ 162 $ 5 Working capital 367 279 250 252 51 Net property, plant and equipment 1,229 1,456 1,469 1,394 1,399 Total assets 2,453 2,558 2,669 2,500 2,305 Current maturities of long-term obligations 32 38 36 36 28 Long-term obligations 311 470 502 671 674 Redeemable Preferred Stock--Series B ________ 64 65 67 68 Stockholders' equity 837 645 600 401 220 - ------------------------------------------------------------------------------- Other Data Shipments (net tons, in thousands) 6,144 5,895 5,564 5,208 5,005 Raw steel production (net tons, in thousands) 6,527 6,557 6,081 5,763 5,551 Effective capacity utilization 96.0% 93.7% 96.5% 96.1% 100.0% Number of employees at year end 9,417 9,579 9,474 9,711 10,069 Capital investments $ 152 $ 129 $ 215 $ 138 $ 161 Total debt and redeemable preferred stock as a percent of total capitalization 29.0% 47.0% 50.1% 65.9% 77.8% Common shares outstanding at year end (in thousands) 43,288 43,288 43,288 36,376 36,361
1997 ANNUAL REPORT NATIONAL STEEL 17 Management's Discussion and Analysis of Results of Operations and Financial Condition AUDIT COMMITTEE INQUIRY AND RESTATEMENT OF PRIOR PERIODS In the third quarter of 1997, the Audit Committee of the Company's Board of Directors was informed of allegations about managed earnings, including excess reserves and the accretion of such reserves to income over multiple periods, as well as allegations about deficiencies in the system of internal controls. The Audit Committee engaged legal counsel who, with the assistance of an accounting firm, inquired into these matters. The Company, based upon the inquiry, restated its financial statements for certain prior periods. On January 29, 1998, the Company filed a Form 10-K/A for 1996 and Forms 10-Q/A for the first, second and third quarters of 1997 reflecting the restatements. See these Forms for information about the restatement, including the effect of the restatement on items previously presented in Management's Discussion and Analysis of Results of Operations and Financial Condition. The following Management's Discussion and Analysis reflects the effects of the restated financial statements (see Note B to the consolidated financial statements). GENERAL OVERVIEW In 1997, the Company achieved record levels for net sales and net income. Comparative operating results for the last three years are as follows:
1997 1996 1995 Dollars and tons in millions (except earnings per share amounts) Net sales $3,139.7 $2,954.0 $2,954.2 Income from operations 191.0 64.5 129.2 Net income 213.5 53.9 107.5 Basic earnings per share 4.70 .99 2.26 Diluted earnings per share 4.64 .99 2.22 Tons shipped 6.144 5.895 5.564 - -------------------------------------------------------------------------------
In 1997, operations were favorably impacted by record shipments of finished product, increased selling prices, improvements in product and customer mix, and continued cost reduction efforts. Shipments rose 4.2% in 1997 while raw steel production fell just short of its record 1996 level at 6.527 million tons. The improvements in product mix contributed approximately 3% toward the increase in average selling price in 1997. Net income in 1997 was also favorably impacted by the gain recorded on the disposal of non-core assets and other related activities of $58.7 million and a $21.6 million reduction in net financing costs as compared with 1996. Non-core asset disposals included the Company's minority equity investment in Iron Ore Company of Canada, the Great Lakes Division No. 5 coke battery and certain coal properties, as well as a charge related to the decision to cease operations of American Steel Corporation, a wholly-owned subsidiary which pickled and slit steel. The reduction in net financing costs resulted from higher interest income earned coupled with lower debt costs due to significant debt repayments. Income from operations in 1996 was adversely effected by the market pricing environment, significant increases in natural gas prices, an unplanned outage at the Company's pellet operation and a blast furnace explosion at the Granite City Division. Net income in 1996 was favorably impacted by the $11.1 million recorded for the cumulative effect of changing the measurement date used to account for pensions and other postretirement employee benefit obligations ("OPEBs"). 18 The current year's profitable operations and the disposal of non-core assets significantly improved the Company's liquidity and financial condition during 1997. Cash and cash equivalents and investments at year-end 1997 increased to $337.6 million compared to $109.0 million at the end of 1996. The Company's debt/total capital ratio improved from 47.0% at the end of 1996 to 29.0% at the end of 1997. During 1997, the Company utilized a portion of the cash proceeds from the disposal of non-core assets to redeem both its Series A and Series B Preferred Stock. These transactions utilized an aggregate of approximately $83.8 million of cash. Concurrent with the redeemable preferred stock repurchase, the Company and Avatex settled Avatex's obligation relating to certain Weirton liabilities as to which Avatex had agreed to indemnify the Company in prior recapitalization programs. This is further discussed in Note I of the consolidated financial statements. The Company expects that both of these redemptions will be accretive to future income attributable to common shareholders. RESULTS OF OPERATIONS Net Sales Net sales for 1997 were $3.14 billion compared to $2.95 billion in both 1996 and 1995. Tons shipped in 1997 were 6.144 million compared to 5.895 million in 1996 and 5.564 million in 1995. Higher shipment levels resulted in approximately $122.0 million of higher sales in 1997 compared to 1996. Also contributing to the sales increase in 1997 as compared to 1996 was higher pricing as a result of improved market conditions which resulted in higher sales of approximately $34.0 million and the impact of improved customer and product mix which increased sales by approximately $66.0 million. Non-steel related revenues fell by approximately $36.0 million in 1997 due to lower pellet shipments and lower by-product sales. The 1996 sales level was approximately the same as the 1995 sales level despite a 5.9% increase in steel shipment levels largely because of lower market pricing levels which occurred early in 1996. Also contributing to the lower sales level were lower outside sales of pellets. Gross Margin The table below compares gross margin, calculated as net sales less cost of products sold and depreciation for the last three years.
Years Ended December 31, 1997 1996 1995 Gross margin (dollars in millions) $330.7 $191.5 $279.4 Gross margin as a percentage of net sales 10.5% 6.5% 9.5%
The improved gross margin level in 1997 as compared to 1996 is a result of the net sales improvements discussed above, cost reductions as a result of continued emphasis on cost improvements, reduced depreciation expense in 1997 and more stable operations in 1997 as compared to 1996. These cost improvements were partially offset by higher prices for coke and zinc. In addition, insurance recoveries aggregating approximately $8.5 million were received in 1997, which increased gross margin. Depreciation expense in 1997 was $134.5 million as compared to $144.4 million in 1996 and $145.5 million in 1995. The lower level of depreciation in 1997 principally results from the sale of the Great Lakes Division No. 5 coke battery in the second quarter of 1997. The lower level of gross margin in 1996 as compared to 1995 is the result of a less favorable market pricing environment, particularly in the early part of the year, significant increases in natural gas prices as a result of adverse market conditions and two unplanned outages that interrupted business and increased costs. The first of these was a kiln outage at the Company's pellet operation in the first quarter of 1996, which increased costs by approximately $10 million. The second outage was a blast furnace explosion at the Granite City Division in the third quarter, which increased costs by approximately $15 1997 ANNUAL REPORT NATIONAL STEEL 19 million. Partially offsetting these higher costs in 1996 was the reversal of an accrual resulting from the settlement of a dispute with the Pension Benefit Guaranty Corporation, which reduced costs and increased gross margin by $7.5 million. Selling, General and Administrative Expense Selling, general and administrative expense comparative data for the last three years is as follows:
Years Ended December 31, 1997 1996 1995 Selling, general and administrative expense (dollars in millions) $141.3 $136.7 $153.7 Selling, general and administrative expense as a percentage of net sales 4.5% 4.6% 5.2% - --------------------------------------------------------------------------------
Expense levels increased in 1997 as compared to 1996 as a result of the expense associated with converting stock options to stock appreciation rights; higher information systems costs, which are the result of preliminary systems evaluations and engineering expenses and year 2000 remediation costs; and higher legal and professional fees primarily due to the Audit Committee inquiry (see Note B to the consolidated financial statements). These higher cost levels are offset by lower benefit related expenses. In addition, 1996 expense levels were lower as a result of the settlement of a lawsuit in 1996, the proceeds of which were recognized as an offset to selling, general and administrative expenses. The 1996 expense levels are lower than in 1995 as a result of lower professional and legal services. Equity Income from Affiliates Equity income from affiliates was $1.6 million in 1997 compared to $9.8 million in 1996 and $8.8 million in 1995. The lower income level in 1997 is primarily the result of the sale of the Company's minority equity investment in Iron Ore Company of Canada early in the second quarter of 1997. Unusual Charge The unusual charge in 1995 represents costs associated with the reduction of the salaried work force. 20 Net Financing Costs Net financing costs for the last three years are as follows:
Years Ended December 31, 1997 1996 1995 (Dollars in millions) Interest and other financial income $(19.2) $(7.1) $(11.7) Interest and other financial expense 33.8 43.3 50.9 - -------------------------------------------------------------------------------- Net financing costs $ 14.6 $36.2 $ 39.2 ================================================================================
The reduced cost levels in 1997 are the result of higher interest income of $12.1 million due to higher average cash and cash equivalents, and investments balances and lower interest costs of $9.5 million due to lower average debt outstanding. The higher cash and cash equivalents, and investments and lower debt balances are the result of the disposal of non-core assets, which were completed in 1997, as well as positive cash flows from operations in 1997. The 1996 net financing costs were lower than the 1995 expense level principally as a result of lower levels of average debt outstanding due to the prepayment of $133.3 million of debt in August of 1995. Net Gain on Disposal of Non-Core Assets and Other Related Activities In 1997 and 1996, the Company disposed, or made provisions for disposing of, certain non-core assets. The effects of these transactions and other activities relating to non-core assets are presented as a separate component in the statement of consolidated income entitled "net gain on disposal of non-core assets and other related activities." A discussion of these items follows. On April 1, 1997, the Company completed the sale of its 21.7% minority equity interest in the Iron Ore Company of Canada ("IOC") to North Limited, an Australian mining and metal company ("North"). The Company received proceeds (net of taxes and expenses) of $75.3 million from North in exchange for its interest in IOC and recorded a $37.0 million gain. The Company will continue to purchase iron ore at fair market value from IOC pursuant to the terms of long- term supply agreements. On June 12, 1997, the Company completed the sale of the Great Lakes Division No. 5 coke battery and other related assets, including coal inventories, to a subsidiary of DTE Energy Company ("DTE"). The Company received proceeds (net of taxes and expenses) of $234.0 million in connection with the sale and recorded a $14.3 million loss. The Company utilized a portion of the proceeds to prepay the remaining $154.3 million of the related party coke battery debt, which resulted in a net of tax extraordinary loss of $5.4 million. As part of the arrangement, the Company has agreed to operate the battery, under an operation and maintenance agreement executed with DTE, and will purchase the majority of the coke produced from the battery under a requirements contract, with the price being adjusted during the term of the contract, primarily to reflect changes in production costs. In the second quarter of 1997, the Company also recorded a charge of $3.6 million related to the decision to cease operations of American Steel Corporation, a wholly-owned subsidiary which pickled and slit steel. In 1997, the Company sold four coal properties and recorded a net gain of $11.8 million. In conjunction with one of the property sales, the purchaser agreed to assume the potential environmental liabilities and, as a result, the Company eliminated the related accrual of approximately $8 million. Additionally, during 1997, the Company received new information related to closed coal properties" employee benefit liabilities and other expenses, and reduced the related accrual by $19.8 million. In aggregate, the above coal properties" transactions resulted in a gain of $39.6 million in 1997. In September 1996, the Company sold a portion of the land that had been received in conjunction with the settlement of a lawsuit and recorded a net gain of $3.7 million. Income Taxes (Credit) During 1997, the Company recorded current taxes payable of $37.8 million. In 1996 and 1995, the Company recorded current taxes payable of $10.8 million and $16.4 million, respectively. The current portion of the income tax represents taxes which are 1997 ANNUAL REPORT NATIONAL STEEL 21 expected to be due as a result of the filing of the current period's tax returns and, for federal purposes, such amounts have generally been determined based on alternative minimum tax payments due. The current taxes payable represents 16.1% of pre-tax income in 1997. Current taxes payable in 1996 and 1995 represented 33.6% and 18.2% of pre-tax income, respectively. The current levels are less than the U.S. Statutory Rate primarily because of the continued utilization of net operating loss carryforwards, which exist for federal and state tax purposes. In the years ended December 31, 1997 and 1996, the Company recorded a deferred tax benefit of $21.6 million due to the expectation of additional future taxable income. A deferred tax benefit of $28.6 million was recorded in 1995. An additional deferred tax benefit is expected to be recognized in 1998 as continued realization of taxable income increases the likelihood of future taxable income. Cumulative Effect of Accounting Change The Company reflected in its 1996 income statement the cumulative effect of an accounting change which resulted from a change in the valuation date used to measure pension and OPEBs. The cumulative effect of this change was $11.1 million. The valuation date to measure the liabilities was changed from December 31 to September 30 in order to provide more timely information with respect to pension and OPEB provisions. Extraordinary Items An extraordinary loss of $5.4 million (net of a tax benefit of $1.4 million) was reflected in 1997 income. This loss relates to early debt repayment costs related to debt associated with the Company's Great Lakes Division No. 5 coke battery, which was sold in the second quarter of 1997. An extraordinary gain of $5.4 million (net of a tax provision of $.5 million) was recorded in income in 1995. This gain relates to the early payment of $133.3 million of debt. COMMENTS ON EARNINGS OUTLOOK As stated in a press release dated March 24, 1998, the Company's First Quarter 1998 results are expected to be roughly break-even. Among those items affecting First Quarter 1998 performance are the planned major reline of a blast furnace at the Company's Great Lakes Division which began several weeks earlier than anticipated and will likely take longer to complete. This has been coupled with the effects of a late winter storm earlier this month which as negatively impacted operations, particularly at the Midwest Steel Division and an equipment failure at the National Steel Pellet operations which has affected production. While these operating issues will have a negative impact on First Quarter 1998 results, the problems have been largely resolved and the effects will be primarily confined to the First Quarter of 1998. DISCUSSIONS OF OTHER OPERATIONAL AND FINANCIAL DISCLOSURE MATTERS: Impact of Recommendations from Audit Committee Inquiry On January 21, 1998, the Board of Directors accepted the report and approved the recommendations of the legal counsel to the Audit Committee for improvements in the Company's system of internal controls, a restructuring of its finance and accounting department, and the expansion of the role of the internal audit function, as well as corrective measures to be taken related to the specific causes of accounting errors. On February 9, 1998, the Board of Directors approved revisions to the Audit Committee charter. The Company has begun the process of implementing these recommendations with the involvement of the Audit Committee. The cost of these corrective actions is expected to approximate $1.5 million on an annual basis. Change in Assumptions for Pensions and OPEBs As a result of the decrease in long-term interest rates in the United States, at September 30, 1997, the Company decreased the discount rate used to calculate the actuarial present value of its accumulated benefit obligation for pensions and OPEBs by 50 basis points to 7.5% from the rate used at December 31, 1996. The effect of these changes did not impact 1997 expense. The decrease in the discount rate used to calculate the pension obligation increased the minimum pension liability. However, the increase to the minimum pension liability was more than offset by favorable investment returns and higher contribution levels, resulting in a decrease on the Company's balance sheet from $17.5 million to $2.3 million at September 30, 1997, and, at the same time, a $.7 million decrease to stockholders' equity. Environmental Liabilities The Company's operations are subject to numerous laws and regulations relating to the protection of human health and the environment. The Company has expended, and can be expected to expend in the future, substantial amounts for ongoing compliance with these laws and regulations, including, the Clean Air Act, the Resource 22 Conservation's Recovery Act of 1976 and the Great Lakes Water Quality Initiative. Additionally, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state superfund statutes have imposed joint and several liability on the Company as one of many potentially responsible parties at a number of sites requiring remediation. During 1997, in connection with a settlement with Avatex, the Company released Avatex from its obligation to indemnify the Company for certain environmental liabilities of its former Weirton Steel Division. With respect to those claims for which the Company has sufficient information to reasonably estimate its future expenditures, the Company has accrued $18.7 million. Since environmental laws are becoming increasingly more stringent, the Company's expenditures and costs for environmental compliance may increase in the future. 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. Impact of Recently Issued Accounting Standards In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which is effective for years beginning after December 15, 1997, and will be adopted by the Company in 1998. The Statement establishes standards for the reporting and display of comprehensive income and its components, including changes in minimum pension liabilities. Implementation of this disclosure standard will not affect financial position or results of operations and management has not yet determined the manner in which comprehensive income will be displayed. In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement changes the way public companies are required to report operating segment information in annual financial statements and in interim financial reports to stockholders. Operating segments are determined consistent with the way management organizes and evaluates financial information internally for making decisions and assessing performance. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Statement is effective for financial statements for fiscal years beginning after December 15, 1997, and the Company will adopt the Statement in 1998. Although the Company continues to evaluate the impact that this Statement will have on its financial reporting, the Company does not expect significant additional reporting requirements. 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. The Company has a similar labor agreement with the International Chemical Workers Union Council of the United Food and Commercial Workers. The Company estimates that these items, along with certain other provisions in the agreement, will increase employee related expenses by approximately $15 million and $10 million for 1998 and 1999, respectively. The Company's 1997 labor costs increased by approximately $12 million as a result of the arbitrator's award. 1997 ANNUAL REPORT NATIONAL STEEL 23 Year 2000 Issues The "Year 2000" problem is caused by software which processes years using only two digits in the date field. In computer programming, programmers routinely create date fields with only two digit years in an effort to conserve computer memory. If not corrected, this programming technique would cause computer applications to fail or give erroneous results by or at the year 2000. This problem is not exclusive to the mainframe business computer, but may affect all devices using a microprocessor, including mill equipment, process control computers, telephony, discreet devices and even elevators and security systems. The Company is in the process of correcting this problem and has formed a committee consisting of executive management to oversee all Year 2000 activities. The Company retained a third party consulting group to assess the Company's mainframe environment and identify the actions which need to be taken to correct any Year 2000 problems. Based upon these assessments, certain modifications to existing software will be necessary to maintain both operational and support systems. The Company has already begun work on projects related to Year 2000 and spent approximately $1.8 million in 1997. The Company expects to spend up to an additional $10 million on Year 2000 projects and anticipates final completion of these projects to occur sometime in the second quarter of 1999. The cost and completion of the Year 2000 projects are based on management's best estimates and were derived utilizing certain industry standard estimation techniques and analysis of actual programs. Assumptions are relative to the timing of future events and availability of resources. Various factors could cause expected cost and completion times to differ from those anticipated. However, the Company does not believe that the Year 2000 issues will have a material adverse impact on the Company's financial condition or results of operations. DISCUSSION OF LIQUIDITY AND SOURCES OF CAPITAL: Overview 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. Additional sources of liquidity consist of a Receivables Purchase Agreement (the "Receivables Purchase Agreement") with commitments of up to $200.0 million which was extended during 1997 and now has an expiration date of September 2002, and a $100.0 million and a $50.0 million credit facility, both of which are secured by the Company's inventories (the "Inventory Facilities") and expire in May 2000 and July 1998, respectively. 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, 1997, 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 $91.0 million. For 1997, the maximum availability under the Receivables Purchase Agreement, after reduction for letters of credit outstanding, varied from $76.7 million to $111.1 million and was $109.0 million as of December 31, 1997. At December 31, 1997, total debt as a percentage of total capitalization decreased to 29.0% as compared to 47.0% at December 31, 1996. Cash and cash equivalents, and investments totaled $337.6 million and $109.0 million as of December 31, 1997 and 1996, respectively. At December 31, 1997, obligations guaranteed by the Company approximated $21.7 million, compared to $32.2 million at December 31, 1996. Cash Flows From Operating Activities For 1997, cash provided from operating activities totaled $332.2 million, an increase of $173.3 million compared to 1996. This increase is primarily 24 attributable to the $159.6 million increase in net income as well as a lower cash usage to fund working capital needs. For 1996, cash provided from operating activities totaled $158.9 million, a decrease of $106.2 million compared to 1995. This decrease is primarily attributable to the $53.6 million decrease in net income as well as a higher cash usage to fund working capital needs. Capital Expenditures Capital investments at December 31, 1997 and 1996 amounted to $151.8 million and $128.6 million, respectively. The 1997 and 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. Budgeted capital expenditures approximating $222 million, of which $45.8 million is committed at December 31, 1997, are expected to be made during 1998. Included among the budgeted capital expenditures is a new hot dip galvanizing line. Other capital expenditures include new business systems, a blast furnace reline at the Great Lakes Division and mobile equipment purchases to be used mainly at the Company's pellet operations. It is expected that capital expenditures will be in excess of historical levels for the next several years. Cash Proceeds From The Sale Of Non-Core Assets During the second quarter of 1997, the Company sold its Great Lakes Division No. 5 coke battery, as well as its minority equity investment in the Iron Ore Company of Canada. The sale of these two assets generated net proceeds of $309.3 million. Additionally, in 1997, certain coal properties were sold generating net proceeds of $11.3 million. A portion of the proceeds from these sales was used in the fourth quarter when the Company redeemed all of the outstanding Redeemable Preferred Stock-- Series B owned by Avatex. Concurrent with the stock repurchase, the Company and Avatex settled Avatex's obligation relating to certain Weirton liabilities as to which 1997 ANNUAL REPORT NATIONAL STEEL 25 Avatex had agreed to indemnify the Company in prior recapitalization programs. Avatex had pre-funded certain of these indemnifications and, at the time of the pre-funding, the Company and Avatex agreed that a settlement of the liabilities would occur no later than in the year 2000. The redemption of the preferred stock and the related settlement resulted in the Company paying Avatex $59.0 million in the fourth quarter, with an additional $10.0 million required to be paid in 1998. At the time of the settlement, the Company recognized insurance proceeds (net of taxes and expenses) aggregating approximately $13.6 million relating to certain environmental sites, some of which had been indemnified by Avatex and for which the Company is now solely responsible. This transaction is expected to result in lower on-going costs to the Company with respect to the continuing Weirton employee benefit obligations. These lower costs and the elimination of approximately $7 million per year in dividend costs are expected to have an accretive impact on future reported basic and diluted earnings per common share. (See Note I of the consolidated financial statements.) On December 29, 1997, the Company also redeemed the Preferred Stock--Series A, which was owned by NKK U.S.A. Corporation. The Company paid NKK U.S.A. Corporation the face value of the stock ($36.7 million) plus accrued dividends as of the redemption date. The accrued dividends approximated $.6 million. The Company is continuing to evaluate other possible uses of the proceeds of the sale of non-core assets, including additional pension and Voluntary Employees' Beneficiary Association ("VEBA Trust") funding, additional debt retirements and additional strategic investment opportunities. Cash Flows Utilized In Financing Activities During 1997, the Company utilized $297.1 million for financing activities. These included the $154.3 million prepayment of related party debt associated with the sale of the Great Lakes Division No. 5 coke battery and $4.5 million of costs associated with the prepayment of the aforementioned debt. In addition, also included was the $83.8 million for the redemption of the Preferred Stock--Series A and B. Other areas of cash utilization for financing activities included scheduled payments of debt, as well as dividend payments on the Company's preferred stock. 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. 26
NATIONAL STEEL CORPORATION AND SUBSIDIARIES Statements of Consolidated Income Dollars in thousands (except per share amounts) Years Ended December 31, 1997 1996 1995 Net Sales $3,139,659 $2,954,033 $2,954,218 Cost of products sold 2,674,444 2,618,151 2,529,323 Selling, general and administrative expense 141,252 136,731 153,690 Depreciation 134,546 144,413 145,452 Equity income of affiliates (1,576) (9,763) (8,767) Unusual charge ------ ------ 5,336 - ----------------------------------------------------------------------------------------------------------- Income from Operations 190,993 64,501 129,184 - ----------------------------------------------------------------------------------------------------------- Other (income) expense Interest and other financial income (19,198) (7,103) (11,736) Interest and other financial expense 33,805 43,352 50,950 Net gain on disposal of non-core assets and other related activities (58,745) (3,732) ------ - ----------------------------------------------------------------------------------------------------------- Income Before Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Change 235,131 31,984 89,970 - ----------------------------------------------------------------------------------------------------------- Income taxes (credit) 16,231 (10,840) (12,201) - ----------------------------------------------------------------------------------------------------------- Income Before Extraordinary Items and Cumulative Effect of Accounting Change 218,900 42,824 102,171 Extraordinary items (5,397) ------ 5,373 Cumulative effect of accounting change ------ 11,100 ------ - ----------------------------------------------------------------------------------------------------------- Net Income 213,503 53,924 107,544 Less preferred stock dividends 10,252 10,959 10,958 - ----------------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 203,251 $ 42,965 $ 96,586 =========================================================================================================== Basic Earnings Per Share: - ----------------------------------------------------------------------------------------------------------- Income before extraordinary items and cumulative effect of accounting change $ 4.82 $ .74 $ 2.13 Extraordinary items (.12) --- .13 Cumulative effect of accounting change --- .25 --- - ----------------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 4.70 $ .99 $ 2.26 =========================================================================================================== Diluted Earnings Per Share: - ----------------------------------------------------------------------------------------------------------- Income before extraordinary items and cumulative effect of accounting change $ 4.76 $ .74 $ 2.10 Extraordinary items (.12) --- .12 Cumulative effect of accounting change --- .25 --- - ----------------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 4.64 $ .99 $ 2.22 =========================================================================================================== Weighted average shares outstanding 43,288 43,288 42,707 - -----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 1997 ANNUAL REPORT NATIONAL STEEL 27
National Steel Corporation and Subsidiaries Consolidated Balance Sheets Dollars in thousands December 31, 1997 1996 ASSETS Current assets Cash and cash equivalents $ 312,642 $ 109,041 Investments 25,000 ------ Receivables, less allowances (1997--$17,644; 1996--$19,320) 284,306 281,889 Inventories 374,202 440,567 Deferred tax assets 8,597 ------ - -------------------------------------------------------------------------------------------------------------- Total current assets 1,004,747 831,497 - -------------------------------------------------------------------------------------------------------------- Investments in affiliated companies 15,709 65,399 Property, plant and equipment Land and land improvements 190,859 244,203 Buildings 301,058 272,897 Machinery and equipment 2,886,214 3,147,497 - -------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 3,378,131 3,664,597 Less accumulated depreciation 2,149,107 2,209,079 - -------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 1,229,024 1,455,518 Deferred tax assets 164,503 153,538 Intangible pension asset 1,151 17,040 Other assets 38,325 35,338 - -------------------------------------------------------------------------------------------------------------- Total Assets $2,453,459 $2,558,330 ============================================================================================================== LIABILITIES, Current liabilities REDEEMABLE Accounts payable $ 246,085 $ 234,892 PREFERRED Salaries and wages 90,604 67,964 STOCK AND Withheld and accrued taxes 70,608 69,137 STOCKHOLDERS' Pension and other employee benefits 141,350 79,132 EQUITY Other accrued liabilities 50,680 57,525 Income taxes 6,507 6,427 Current portion of long-term obligations 31,533 37,731 - -------------------------------------------------------------------------------------------------------------- Total current liabilities 637,367 552,808 - -------------------------------------------------------------------------------------------------------------- Long-term obligations 310,976 323,550 Long-term obligations to related parties ------ 146,744 Long-term pension liabilities 162,234 243,237 Postretirement benefits other than pensions 354,604 251,769 Other long-term liabilities 151,300 332,130 Redeemable Preferred Stock--Series B ------ 63,530 - -------------------------------------------------------------------------------------------------------------- Stockholders' equity Common Stock par value $.01: Class A--authorized 30,000,000 shares; issued and outstanding 22,100,000 shares in 1997 and 1996 221 221 Class B--authorized 65,000,000 shares; issued and outstanding 21,188,240 shares in 1997 and 1996 212 212 Preferred Stock--Series A ------ 36,650 Additional paid-in capital 491,835 465,359 Retained earnings 344,710 142,120 - -------------------------------------------------------------------------------------------------------------- Total stockholders' equity 836,978 644,562 - -------------------------------------------------------------------------------------------------------------- Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity $2,453,459 $2,558,330 ==============================================================================================================
See notes to consolidated financial statements. 28 NATIONAL STEEL CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS
Dollars in thousands Years Ended December 31, 1997 1996 1995 Cash Flows from Operating Activities Net Income $ 213,503 $ 53,924 $ 107,544 Adjustments To Reconcile Net Income To net cash provided by operating activities: Depreciation 134,546 144,413 145,452 Carrying charges related to facility sales and plant closings 19,322 22,385 24,307 Net gain on disposal of non-core assets (58,745) (3,732) ------ Equity income of affiliates (1,576) (9,763) (8,767) Dividends from affiliates 6,808 4,375 6,332 Long-term pension liability (net of change in intangible pension asset) (79,717) 18,430 24,763 Postretirement benefits other than pensions 19,028 29,459 43,579 Extraordinary items 5,397 ------ (5,373) Cumulative effect of accounting change ------ (11,100) ------ Deferred income taxes (21,600) (21,600) (28,600) Changes in working capital items: Investments (25,000) ------ ------ Receivables 4,757 34,773 (23,793) Inventories 56,365 (27,192) (44,291) Accounts payable 942 (20,682) (17,012) Accrued liabilities 74,166 (38,209) 52,386 Other (15,990) (16,576) (11,431) - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 332,206 158,905 265,096 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities Purchases of property, plant and equipment (151,773) (128,621) (215,442) Net proceeds from sale of assets ------ 4,118 110 Net proceeds from disposal of non-core assets 320,602 3,732 ------ Other (362) ------ ------ - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by (Used in) Investing Activities 168,467 (120,771) (215,332) - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities Redemption of Preferred Stock--Series A (36,650) ------ ------ Redemption of Redeemable Preferred Stock--Series B and related settlement with Avatex (47,148) ------ ------ Prepayment of related party debt (154,328) ------ (125,624) Cost associated with prepayment of related party debt (4,500) ------ ------ Debt repayments (35,041) (35,750) (35,849) Borrowings 3,959 6,500 ------ Payment of released Weirton benefit liabilities (12,119) (15,360) (15,429) Payment of unreleased Weirton liabilities and their release in lieu of cash dividends on Redeemable Preferred Stock--Series B (7,037) (8,066) (7,099) Dividend payments on Preferred Stock--Series A (3,998) (4,033) (4,032) Dividend payments on Redeemable Preferred Stock--Series B (210) ------ (964) Exercise of stock options ------ ------ 169 Issuance of Class B Common Stock ------ ------ 104,734 - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Used in Financing Activities (297,072) (56,709) (84,094) - ------------------------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents 203,601 (18,575) (34,330) Cash and cash equivalents at beginning of the year 109,041 127,616 161,946 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of the year $ 312,642 $ 109,041 $ 127,616 ==================================================================================================================================== Supplemental Cash Payment Information Interest and other financing costs paid $ 28,728 $ 42,487 $ 45,627 - ------------------------------------------------------------------------------------------------------------------------------------
See Notes To Consolidated Financial Statements. 1997 ANNUAL REPORT NATIONAL STEEL 29 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 Total Redeemable Stock-- Stock-- Stock-- Paid-In Retained Stockholders-- Preferred Class A Class B Series A Capital Earnings Equity Stock--Series B - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1995 $ 221 $ 143 $ 36,650 $ 360,525 $ 3,072 $ 400,611 $ 66,530 Net Income 107,544 107,544 Amortization of excess of book value over redemption value of Redeemable Preferred Stock--Series B 1,500 1,500 (1,500) Cumulative dividends on Preferred Stock-- Series A and B (12,458) (12,458) Issuance of Common Stock--Class B 69 104,665 104,734 Exercise of stock options 169 169 Minimum pension liability (1,765) (1,765) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 221 212 36,650 465,359 97,893 600,335 65,030 Net Income 53,924 53,924 Amortization of excess of book value over redemption value of Redeemable Preferred Stock--Series B 1,500 1,500 (1,500) Cumulative dividends on Preferred Stock-- Series A and B (12,459) (12,459) Minimum pension liability 1,262 1,262 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 221 212 36,650 465,359 142,120 644,562 63,530 Net Income 213,503 213,503 Amortization of excess of book value over redemption value of Redeemable Preferred Stock--Series B 1,354 1,354 (1,354) Cumulative dividends on Preferred Stock-- Series A and B (11,606) (11,606) Redemption of Preferred Stock--Series A (36,650) (36,650) Redemption of Redeemable Preferred Stock--Series B and related settlement with Avatex 26,476 26,476 (62,176) Minimum pension liability (661) (661) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 3l, 1997 $ 221 $ 212 $ ------ $ 491,835 $ 344,710 $ 836,978 $ ------- ====================================================================================================================================
See notes to consolidated financial statements. 30 National Steel Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 1997 NOTE A--DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of Operations National Steel Corporation and its majority owned subsidiaries (the "Company") is a domestic manufacturer engaged in a single line of business, the production and processing of steel. The Company targets high value-added applications of flat rolled carbon steel for sale primarily to the automotive, construction and container markets. The Company also sells hot and cold rolled steel to a wide variety of other users including the pipe and tube industry and independent steel service centers. The Company's principal markets are located throughout the United States. In 1997, 1996 and 1995, no single customer accounted for more than 10.0% of net sales. Sales to the automotive market accounted for approximately 27% of total net sales in 1997 and approximately 28% in 1996 and 1995. 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"), the International Chemical Workers Union Council of the United Food and Commercial Workers and other labor organizations, which collectively represent 82.3% of the Company's employees. The Company entered into a six-year agreement with these labor organizations in 1993 (the "1993 Settlement Agreement"). Additionally, the 1993 Settlement Agreement contains a no-strike clause also effective through August 1, 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. The 1993 Settlement Agreement provided that an individual designated by the International President of the United Steelworkers of America would be elected to the Company's Board of Directors. Principles of Consolidation The consolidated financial statements include the accounts of National Steel Corporation and its majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Cash Equivalents Cash equivalents are short-term liquid investments consisting 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. Investments Investments consist of a time deposit at cost which has a maturity greater than three months at the time of purchase. At December 31, 1997, the cost of the investment approximates market. Risk Management Contracts In the normal course of business, the Company enters into certain derivative financial instruments, primarily commodity purchase swap contracts and foreign currency forward contracts, to manage its exposure to fluctuations in commodity prices and foreign currency exchange rates. The Company designates the financial instruments as hedges for 1997 ANNUAL REPORT NATIONAL STEEL 31 specific anticipated transactions. Gains and losses from hedges are classified in the income statement in cost of goods sold when the contracts are closed. Cash flows from hedges are classified in the statement of consolidated cash flows under the same category as the cash flows from the related anticipated transactions. The Company does not enter into any derivative transactions for speculative purposes. (See Note N--Risk Management Contracts.) 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 $183.9 and $168.8 million higher than reported at December 31, 1997 and 1996, 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 inventories as of December 31 are as follows:
1997 1996 Dollars in thousands Inventories Finished and semi-finished $358,486 $390,675 Raw materials and supplies 154,056 184,331 - -------------------------------------------------- 512,542 575,006 Less LIFO reserve 138,340 134,439 - -------------------------------------------------- $374,202 $440,567 ==================================================
Investments in Affiliated Companies Investments in affiliated companies (corporate joint ventures and 20.0% to 50.0% owned companies) are stated at cost plus equity in undistributed earnings since acquisition. Undistributed earnings (deficit) of affiliated companies included in retained earnings at December 31, 1997 and 1996 amounted to ($1.1) million and $14.6 million, respectively. (See Note J--Non-Operational Income Statement Activities.) In May 1997, the Company completed the acquisition of an additional 12% of the equity in ProCoil Corporation ("ProCoil") for approximately $.4 million. This brings the Company's total ownership to 56% as of December 31, 1997. ProCoil's financial position and results of operations have been included in the consolidated financial statements from the date of this acquisition. 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 $5.3 million in 1997, $4.0 million in 1996 and $6.3 million in 1995. Depreciation of capitalized interest amounted to $4.5 million in 1997, $5.5 million in 1996 and $5.6 million in 1995. Depreciation Depreciation of production facilities and capitalized lease obligations are generally computed by the straight-line method. Depreciation of furnace relinings are computed on the basis of tonnage produced in relation to estimated total production to be obtained from such facilities. Research and Development Research and development costs are expensed when incurred as a component of cost of products sold. Expenses for 1997, 1996 and 1995 were $10.9 million, $11.1 million and $9.6 million, respectively. Financial Instruments Financial instruments consist of cash and cash equivalents, investments and long-term obligations (excluding capitalized lease obligations). The fair value of these financial instruments approximates their carrying amounts at December 31, 1997. Earnings per Share (Basic and Diluted) In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, Earnings per Share. SFAS No. 128 requires the Company to present two earnings per share ("EPS") amounts. It replaces the presentation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the year. Diluted EPS is computed by dividing net income available to common stockholders by the 32 weighted-average number of common stock shares outstanding during the year plus potential dilutive instruments such as stock options. The effect of stock options on diluted EPS is determined through the application of the treasury stock method, whereby proceeds received by the Company based on assumed exercises are hypothetically used to repurchase the Company's common stock at the average market price during the period. The calculation of the dilutive effect of stock options on the weighted average shares is as follows:
1997 1996 1995 Shares in thousands - ------------------------------------------------------- Denominator for basic earnings per share-- weighted-average shares 43,288 43,288 42,707 Effect of stock options 485 6 772 - ------------------------------------------------------- Denominator for diluted earnings per share 43,773 43,294 43,479 =======================================================
Options to purchase common stock of 194,000 shares in 1997, 1,154,235 shares in 1996 and 196,000 shares in 1995 were outstanding, but were excluded from the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares during those years. All EPS amounts for all periods presented conform to SFAS No. 128 requirements. Use of Estimates Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expense during the year. Actual results could differ from those estimates. Reclassifications Certain amounts in prior years consolidated financial statements have been reclassified to conform with the current year presentation. Impact of Recently Issued Accounting Standards In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which is effective for years beginning after December 15, 1997, and will be adopted by the Company in 1998. The Statement establishes standards for the reporting and display of comprehensive income and its components, including changes in minimum pension liabilities. Implementation of this disclosure standard will not affect financial position or results of operations and management has not yet determined the manner in which comprehensive income will be displayed. In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement changes the way public companies are required to report operating segment information in annual financial statements and in interim financial reports to stockholders. Operating segments are determined consistent with the way management organizes and evaluates financial information internally for making decisions and assessing performance. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Statement is effective for financial statements for fiscal years beginning after December 15, 1997, and the Company will adopt the Statement in 1998. Although the Company continues to evaluate the impact that this Statement will have on its financial reporting; the Company does not expect significant additional reporting requirements. NOTE B--AUDIT COMMITTEE INQUIRY AND SECURITIES AND EXCHANGE COMMISSION INQUIRY In the third quarter of 1997, the Audit Committee of the Company's Board of Directors was informed of allegations about managed earnings, including excess reserves and the accretion of such reserves to income over multiple periods, as well as allegations about deficiencies in the system of internal controls. The Audit Committee engaged legal counsel who, with the assistance of an accounting firm, inquired into these matters. The Company, based upon the inquiry, restated its financial statements for certain prior periods. On January 29, 1998, the Company filed a Form 10-K/A for 1996 and Forms 10-Q/A for the first, 1997 ANNUAL REPORT NATIONAL STEEL 33 second and third quarters of 1997 reflecting the restatements. See these Forms for information about the restatement, including the effect of the restatement on items previously presented in Management's Discussion and Analysis of Results of Operations and Financial Condition. On December 15, 1997, the Board of Directors approved the termination of the Company's Vice-President Finance in connection with the Audit Committee inquiry. During January 1998, legal counsel to the Audit Committee issued its report to the Audit Committee, and the Audit Committee approved the report and concluded its inquiry. On January 21, 1998, the Board of Directors accepted the report and approved the recommendations, except for the recommendation to revise the Audit Committee Charter, which was approved on February 9, 1998. The report found certain misapplications of generally accepted accounting principles and accounting errors, including excess reserves, which have been corrected in the amended filings, referred to above. The report found that the accretion of excess reserves to income during the first, second and third quarters of 1997, as described in the Forms 10-Q/A for those quarters, may have had the effect of management of earnings as the result of errors in judgement and the misapplication of generally accepted accounting principles. However, the report concluded that these errors do not appear to have involved the intentional misstatement of the Company's accounts. The report also found weaknesses in internal controls and recommended various improvements in the Company's system of internal controls, including a comprehensive review of such controls, a restructuring of the Company's finance and accounting department, and expansion of the role of the internal audit functions, as well as corrective measures to be taken related to the specific causes of the accounting errors. The Company has begun to implement these recommendations with involvement of the Audit Committee. The Securities and Exchange Commission (the "Commission") has authorized an investigation pursuant to a formal order of investigation relating to the matters described above. The Company has been cooperating with the staff of the Commission and intends to continue to do so. 34 NOTE C--CAPITAL STRUCTURE The Company has two classes of common stock. The shares of Class A Common Stock are owned by NKK U.S.A. Corporation. Each of these shares is entitled to two votes. The shares of Class B Common Stock are publicly traded and each of the shares is entitled to one vote. As a result of its ownership of the Class A Common Stock, NKK U.S.A. Corporation controls approximately 67.6% of the voting power of the Company. The remaining 32.4% of the combined voting power is held by the public. At December 31, 1997, the Company's capital structure was as follows. Class A Common Stock: At December 31, 1997, the Company had 30,000,000 shares of $.01 par value Class A Common Stock authorized, of which 22,100,000 shares were issued and outstanding and owned by NKK U.S.A. Corporation. Each share is entitled to two votes. No cash dividends were paid on the Class A Common Stock in 1997, 1996, or 1995. Class B Common Stock: At December 31, 1997, 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 1997, 1996, or 1995. All of the issued and outstanding shares of Class B Common Stock are publicly traded. On February 10, 1998, the Board of Directors authorized a quarterly dividend payment of $.07 per common share, payable on March 11, 1998 to stockholders of record on February 25, 1998. In prior years, the Company had two series of preferred stock outstanding. Both of these series of stock were redeemed in the fourth quarter of 1997. Prior to redemption, which occurred on December 29, 1997, there were 5,000 shares of $1.00 par value Series A Preferred Stock issued and outstanding. All of this stock was owned by NKK U.S.A. Corporation. Annual dividends of $806.30 per share were cumulative and payable quarterly. Dividend payments of approximately $4 million were paid in each of the three years ended December 31, 1997. This stock was redeemed at its book value of approximately $36.7 million plus accrued dividends through the redemption date. This stock had not been subject to mandatory redemption provisions. The Company also had 10,000 shares of Redeemable Preferred Stock--Series B issued and outstanding prior to the redemption of these shares on November 24, 1997. This stock had been owned by Avatex Corporation ("Avatex"--formerly known as FoxMeyer Health Corporation). Annual dividends of $806.30 per share were cumulative and payable quarterly. This stock was subject to mandatory redemption on August 5, 2000. Concurrent with the stock repurchase in 1997, the Company and Avatex settled Avatex's obligations relating to certain Weirton liabilities for which Avatex agreed to indemnify the Company in prior recapitalization programs. A further discussion of the redemption and assumption can be found in Note I-- Weirton Liabilities. In 1997, dividends were accrued and paid on this stock through November 4, 1997. The mandatory redemption price of the Redeemable Preferred Stock--Series B was $58.3 million. The difference between this price and the book value of the stock was being amortized to retained earnings at a rate of $1.5 million per year. 1997 ANNUAL REPORT NATIONAL STEEL 35 NOTE D--LONG-TERM OBLIGATIONS Long-term obligations are as follows:
December 31, 1997 1996 Dollars in thousands First Mortgage Bonds, 8.375% Series due August 1, 2006, with general first liens on principal plants, properties and certain subsidiaries. $ 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. 19,753 26,375 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. 107,873 113,920 Coke Battery Loan, 7.54% fixed rate with semi-annual payments due through 2008. Lenders are wholly-owned subsidiaries of NKK and are unsecured. (See discussion of debt repayment in this note.) ------- 161,912 Pickle Line Loan, 7.726% fixed rate due in equal semi-annual installments through 2007, with a first mortgage in favor of the lender. 78,788 83,526 ProCoil, various rates and due dates 18,959 ------- Capitalized lease obligations 21,026 24,965 Other 21,110 22,327 - ------------------------------------------------------------------------------------------------------------------------------- Total long-term obligations 342,509 508,025 Less long-term obligations due within one year 31,533 37,731 - ------------------------------------------------------------------------------------------------------------------------------- Long-term obligations $310,976 $470,294 ===============================================================================================================================
Future minimum payments for all long-term obligations and leases as of December 31, 1997 are as follows:
Other Capitalized Operating Long-Term Lease Leases Obligations Dollars in thousands 1998 $ 6,712 $ 64,463 $ 27,125 1999 6,712 59,868 24,829 2000 6,712 50,446 22,983 2001 6,712 39,673 24,001 2002 ------- 36,881 32,600 Thereafter ------- 113,603 189,945 - ------------------------------------------------------------------------------------------------------ Total Payments $ 26,848 $364,934 $321,483 ======================= Less amount representing interest 5,822 Less current portion of obligations under capitalized lease 4,408 - -------------------------------------------------------------------------- Long-term obligations under capitalized lease $ 16,618 ==========================================================================
36 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 $75.3 million in 1997, $72.2 million in 1996 and $71.8 million in 1995. The Company borrowed a total of $350.0 million over a three year period ended in 1993 from United States subsidiaries of NKK for the rebuild of the Great Lakes Division No. 5 coke battery. During 1995, the Company utilized proceeds from the 6.9 million share Class B Common Stock primary offering, along with other cash funds, to prepay $133.3 million aggregate principal amount of the aforementioned loan. During 1996, the Company made principal payments of $15.2 million and recorded $12.1 million in interest expense on the coke battery loan. During 1997, the Company made principal payments of $161.9 million (includes a $154.3 million prepayment) and recorded $5.3 million in interest expense on the coke battery loan. In June 1997, the Company utilized $154.3 million of the proceeds from the sale of the Great Lakes Division No. 5 coke battery to prepay all of the outstanding debt associated with the related loan. As a result of the early debt repayment, an extraordinary loss of $5.4 million (net of a tax benefit of $1.4 million) was reflected in 1997 income. Credit Arrangements The Company's credit arrangements consist of a Receivables Purchase Agreement (the "Receivables Purchase Agreement") with commitments of up to $200.0 million and an expiration date of September 2002 and a $100.0 million and a $50.0 million credit facility, both of which are secured by the Company's inventories (the "Inventory Facilities") and expire in May 2000 and July 1998, respectively. 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, 1997, 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 $91.0 million. During 1997, the maximum availability under the Receivables Purchase Agreement, after reduction for letters of credit outstanding, varied from $76.7 million to $111.1 million and was $109.0 million as of December 31, 1997. 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 $391.3 million was free of such limitations at December 31, 1997. In addition, any dividend payments must be matched by a like contribution into a Voluntary Employees' Beneficiary Association Trust ("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. The asset value of the VEBA Trust at December 31, 1997 was approximately $91 million. The labor agreement provides for exclusion or "offsets" to the matching of cash dividends. Currently, the Company has the capability of declaring a dividend slightly in excess of $27 million without having to contribute any matching amounts into the VEBA Trust. NOTE E--PENSIONS The Company has various non-contributory defined benefit pension plans covering substantially all employees. Benefit payments for salaried employees are based upon a formula which utilizes employee age, years of credited service and the highest sixty consecutive months of pensionable 1997 ANNUAL REPORT NATIONAL STEEL 37 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 Retirement Protection Act of 1994 accelerated the Company's funding requirement in order to reach a target funding level of 90% of current pension liability. The Company's contributions to the pension trust for 1997 and 1996 were $83.7 million and $59.9 million, respectively. The Company will contribute approximately $125.6 million to its pension plans in 1998 and expects to make similar contributions over the next two years. As a result of a third quarter 1996 change in measurement date from December 31 to September 30 for pension and other postretirement employee benefit obligations ("OPEBs"), the Company recorded a cumulative effect credit of $8.3 million ($.19 per share) in 1996 related to pensions. Pension expense and related actuarial assumptions utilized are summarized below:
1997 1996 1995 Dollars in thousands Assumptions: Discount rate 8.00% 7.25% 8.75% Return on assets 9.25% 9.25% 8.50% Average rate of compensation increase 4.70% 4.70% 4.70% - ------------------------------------------------------------------------------ Pension expense: Service cost $ 24,059 $ 25,989 $ 19,143 Interest cost 114,975 111,364 110,683 Actual return on plan assets (216,665) (82,362) (234,792) Net amortization and deferral 135,356 6,930 169,756 - ------------------------------------------------------------------------------ Net pension expense 57,725 61,921 64,790 Cumulative effect of accounting change ------- (8,300) ------- - ------------------------------------------------------------------------------ Total pension expense $ 57,725 $ 53,621 $ 64,790 ==============================================================================
1997 1996 Dollars in thousands Assumptions: Discount rate 7.50% 8.00% Average rate of compensation increase 4.70% 4.70% - ------------------------------------------------------------------------------ Funded Status: Accumulated benefit obligation ("ABO") including vested benefits of $1,338,694 and $1,249,551 for 1997 and 1996, respectively $1,464,940 $1,364,742 Effect of future projected pensionable earnings increases 122,029 99,502 - ------------------------------------------------------------------------------ Projected benefit obligation ("PBO") 1,586,969 1,464,244 Plan assets at fair market value 1,352,925 1,181,708 - ------------------------------------------------------------------------------ PBO in excess of plan assets at fair market value 234,044 282,536 Unrecognized transition obligation (35,078) (43,809) Unrecognized net gain 130,606 106,702 Unrecognized prior service cost (85,804) (98,480) Pension contributions October through December (9,633) (7,321) Adjustment required to recognize minimum pension liability 2,315 17,543 - ------------------------------------------------------------------------------ Accrued pension liability 236,450 257,171 Less pension liability due within one year 69,616 13,934 - ------------------------------------------------------------------------------ Long-term pension liability at December 31 $ 166,834 $ 243,237 ==============================================================================
As a result of a decrease in long-term interest rates at September 30, 1997, the Company decreased the discount rate used to calculate the actuarial present value of its ABO by 50 basis points to 7.50% from the rate used at September 30, 1996. This is the primary reason for the increase in the ABO. The adjustment required to recognize the minimum pension liability of $2.3 million and $17.5 million at December 31, 1997 and 1996, 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 favorable investment returns and higher contribution levels partially offset by a lower discount rate. At September 30, 1997, the Company's pension plans' assets of $1.4 billion were comprised of approximately 62% equity investments, 35% fixed income investments and 3% real estate investments. 38 NOTE F--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides contributory healthcare and life insurance benefits for certain retirees and their dependents. Generally, employees who are retired 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, 15 of which remain at December 31, 1997. As a result of a third quarter 1996 change in measurement date from December 31 to September 30 for pensions and OPEBs, the Company recorded a cumulative effect credit of $2.8 million ($.06 per share) in 1996 related to OPEBs. The components of postretirement benefit cost and related actuarial assumptions were as follows:
1997 1996 1995 Dollars in thousands Assumptions: Discount rate 8.00% 7.25% 8.75% Health care trend rate 6.60% 7.20% 7.80% - ------------------------------------------------------------------- Postretirement benefit cost: Service cost $ 11,256 $ 12,546 $ 10,573 Interest cost 48,623 47,812 54,416 Actual return of plan assets (18,380) (3,422) ------- Amortization of transition obligation 27,285 27,759 27,759 Other 6,635 (1,465) (5,003) - -------------------------------------------------------------------- Net postretirement benefit cost 75,419 83,230 87,745 Cumulative effect of accounting change ------- (2,800) ------- - -------------------------------------------------------------------- Total postretirement benefit cost $ 75,419 $ 80,430 $ 87,745 ====================================================================
The following represents the plans' funded status as of September 30, 1997 and 1996, reconciled with amounts recognized in the consolidated balance sheet and related actuarial assumptions (excluding Weirton liabilities, which are presented in Note I of the consolidated financial statements):
1997 1996 Dollars in thousands Assumptions: Discount rate 7.50% 8.00% Health care trend rate 6.30% 6.60% Accumulated postretirement benefit obligation ("APBO"): Retirees $ 424,002 $ 429,774 Fully eligible active participants 75,207 76,945 Other active participants 109,671 108,823 - ---------------------------------------------------------------- Total 608,880 615,542 Plan assets at fair value 82,667 48,287 - ---------------------------------------------------------------- APBO in excess of plan assets 526,213 567,255 Unrecognized transition obligation (400,515) (427,800) Unrecognized net gain 169,871 137,432 Claims and contributions October through December (15,865) (15,118) - ---------------------------------------------------------------- Accrued postretirement benefit liability 279,704 261,769 Less postretirement benefit liability due within one year 27,000 10,000 - ---------------------------------------------------------------- Long-term postretirement benefit liability at December 31 $ 252,704 $ 251,769 ================================================================
The assumed healthcare cost trend rate of 6.3% in 1997 decreases gradually to the ultimate trend rate of 5.0% in 2002 and thereafter. A 1.0% increase in the assumed healthcare cost trend rate would have increased the APBO at September 30, 1997 and postretirement benefit cost for 1997 by $56.3 million and $6.5 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 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 1997 and 1996, the Company contributed $16.0 million and $15.5 million, respectively, to the VEBA Trust. The VEBA Trust assets of $82.7 million at September 30, 1997, were comprised of 43.0% equity investments and 57.0% fixed income investments. 1997 ANNUAL REPORT NATIONAL STEEL 39 NOTE G--OTHER LONG-TERM LIABILITIES Other long-term liabilities at December 31 consisted of the following:
1997 1996 Dollars in thousands Deferred gain on sale leasebacks $ 18,618 $ 21,503 Insurance and employee benefits (excluding pensions and OPEBs) 94,861 117,913 Plant closings 13,720 45,480 Released Weirton benefit liabilities --- 122,697 Other 24,101 24,537 - -------------------------------------------------------------------- Total other long-term liabilities $151,300 $332,130 ====================================================================
During 1997, the Company and Avatex settled certain Weirton benefit liabilities. See Note I--Weirton Liabilities for details of this transaction. NOTE H--INCOME TAXES Deferred income taxes reflect the net effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities at December 31 are as follows:
1997 1996 Dollars in thousands Deferred tax assets Accrued liabilities $ 127,300 $ 139,900 Employee benefits 211,300 206,300 Net operating loss ("NOL") carryforwards 17,400 63,000 Leases 10,000 12,700 Alternative minimum tax credits 66,200 30,400 Other 29,200 28,000 - -------------------------------------------------------------------- Total deferred tax assets 461,400 480,300 Valuation allowance (83,300) (106,200) - -------------------------------------------------------------------- Deferred tax assets net of valuation allowance 378,100 374,100 - -------------------------------------------------------------------- Deferred tax liabilities Book basis of property in excess of tax basis (174,300) (168,200) Excess tax LIFO over book (21,800) (40,400) Other (8,900) (14,000) - -------------------------------------------------------------------- Total deferred tax liabilities (205,000) (222,600) - -------------------------------------------------------------------- Net deferred tax assets after valuation allowance $ 173,100 $ 151,500 ====================================================================
In 1997 and 1996, the Company determined that it was more likely than not that approximately $450 million and $395 million, respectively, of future taxable income would be generated to justify the net deferred tax assets after the valuation allowance. Accordingly, the Company recognized additional deferred tax assets of $21.6 million in both 1997 and 1996 and $28.6 million in 1995. Significant components of income taxes (credit) are as follows:
1997 1996 1995 Dollars in thousands Current taxes payable: Federal alternative minimum tax $ 35,536 $ 10,426 $ 9,498 State and foreign 2,295 334 6,901 Deferred tax credit (21,600) (21,600) (28,600) - ------------------------------------------------------------------------------- Income taxes (credit) $ 16,231 $(10,840) $(12,201) ===============================================================================
The reconciliation of income tax computed at the federal statutory tax rates to the recorded income taxes (credit) is as follows:
1997 1996 1995 Dollars in thousands Tax at federal statutory rates $ 82,300 $ 11,200 $ 31,500 Benefit of operating loss carryforward (41,400) (9,900) (62,200) Temporary differences for which no benefit (benefit) was recognized (net) (39,300) (27,300) 14,700 Depletion (5,200) (1,900) (4,300) Dividend exclusion (2,000) (1,200) (1,800) Alternative minimum tax 35,536 10,426 9,498 Other (13,705) 7,834 401 - ----------------------------------------------------------------------------- Income taxes (credit) $ 16,231 $ (10,840) $ (12,201) =============================================================================
At December 31, 1997, the Company had unused federal NOL carryforwards of approximately $47.8 million ($174.8 million at December 31, 1996), which expire in 2008. At December 31, 1997, the Company had unused alternative minimum tax credit carryforwards of approximately $66.2 million which may be applied to offset its future regular federal income tax liabilities. These tax credits may be carried forward indefinitely. 40 NOTE I--WEIRTON LIABILITIES In 1984, NKK purchased a 50% equity interest in the Company from Avatex. As a part of these transactions, Avatex agreed to indemnify the Company, based on agreed-upon assumptions, for certain ongoing employee benefit liabilities related to the Company's former Weirton Steel Division ("Weirton"), which had been divested through an Employee Stock Ownership Plan arrangement in 1984. In 1990, NKK purchased an additional 20% equity interest in the Company from Avatex. As a part of the 1990 transaction, Avatex contributed $146.6 million to the Company for employee benefit related liabilities and agreed that dividends from the Redeemable Preferred Stock--Series B would be primarily used to fund pension obligations of Weirton. Under this arrangement, it was agreed that the Company would release Avatex from its indemnification obligation at the time of the scheduled redemption of the Redeemable Preferred Stock--Series B or at an earlier date if agreed to by the parties. The Redeemable Preferred Stock--Series B was scheduled to be redeemed in the year 2000. Avatex also agreed in 1984 to indemnify the Company against certain environmental liabilities related to Weirton and the Company's subsidiary, The Hanna Furnace Corporation ("Environmental Liabilities"). In 1994, Avatex prepaid $10.0 million to the Company with respect to these Environmental Liabilities. In 1995, the Company redeemed one half of the outstanding Redeemable Preferred Stock--Series B for approximately $67 million, with the proceeds going to partially fund the Weirton pension obligations. During the fourth quarter of 1997, the Company redeemed the remaining Redeemable Preferred Stock--Series B held by Avatex, which had a book value including accrued dividends of $62.6 million. In addition, the Company finalized a settlement with Avatex regarding certain employee benefit liabilities associated with Weirton, as well as the Environmental Liabilities. As a result of the redemption and settlement, the Company made a payment of $59.0 million to Avatex and will pay Avatex an additional $10.0 million, without interest, in installments of $2.5 million each, in the first and second quarters of 1998, and a third installment of $5.0 million in the fourth quarter of 1998. In connection with the settlement, Avatex released any claims to amounts received with respect to settlements reached in a lawsuit brought by the Company and Avatex against certain former insurers of the Company, wherein recovery was sought for past and future environmental claims, which included the Environmental Liabilities. At the time of the Avatex settlement, the Company recognized insurance proceeds (net of taxes and expenses) aggregating approximately $13.6 million related to the settlement of such lawsuit. The Company will also retain the $9.2 million remaining balance of the Environmental Liabilities prepayment made by Avatex in 1994. Under its settlement with Avatex, the Company has recorded liabilities for the Weirton pension obligation, certain other Weirton employee benefit liabilities and the Environmental Liabilities, and has relieved Avatex from any future indemnity obligation with regard to all such liabilities. Also, as a result of the redemption of the Company's Redeemable Preferred Stock--Series B, NKK U.S.A. Corporation, a subsidiary of NKK Corporation, will no longer have any obligation to Avatex relating to a "put" agreement entered into in 1990 at the time this preferred stock was issued. The lapse of this "put" with respect to the Company's dividend and redemption obligations may result in imputed income to NKK U.S.A. Corporation. Subsequent to December 31, 1997, the Company made a payment of approximately $1.4 million to NKK U.S.A. Corporation for taxes related to this imputed income. The redemption of Redeemable Preferred Stock--Series B and the related transactions described above, which are the resolution of the 1990 recapitalization plan, have been reflected as a capital transaction resulting in an increase in additional paid-in capital of approximately $26.5 million. The Company has accrued for the Weirton employee benefit liabilities in its financial statements based on consistent interest rate, mortality and other assumptions used in its other benefit plan valuations. 1997 ANNUAL REPORT NATIONAL STEEL 41 Information with respect to the funded status of the Weirton Pension and OPEB liabilities using actuarial valuations as of November 30, 1997 is as follows: (See Note E--Pensions and Note F--Post retirement Benefits Other than Pensions.)
Pension Information Dollars in thousands Funded Status: Accumulated benefit obligations ("ABO") including vested benefits and effect of future pensionable earnings increases $489,000 - ----------------------------------------------------------------------- Projected benefit obligation ("PBO") 489,000 Plans assets at fair value 493,600 - ----------------------------------------------------------------------- Plan assets at fair value in excess of PBO $ 4,600 =======================================================================
OPEB Information Dollars in thousands Funded Status: Accumulated postretirement benefit obligation ("APBO") Retirees $101,900 Fully eligible active participants ------- Other active participants ------- - ----------------------------------------------------------------------- Long-term postretirement benefit liability $101,900 =======================================================================
NOTE J--NON-OPERATIONAL INCOME STATEMENT ACTIVITIES A number of non-operational activities are reflected in the income statement in each of the three years ended December 31, 1997. A discussion of these items follows. Net Gain on the Disposal Of Non-Core Assets and Other Related Activities In 1997 and 1996, the Company disposed, or made provisions for disposing of, certain non-core assets. The effects of these transactions and other activities relating to non-core assets are presented as a separate component in the statement of consolidated income. A discussion of these items follows. On April 1, 1997, the Company completed the sale of its 21.7% minority equity interest in the Iron Ore Company of Canada ("IOC") to North Limited, an Australian mining and metal company ("North"). The Company received proceeds (net of taxes and expenses) of $75.3 million from North in exchange for its interest in IOC and recorded a $37.0 million gain. The Company will continue to purchase iron ore at fair market value from IOC pursuant to the terms of long- term supply agreements. On June 12, 1997, the Company completed the sale of the Great Lakes Division No. 5 coke battery and other related assets, including coal inventories, to a subsidiary of DTE Energy Company ("DTE"). The Company received proceeds (net of taxes and expenses) of $234.0 million in connection with the sale and recorded a total loss on the transaction of $14.3 million ($11.0 million in the second quarter of 1997 and $3.3 million in the fourth quarter of 1997). The Company utilized a portion of the proceeds to prepay the remaining $154.3 million of the related party coke battery debt, resulting in an extraordinary loss of $5.4 million (net of a tax benefit of $1.4 million). As part of the arrangement, the Company has agreed to operate the battery under an operation and maintenance agreement executed with DTE, and will purchase the majority of the coke produced from the battery under a requirements contract, with the price being adjusted during the term of the contract, primarily to reflect changes in production costs. In the second quarter of 1997, the Company also recorded a charge of $3.6 million for costs related to the decision to cease operations of American Steel Corporation, a wholly-owned subsidiary which pickled and slit steel. In 1997, the Company sold four coal properties and recorded a net gain of $11.8 million. In conjunction with one of the property sales, the purchaser agreed to assume the potential environmental liabilities and, as a result, the Company eliminated the related accrual of approximately $8 million. Additionally, during 1997, the Company received new information related to closed coal properties' employee benefit liabilities and other expenses and reduced the related accruals by $19.8 million. In aggregate, the above coal properties transactions resulted in a gain of $39.6 million in 1997. In September 1996, the Company sold a portion of land that had been received in conjunction with the settlement of a lawsuit and recorded a net gain of $3.7 million. 42 Unusual Charge In 1995 the Company recorded an unusual charge of $5.3 million for costs associated with a reduction in the salaried work force. Extraordinary Items An extraordinary loss of $5.4 million (net of a tax benefit of $1.4 million) was reflected in 1997 income. This loss relates to early debt repayment costs related to debt associated with the Company's Great Lakes Division No. 5 coke battery, which was sold in the second quarter of 1997. An extraordinary gain of $5.4 million (net of a tax provision of $.5 million) was recorded in income in 1995. This gain relates to the early payment of $133.3 million of debt. Cumulative Effect of Accounting Change The Company reflected in its 1996 income statement the cumulative effect of an accounting change which resulted from a change in the valuation date used to measure liabilities related to pension and OPEB liabilities. The cumulative impact of this change was $11.1 million. The valuation date to measure the liabilities was changed from December 31 to September 30 in order to provide more timely information with respect to pension and OPEB provisions. NOTE K--RELATED PARTY TRANSACTIONS Summarized below are transactions between the Company and NKK, and the Company's affiliated companies accounted for using the equity method. The Company had U.S. dollar denominated borrowings outstanding with NKK affiliates totaling $161.9 million as of December 31, 1996. The Company prepaid this related party debt in June of 1997. In addition, the Company incurred an early debt repayment penalty of $4.5 million which was paid to the NKK affiliates. (See Note D--Long-Term Obligations and Note J--Non-Operational Income Statement Activity.) During 1997, the Company purchased approximately $4.3 million of finished coated steel produced by NKK, with such purchase made from trading companies, for what the Company believes are fair market values. Effective May 1, 1995, the Company entered into an Agreement for the Transfer of Employees (the "Agreement"--superceding 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 this Agreement, technical and business advice is provided through NKK employees who are transferred to the employ of the Company. The Agreement further provides that the initial term can be extended from year to year after expiration of the initial term, if approved by NKK and by a majority of the directors of the Company who were not then, and never have been, employees of NKK. The Agreement has been extended through the calendar year 1998 in accordance with this provision. Pursuant to the terms of the Agreement, the Company is obligated to reimburse NKK for the costs and expenses incurred by NKK in connection with the transfer of these employees, subject to an agreed-upon cap. The cap was $11.7 million during the initial term and $7.0 million during each of 1997 and 1998. The Company expensed $5.4 million and $4.2 million under this Agreement, and for various other engineering services provided by NKK during 1997 and 1996, respectively. In both 1997 and 1996, cash dividends of approximately $4.0 million were paid on the Preferred Stock--Series A. On December 29, 1997, all shares of Preferred Stock--Series A were redeemed. (See Note C--Capital Structure.) Also, as a result of the redemption of the Company's Redeemable Preferred Stock--Series B, NKK U.S.A. Corporation, a subsidiary of NKK Corporation, will no longer have any obligation to Avatex relating to a "put" agreement entered into in 1990 at the time this preferred stock was issued. The lapse of this "put" with respect to the Company's dividend and redemption obligations may result in imputed income to NKK U.S.A. Corporation. Subsequent to December 31, 1997, the Company made a payment of approximately $1.4 million to NKK U.S.A. Corporation for taxes related to this imputed income. (See Note I--Weirton Liabilities.) 1997 ANNUAL REPORT NATIONAL STEEL 43 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 $38.3 million in 1997, $111.4 million in 1996 and $86.5 million in 1995. Additional expenses were incurred in connection with the operation of a joint venture agreement. (See Note M--Other Commitments and Contingencies.) Accounts payable at December 31, 1997 and 1996 included amounts with affiliated companies accounted for by the equity method of $5.3 million and $18.6 million, respectively. Accounts receivable at December 31, 1997 included amounts with affiliated companies of $1.2 million. There were no accounts receivable balances with affiliated companies at December 31, 1996. NOTE L--ENVIRONMENTAL LIABILITIES The Company's operations are subject to numerous laws and regulations relating to the protection of human health and the environment. Because these environmental laws and regulations are quite stringent and are generally becoming more stringent, the Company has expended, and can be expected to expend in the future, substantial amounts for compliance with these laws and regulations. Due to the possibility of future changes in circumstances or regulatory requirements, the amount and timing of future environmental expenditures could vary substantially from those currently anticipated. It is the Company's policy to expense or capitalize, as appropriate, environmental expenditures that relate to current operating sites. Environmental expenditures that relate to past operations and which do not contribute to future or current revenue generation are expensed. With respect to costs for environmental assessments or remediation activities, or penalties or fines that may be imposed for noncompliance with such laws and regulations, such costs are accrued when it is probable that liability for such costs will be incurred and the amount of such costs can be reasonably estimated. The Company has accrued an aggregate liability of approximately $4.4 million for these items at both December 31, 1997 and 1996. 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, the Company does not have sufficient information regarding the nature and extent of the contamination, the wastes contributed by other PRPs, or the required remediation activity to estimate its potential liability. With respect to those sites for which the Company has sufficient information to estimate its potential liability, the Company has accrued an aggregate liability for CERCLA claims of approximately $2.3 million and $5.1 million as of December 31, 1997 and 1996, respectively. The Company has also recorded reclamation and other costs to restore its shutdown coal locations to their original and natural state, as required by various federal and state mining statutes. The Company has recorded an aggregate liability of approximately $2.0 million and $12.1 million at December 31, 1997 and 1996, respectively, relating to these properties. Approximately $8 million of the decrease in the environmental liability from 1996 to 1997 was a result of the sale of a coal property in the third quarter of 1997 where the buyer assumed the liability. The balance of the decrease was a result of updated information regarding other environmental proceedings. During the fourth quarter of 1997, the Company finalized a settlement with Avatex regarding certain environmental liabilities which are primarily associated with the Company's former Weirton Steel Division. As a result of the settlement, the Company will have responsibility for these former Avatex indemnified sites, and accordingly, has recorded an aggregate net liability of $10.0 million at December 31, 1997 (see Note I--Weirton Liabilities). Since the Company has been conducting steel manufacturing and related operations at numerous 44 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 accruals, could have a material adverse effect on the Company's results of operations and liquidity for the applicable period, the Company has no reason to believe that such outcomes, whether considered individually or in the aggregate, will have a material adverse effect on the Company's financial condition. NOTE M--OTHER COMMITMENTS AND CONTINGENCIES The Company has an agreement providing for the availability of raw material loading and docking facilities through 2002. Pursuant to this agreement, the Company must make advance freight payments if shipments fall below the contract requirements. At December 31, 1997, the maximum amount of such payments, before giving effect to certain credits provided in the agreement, totaled approximately $10 million through 2002, or approximately $2 million per year. During the three years ended December 31, 1997, no advance freight payments were made as the Company met all of the contract requirements. The Company anticipates meeting the specified contract requirements in 1998. In September 1990, the Company entered into a joint venture agreement to build a 400,000 ton per year continuous galvanizing line to serve North American automakers. The joint venture, DNN Galvanizing Limited Partnership, which was completed in 1993, coats steel products for the Company and Dofasco, Inc., a large Canadian steel producer ("Dofasco"). The Company is a 10.0% equity owner of the facility, Dofasco is a 50.0% owner, and a subsidiary of NKK owns the remaining 40.0%. The Company is committed to utilize and pay a tolling fee in connection with 50.0% 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 50.0% interest in a joint venture with an unrelated third party, which commenced production in May 1994. The joint venture, Double G Coatings Company, L.P. ("Double G"), is a 270,000 ton per year coating facility near Jackson, Mississippi which produces galvanized and Galvalume(R) steel sheet for the construction market. The Company is committed to utilize and pay a tolling fee in connection with 50.0% 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 $21.7 million of Double G's debt as of December 31, 1997. The Company has agreed to purchase its proportionate share of the limestone production from an affiliated company, which will approximate $2 million per year. These agreements contain pricing provisions that are expected to approximate market price at the time of purchase. The Company has entered into certain commitments with suppliers which are of a customary nature within the steel industry. Commitments have been entered into relating to future expected requirements for such commodities as coal, coke, iron ore pellets, natural and industrial gas, electricity and certain transportation and other services. Commitments have also been made relating to the supply of pulverized coal and coke briquettes. Certain commitments contain provisions which require that the Company "take or pay" for specified quantities without regard to actual usage for periods of up to 14 years. In 1998 and 1999 the Company has commitments with "take or pay" or other similar commitment provisions for approximately $194.1 million and $187.2 million, respectively. The Company believes that production requirements will be such that consumption of the products or services purchased under these 1997 ANNUAL REPORT NATIONAL STEEL 45 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. NOTE N--RISK MANAGEMENT CONTRACTS In the normal course of business, operations of the Company are exposed to continuing fluctuations in certain commodity prices and foreign currency values. The Company's objective is to reduce earnings volatility associated with these fluctuations to allow management to focus on core business issues. Accordingly, the Company addresses these risks through a controlled program of risk management that includes the use of derivative financial instruments. The Company's derivative activities, all of which are for purposes other than trading, are initiated within the guidelines of documented corporate risk- management policies. The Company does not enter into any derivative transactions for speculative purposes. The amounts of derivatives summarized in the following paragraphs indicate the extent of the Company's involvement in such agreements but do not represent its exposure to market risk through the use of derivatives. Foreign Exchange Risk Management: A portion of the Company's cash flows are derived from transactions denominated in foreign currencies, principally the currency of Canada. The United States dollar value of transactions denominated in foreign currencies fluctuates as the United States dollar strengthens or weakens relative to the foreign currency. In order to reduce the uncertainty of foreign exchange rate movements on transactions denominated in foreign currencies, the Company enters into derivative financial instruments in the form of foreign exchange forward contracts with a major international financial institution. These forward contracts, which typically mature within one year, are designed to hedge anticipated foreign currency transactions, primarily inventory purchases and processing fees. At December 31, 1997, the Company had no contracts outstanding with respect to foreign currencies. At December 31, 1996, the Company had foreign currencies contracts outstanding in the amount of $5.3 million. Fair value approximated the contract value of these instruments at December 31, 1996. Commodity Risk Management: In order to reduce the uncertainty of movements on transactions to purchase zinc requirements, the Company enters into derivative financial instruments in the form of swap contracts with a major international financial institution. These swap contracts typically mature within one year. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by changes in the value of the underlying exposures being hedged. The Company had contracts to hedge future zinc requirements (up to 50% of annual requirements) in the amounts of $40.3 million and $9.2 million at December 31, 1997 and 1996, respectively. The fair value of these contracts was $35.0 million and $9.2 million at December 31, 1997 and 1996, respectively. The estimated fair values of derivative financial instruments used to hedge the Company's risks will fluctuate over time. The fair value of commodity purchase swap contracts and foreign currency forward contracts are calculated using pricing models used widely in financial markets. NOTE O--LONG-TERM INCENTIVE PLAN The Long-Term Incentive Plan established in 1993 authorized the granting of options for up to 3,400,000 shares of Class B Common Stock to certain executive officers and other key employees of the Company. The Non-Employee Directors Stock Option Plan, also established in 1993, has authorized the grant of options for up to 100,000 shares of Class B Common Stock to certain non-employee directors. The exercise price of the options equals the fair market value of the Common Stock on the date of the grant. All options granted have ten-year terms and generally vest and become fully exercisable at the end of three years of continued employment. However, in the event that termination is by reason of retirement, permanent disability or death, the option must be exercised in whole or in part within 24 months of such occurrences. 46 In 1997, the Company canceled 653,265 options and replaced them with Stock Appreciation Rights ("SARs"). In accordance with Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the Company recorded compensation expense of $1.5 million in 1997. The Company adopted the disclosure-only provisions of SFAS 123 during 1996. Accordingly, no compensation expense has been recognized for the stock option plans. Had compensation cost for the option plans been determined based on the fair value at the grant date for awards in 1997, 1996 and 1995 consistent with the provision of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 Dollars in thousands (except per share amounts) Net income -- pro forma $213,503 $52,659 $106,935 Basic earnings per share--pro forma 4.70 .99 2.26 Diluted earnings per share--pro forma 4.64 .96 2.21
As a result of the aforementioned replacement of stock options with SARs, a recovery of prior years' pro forma expense for those options would be required in 1997. The recovery would offset compensation costs to be recorded in 1997, causing the pro forma net income to be the same as the reported net income. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997: dividend yield of 2.9%; expected volatility 41.4%; risk-free interest rate of 6.5%; and expected term of seven years. A reconciliation of the Company's stock option activity and related information follows:
Number Of Exercise Options Price (Weighted average) Balance outstanding at January 1, 1995 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 Forfeited (122,181) - --------------------------------------------------------------- Balance outstanding at December 31, 1996 1,159,735 14.03 Granted 304,500 9.37 Forfeited (132,470) Cancelled and replaced with SARs (653,265) 14.14 - --------------------------------------------------------------- Balance outstanding at December 31, 1997 678,500 $12.10 ===============================================================
Exercise prices for options outstanding as of December 31, 1997 ranged from $9.00 to $17.50. The weighted-average remaining contractual life of those options is 6.7 years. There were no exercisable stock options as of December 31, 1997 and 457,401 and 324,249 at 1996 and 1995, respectively. 1997 ANNUAL REPORT NATIONAL STEEL 47 NOTE P--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Following are the unaudited quarterly results of operations for the years 1997 and 1996.
1997 Three Months Ended March 31 June 30 September 30 December 31 Dollars in thousands (except per share amounts) - --------------------------------------------------------------------------------------------------- Net sales $757,618 $824,869 $788,663 $768,509 Gross margin 69,263 87,834 103,747 69,825 Unusual items ----- (25,385) (28,804) (4,556) Income before extraordinary item 26,665 64,925 78,561 48,749 Extraordinary item ----- (5,397) ----- ----- - --------------------------------------------------------------------------------------------------- Net income $ 26,665 $ 59,528 $ 78,561 $ 48,749 =================================================================================================== Basic earnings per share: Income before extraordinary item $ .55 $ 1.43 $ 1.76 $ 1.08 Extraordinary item -- (.12) -- -- - --------------------------------------------------------------------------------------------------- Net income applicable to common stock $ .55 $ 1.31 $ 1.76 $ 1.08 =================================================================================================== Diluted earnings per share: Income before extraordinary item $ .55 $ 1.42 $ 1.72 $ 1.06 Extraordinary item -- (.12) -- -- - --------------------------------------------------------------------------------------------------- Net income applicable to common stock $ .55 $ 1.30 $ 1.72 $ 1.06 =================================================================================================== 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 margin 16,853 52,614 54,397 67,605 Income (loss) before cumulative effect of accounting change (14,196) 17,917 11,527 27,576 Cumulative effect of accounting change ----- ----- 11,100 ----- - --------------------------------------------------------------------------------------------------- Net income (loss) $(14,196) $ 17,917 $ 22,627 $ 27,576 =================================================================================================== Basic and diluted earnings per share: Income (loss) before cumulative effect of accounting change $ (.39) $ .35 $ .21 $ .57 Cumulative effect of accounting change -- -- .25 -- - --------------------------------------------------------------------------------------------------- Net income (loss) applicable to common stock $ (.39) $ .35 $ .46 $ .57 ===================================================================================================
(See Note A--Description of the Business and Significant Accounting Policies for diluted earnings per share.) 48 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS BOARD OF DIRECTORS NATIONAL STEEL CORPORATION We have audited the accompanying consolidated balance sheets of National Steel Corporation and subsidiaries (the "Company") as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note J to the consolidated financial statements, in 1996, the Company changed the measurement date that is used in accounting for pensions and postretirement benefits other than pensions. /s/ ERNST & YOUNG LLP Fort Wayne, Indiana January 28, 1998, except for Notes C, I, and K, as to which the date is February 26, 1998. 1997 ANNUAL REPORT/NATIONAL STEEL 49 Corporate Information HEADQUARTERS 4100 Edison Lakes Parkway Mishawaka, Indiana 46545-3440 Telephone: (219) 273-7000 Telefax: (219) 273-7869 Website: www.nationalsteel.com ANNUAL MEETING The Annual Stockholders' Meeting of National Steel Corporation will be held April 27, 1998. 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 ChaseMellon Shareholders Services, L.L.C. Ridgefield Park, New Jersey 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 1997 ------------------------------------------------ First Quarter $10-1/8 $ 7-5/8 Second Quarter 16-7/8 7-1/2 Third Quarter 21-1/2 14 Fourth Quarter 18-3/4 10-3/4 ------------------------------------------------ 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 ------------------------------------------------
As of December 31, 1997, there were approximately 168 registered holders of Class B Common Stock. (See Note C--Capital Structure.) The Company did not pay any dividends on its Class A Common Stock or Class B Common Stock during 1996 or 1997. On February 10, 1998, the Board of Directors authorized a quarterly dividend payment of $.07 per common share, payable on March 11, 1998, to stockholders of record on February 25, 1998. The decision whether to continue 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 are entitled to share ratably, as a single class, in any dividends paid on the Common Stock. In addition, any dividend payments must be matched by a like contribution 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. The asset value of the VEBA Trust at December 31, 1997 was approximately $91 million. The labor agreement provides for exclusion or "offsets" to the matching of cash dividends. Currently, the Company has the capability of declaring a dividend slightly in excess of $27 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 $391.3 million was free of such limitations at December 31, 1997. 50 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% 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 Pellet 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 28, 1998 (except for Notes C, I, and K, as to which the date is February 26, 1998) included in the 1997 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, presents 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. 33-61087 pertaining to the National Steel Retirement Savings Plan and National Steel Represented Employee Retirement Savings Plan; of our report dated January 28, 1998 (except for Notes C, I, and K as to which the date is February 26, 1998), with respect to the consolidated financial statements incorporated by reference in this Annual Report (Form 10-K) of the Company for the year ended December 31, 1997, and and our report included in the preceding paragraph with respect to the financial statement schedule included therein, filed with the Securities and Exchange Commission. Ernst & Young LLP Fort Wayne, Indiana March 26, 1998 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 312,642 25,000 301,950 17,644 374,202 1,004,747 3,378,131 2,149,107 2,453,459 637,367 310,976 0 0 433 836,545 2,453,459 3,139,659 3,139,659 2,674,444 2,674,444 217,153 (1,676) 14,607 235,131 16,231 218,900 0 (5,397) 0 213,503 4.70 4.64
EX-27.1 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 109,041 127,616 0 0 301,209 336,648 19,320 19,986 440,567 413,375 831,497 857,653 3,664,597 3,540,214 2,209,097 2,017,511 2,556,292 2,669,240 550,770 607,320 470,294 501,525 63,530 65,030 36,650 36,650 433 433 607,479 563,252 2,556,292 2,669,240 2,954,033 2,954,218 2,954,033 2,954,218 2,618,151 2,529,323 2,618,151 2,529,323 266,983 290,910 666 4,801 36,249 39,214 31,984 89,970 (10,840) (12,201) 42,824 102,171 0 0 0 5,373 11,100 0 53,924 107,544 0.99 2.26 0.99 2.22
EX-27.2 12 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 APR-30-1997 JUL-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 135,003 426,884 416,906 0 0 0 313,018 310,126 309,353 20,251 24,422 23,844 416,162 382,310 393,380 843,932 1,094,898 1,095,795 3,709,305 3,393,635 3,334,335 2,245,443 2,161,728 2,125,817 2,575,099 2,554,237 2,542,281 551,007 615,420 615,755 453,874 321,341 311,679 63,155 62,780 62,405 36,650 36,650 36,650 433 433 433 631,403 688,194 764,015 2,575,099 2,554,237 2,542,281 757,618 824,869 788,663 757,618 824,869 788,663 653,204 700,051 653,715 653,204 700,051 653,715 66,570 43,693 40,653 931 4,171 (578) 8,174 4,678 1,191 28,739 72,276 93,682 2,074 7,351 15,121 26,665 64,925 78,561 0 0 0 0 (5,397) 0 0 0 0 26,665 59,528 78,561 0.55 1.31 1.76 0.55 1.30 1.72
EX-27.3 13 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS 9-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 APR-30-1996 JUL-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 135,608 158,647 128,055 0 0 0 293,056 312,190 291,299 21,998 22,027 20,333 413,421 429,692 440,041 820,087 878,492 839,062 3,572,968 3,587,769 3,622,322 2,107,756 2,143,786 2,180,721 2,629,000 2,690,346 2,651,791 587,479 642,523 618,304 485,828 482,862 466,876 64,655 64,280 63,905 36,650 36,650 36,650 433 433 433 546,314 561,491 576,774 2,629,000 2,690,346 2,651,791 682,143 769,481 735,858 682,143 769,481 735,858 629,002 680,545 644,960 629,002 680,545 644,960 61,102 67,190 71,044 3,012 29 (1,694) 8,771 9,349 9,451 (19,744) 12,368 12,097 (5,548) (5,549) 570 (14,196) 17,917 11,527 0 0 0 0 0 0 0 0 11,100 (14,196) 17,917 22,627 0.39 0.35 0.46 0.39 0.35 0.46
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