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Lukens Inc · 10-K405/A · For 12/27/97

Filed On 4/24/98   ·   Accession Number 950159-98-104   ·   SEC File 1-03258

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 4/24/98  Lukens Inc                        10-K405/A  12/27/97    1:115K                                   Scullin Group, Inc./FA

Amendment to Annual Report — [X] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405/A   Amendment to Annual Report -- [X] Reg. S-K Item       37    179K 
                          405                                                    


Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 1. Business
7Item 3. Legal Proceedings
8Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
9Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
13Environmental Compliance
18Dividends
19Item 8. Financial Statements and Supplementary Data
24Earnings per Share
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A /X/Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997 OR / /Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-3258 LUKENS INC. 50 South First Avenue, Coatesville, PA 19320-0911 (610) 383-2000 Incorporated in Delaware I.R.S. Employer Identification Number 23-2451900 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Exchange on Which Registered Common Stock, $.01 Par Value New York Stock Exchange 7.625% Notes Due 2004 Not Listed 6.5% Medium-Term Notes, Series A, Due 2006 Not Listed Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark 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/ Based on the closing price of March 2, 1998, the aggregate market value of common stock held by nonaffiliates of the registrant was $329.6 million. The number of common shares outstanding of the registrant was 14,977,090 as of March 2, 1998.
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PART I  ITEM 1. BUSINESS. General Headquartered in Coatesville, Pennsylvania, Lukens Inc. is a holding company incorporated in Delaware. The largest subsidiary of the company, Lukens Steel Company, manufactures carbon, alloy and clad steel plates, and stainless steel sheet, strip, plate, hot band and slabs. Production facilities and markets are located primarily in the United States. On December 15, 1997, Lukens entered into a merger agreement with Bethlehem Steel Corporation. The agreement was subsequently amended as of January 4, 1998. Under the merger agreement, Bethlehem Steel Corporation would acquire Lukens outstanding common and preferred stock (converted to common) for $30 per share. Consideration is a combination of cash and Bethlehem stock. At year-end 1997, the number of common shares outstanding, combined with the conversion of outstanding preferred stock, would total 16,352,127 shares and result in proceeds of $490.6 million in cash and Bethlehem stock. The merger is contingent on shareholder approval. A special meeting of stockholders is expected to be held during the second quarter of 1998. Forward-Looking Information Sections of this Form 10-K include disclosures about future economic conditions and Lukens' future financial performance, capital structure, goals and objectives. Except to the extent that these discussions contain historical facts, these forward-looking statements are subject to risks and uncertainties that could cause actual events to materially differ from those projected. These risks and uncertainties include, but are not limited to, materially adverse changes in general economic conditions, domestic and foreign competition, weather, raw material price fluctuations, possible labor interruptions and regulatory or legislative changes. Business Groups Lukens has two business groups, the Carbon & Alloy Group and the Stainless Group. Financial information for these business groups is incorporated herein by reference to Note 2 to the financial statements included in Part II, Item 8 of this Form 10-K. The charts below outline the business group composition of consolidated net sales and shipped tons for each of the last three years. Composition of Consolidated Net Sales by Business Group 1997 1996 1995 --------- --------- --------- Carbon & Alloy % 51.9 49.6 41.9 Stainless 48.1 50.4 58.1 --------- --------- --------- Total % 100.0 100.0 100.0 ========= ========= ========= Shipped Tons by Business Group 1997 1996 1995 --------- --------- --------- Carbon & Alloy 753,900 652,600 589,100 Stainless 257,700 262,100 267,200
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Carbon & Alloy Group The Carbon & Alloy Group specializes in the production of carbon, alloy and clad steel plate. Primary production locations are in Coatesville and Conshohocken, Pennsylvania. Both plants have hot rolling and finishing facilities, and the Coatesville plant operates a melt shop. Production from these facilities ranks the group as one of the largest domestic plate steel producers and the largest domestic producer of alloy plate steel. There are several domestic and foreign competitors. Major competitors are U.S. Steel Group, a subsidiary of the USX Corporation, and Bethlehem Steel Corporation. The group's competitive position is enhanced by a concentration on plate with a product line that includes a wide range of sizes and grades. Price competition has been and is expected to remain intense as new capacity enters the market. In addition to price and quality, customer satisfaction, measured by factors like shipped-on- time performance and production lead times, has become increasingly important in the competitive environment. Customer satisfaction is also the focus of our customer business teams that integrate sales, technical, manufacturing, financial and purchasing expertise. The Steckel Mill Advanced Rolling Technology (SMART) system, located at the Conshohocken plant, expanded the group's production capabilities and products to include wide, light-gauge plate, including plate coils. During 1997, integration of the SMART system and the wide anneal and pickle line, discussed in the Stainless Group section, was initiated. Products are sold primarily by an in-house sales force. Steel service centers are the largest market for the group. The market accounted for approximately 48 percent of annual sales in 1997 and averaged approximately 38 percent of annual sales in 1996 and 1995. The Carbon & Alloy Group supplies a wide range of markets in the capital goods sector of the economy, including markets for: o Machinery and Industrial Equipment o Infrastructure o Environmental and Energy o Transportation. Some sales involve government contracts which may be subject to termination or renegotiation. Terminations for convenience of the government generally provide for payments to a contractor for its costs and a portion of its profit. We do not expect any material portion of our business to be terminated or renegotiated. Raw materials used in the production of carbon and alloy steel plate include carbon scrap, alloy scrap and alloy additives. Generally, these materials are purchased in the open market and are available from several sources. Prices and availability are also affected by the operating level of the domestic steel industry, the quantity of scrap exported, currency exchange rates, and world political and economic conditions. Scrap remains readily available, but scrap prices remain at relatively high levels.
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Principal energy sources used in production include electricity and natural gas. Stainless Group The Stainless Group specializes in manufacturing and marketing stainless steel sheet, strip, plate, hot band and slabs. The group's competitive position is built on the ability to serve niche markets by providing a wide range of quality products. Manufacturing facilities are located in Washington and Houston, Pennsylvania, and Massillon, Ohio. Primary competitors include Allegheny-Teledyne Incorporated, J&L Specialty Steel, Inc., North American Stainless Corporation and Avesta Sheffield Pipe Inc. Washington Specialty Metals Corporation is a service and distribution center that specializes in marketing stainless steel. There are numerous competitors on both a national and a regional scale. Washington Specialty Metals is a leading distributor of flat-rolled stainless steel. Similar to the competitive environment in the Carbon & Alloy Group, customer satisfaction, measured by factors like shipped-on-time performance and production lead times, has become increasingly important. Customer satisfaction is also the focus of our customer business teams. The teams integrate sales, technical, manufacturing, financial and purchasing expertise to solve our customers' problems. Price and quality remain significant factors in the competitive environment. As evidenced by the Stainless Group results in 1997 and 1996, high levels of stainless steel imports accentuated pricing pressures. We continue to support the imposition of trade sanctions on stainless steel imports. Without these sanctions, we do not expect that prices will rebound significantly from 1997 levels and the introduction of new production capacity by competitors will continue to exert pressure on selling prices over the next two or three years. The installation of the wide anneal and pickle line at the Massillon plant was completed in 1996. Commercialization of products from the line continued during 1997. Although product shipments increased consistently throughout the year, utilization of the facility was low in 1997 and is expected to remain relatively low in 1998. Stainless products processed on the Carbon & Alloy Group's SMART system and finished on the wide anneal and pickle line are anticipated to create quality, size and cost advantages in the long term. Products are sold primarily by the group's own sales organizations. Service centers are the largest market for the group and they averaged approximately 37 percent of annual sales in the last three years. The Stainless Group ultimately supplies diverse markets, including:
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o Process Industries o Food Service Equipment o Architecture and Construction o International o Consumer Durables. Raw materials used in production include stainless scrap, chrome, nickel and molybdenum. Generally, these materials are purchased in the open market and are available from several sources. Some of these raw materials sources are located in countries subject to potential interruptions of supply that could cause shortages and affect the availability and price. Prices and availability are also affected by the operating level of the worldwide stainless steel industry, the quantity of scrap exported, currency exchange rates, and world political and economic conditions. Nickel costs remain highly volatile. Forward exchange or hedge contracts for nickel are used to manage the group's exposure to market price volatility. Principal energy sources used in production include electricity and natural gas. Sales Order Backlog (Dollars in thousands) Listed below is the backlog at the end of 1997 and 1996. The backlog at year-end 1997 is anticipated to be shipped in 1998. 12/27/97 12/28/96 -------- -------- Carbon & Alloy $118,553 68,134 Stainless 48,461 59,396 -------- -------- Total $167,014 127,530 ======== ======== Environment Lukens is subject to Federal, state, and local environmental laws and regulations. An environmental committee meets quarterly to review environmental and remediation issues. Also, outside consultants are used on certain technical issues. The trend for tighter environmental standards is expected to result in higher waste disposal and monitoring costs, and additional capital expenditures in the long term. The Environmental Protection Agency's air quality standards for particulate matter were enacted in July 1997. Implementation is dependent on the results of environmental studies being conducted over the next several years. Although it is difficult to estimate, the cost of installing new environmental control systems across our manufacturing facilities could be significant in the long term. In 1997, capital expenditures for environmental compliance projects were $4.7 million. In 1998 and 1999, capital expenditures are anticipated to be approximately $4.3 million and $3.8 million, respectively.
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Lukens has been designated a potentially responsible party under Superfund law at certain waste disposal sites and continually monitors a range of other environmental issues. Superfund designations are made regardless of the extent of the company's direct or indirect involvement. These claims are in various stages of administrative or judicial proceedings and include demands for recovery of incurred costs and for future investigation or remedial actions. Lukens accrues costs associated with environmental matters when they become probable and can be reasonably estimated. In assessing environmental liability, the company considers the extent and type of hazardous substances at a site, the range of technologies that can be used for remediation, evolving laws and regulations, the allocation of costs among potentially responsible parties, and the number and financial strength of those parties. During the second quarter of 1997, a tentative settlement was reached in a Superfund remediation case where Lukens was designated a potentially responsible party. The obligation for the Superfund site was previously recognized in the fourth quarter of 1996. The information contained in the section entitled "Environmental Compliance" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations., of this Form 10-K is incorporated herein by reference. Based on information currently available, the liability recorded for environmental remediation costs was approximately $17.0 million at year-end 1997 and $16.8 million at year-end 1996. Due to their uncertain nature, amounts accrued could differ, perhaps significantly, from the actual costs that will be incurred. No potential insurance recoveries were taken into account in determining the company's cost estimates or reserves. Management does not anticipate that its financial position will be materially affected by additional environmental remediation costs, although quarterly or annual operating results could be materially affected by future developments. Employees The average number of employees during 1997 was 3,300. The labor contract for the Coatesville facility of the Carbon & Alloy Group terminates in 2000. Labor contracts for the manufacturing facilities of the Stainless Group expire in 1999 and 2000.
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ITEM 3. LEGAL PROCEEDINGS. On December 23, 1997, a purported stockholder of Lukens, Carrie Anne Polonetsky, filed a purported class action (the "Polonetsky Action") in the Court of Chancery of the State of Delaware (the "Court of Chancery") against the Lukens Board alleging, among other things, that the Lukens Board had breached its fiduciary duties by failing to obtain the highest value reasonably available in a sale of Lukens. Two other purported stockholders of Lukens, Wretha Evelyn Walker and Michael Abramsky, filed purported class actions (collectively with the Polonetsky Action, the "Delaware Actions") in the Court of Chancery on December 29, 1997 and January 6, 1998, respectively, making substantially similar allegations. The Delaware Actions have been consolidated by order of the Court of Chancery dated March 11, 1998. On March 27, 1998, the plaintiffs in the Delaware Actions filed a consolidated amended complaint against the Lukens Board alleging, among other things, that the Lukens Board had breached its fiduciary duties by failing to obtain the highest value reasonably available in a sale of Lukens. The defendants intend to defend the Delaware Actions vigorously. Lukens is involved in litigation and administrative proceedings which seek the recovery of response costs with respect to certain waste disposal sites and is a potentially responsible party under Superfund law at some of these sites. Lukens' potential exposure in these actions will vary according to the amount of responsibility attributed to Lukens, the allocation of responsibility among, and financial viability of, other responsible parties, and the method and duration of remedial action. Management does not anticipate that its long-term financial position will be materially affected by additional environmental remediation costs, although quarterly or annual operating results could be materially affected by future developments. The information contained in the section entitled "Environmental Compliance" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations., of this Form 10-K is incorporated herein by reference. The company is party to various claims, disputes, legal actions and other proceedings involving negligence, contracts, equal employment opportunity, occupational safety and various other matters. In the opinion of management, the outcome of these matters should not have a material adverse effect on the consolidated financial condition or results of operations of the company.
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PART II  ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information contained in the section entitled "Dividends" in Part II, Item 7 of this Form 10-K and the section entitled "Quarterly Financial Data" in Part II, Item 8 of this Form 10-K is incorporated herein by reference in response to this item.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. On December 15, 1997, Lukens entered into a merger agreement with Bethlehem Steel Corporation. The agreement was subsequently amended as of January 4, 1998. Under the merger agreement, Bethlehem Steel Corporation would acquire Lukens outstanding common and preferred stock (converted to common) for $30 per share. Consideration is a combination of cash and Bethlehem stock. At year-end 1997, the number of common shares outstanding combined with the conversion of outstanding preferred stock, would total 16,352,127 shares and result in proceeds of $490,564 in cash and Bethlehem stock. The merger is contingent on shareholder approval. A special meeting of stockholders to vote on the merger is expected to be held during the second quarter of 1998. The Consolidated Financial Statements, Notes to Consolidated Financial Statements and the discussion below were prepared assuming a going-concern basis and did not recognize the impact of the merger. For a discussion of the contingent liabilities associated with the merger, see Note 10. The following discussion focuses on the results of operations and on the financial condition of Lukens Inc. In addition to the consolidated results analysis, the results of Lukens' two business groups are discussed. This section should be read in conjunction with the consolidated financial statements and notes. Consolidated Results of Operations Net Sales. A graph of net sales appears in this section. 1995 $1,049,158 1996 $ 970,320 1997 $ 994,380 Sales were up 2 percent in 1997. The increase was attributable to strong Carbon & Alloy Group sales that were largely offset by depressed market conditions in the Stainless Group. 1996 sales were down 8 percent compared to 1995. During the second half of 1996, stainless steel market conditions began to deteriorate and contributed to lower Stainless Group sales. The decrease was partially offset by higher shipments in the Carbon & Alloy Group. Operating Earnings (Loss). A graph of operating earnings (loss) appears in this section. 1995 $ 67,980 1996 $(26,053) 1997 $ 13,404 Operating earnings in 1997 were attributable to the Carbon & Alloy Group, which benefited from market conditions, cost reduction initiatives and increased utilization of new facilities. Depressed selling prices experienced by the Stainless Group resulted in a loss for the group in 1997. Included in 1996 results were unusual charges totaling $20,182. A second quarter provision of $10,782 was recognized for a work force reduction. In the fourth quarter, $9,400 was recognized for environmental remediation. Excluding the 1996 unusual items for comparison purposes, operating earnings were up $19,275 in 1997. The 1996 loss represented a dramatic reversal from strong 1995 earnings. Excluding the unusual items discussed above for comparison purposes, the operating loss was $5,871 in 1996. The reversal in results tracks the change in stainless steel market conditions that resulted in significant selling price declines. Results in 1996 were also limited by a $5,933 provision for fixed asset write-downs, higher utility costs caused by severe winter weather and by signing bonuses associated with a new labor contract. Summary of Results 1997 1996 1995 Net sales $ 994,380 970,320 1,049,158 Operating earnings (loss) $ 13,404 (26,053) 67,980 Interest expense $ 19,073 16,735 13,471 Income tax expense (benefit) $ (1,049) (14,377) 20,495 Effective income tax rate % (18.5) (33.6) 37.6 Net earnings (loss) $ (4,620) (28,411) 34,014 Dollars in thousands except per share amounts
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Interest Expense. A graph of interest expense appears in this section. 1995 $ 13,471 1996 $ 16,735 1997 $ 19,073 Interest expense in 1997 was up 14 percent with the increase primarily related to higher amounts of capitalized interest recorded in 1996. Interest expense in 1996 was up 24 percent compared to 1995. Higher debt levels in 1996 were the primary reason for the increase. Income Tax Expense (Benefit). A graph of effective income tax rate appears in this section. 1995 37.6% 1996 (33.6%) 1997 (18.5%) The effective tax rate applied against losses was 18.5 percent in 1997 and 33.6 percent in 1996. The difference between the 1997 and 1996 rates reflected the impact of non-deductible expenses, state taxes and other items that have a greater percentage impact on the effective rate at lower results levels. The tax benefits recognized in the past two years primarily resulted in a build in deferred tax assets that reflected the availability of tax credit carryforwards. In 1995, the effective tax rate applied to earnings was 37.6 percent. Deferred tax assets recognized represent future tax benefits. Recog-nition of deferred tax assets is based on the combination of the historical earnings trend, future reversals of existing taxable temporary differences, carryback and carryforward availability, tax planning strategies and future taxable income. Net Earnings (Loss). A graph of net earnings (loss) appears in this section. 1995 $ 34,014 1996 $(28,411) 1997 $ 4,620 A net loss was recorded both in 1997 and 1996. On an after-tax basis, the unusual items recorded in 1996 reduced results by $12,837. Excluding the unusual items for comparison purposes, the 1996 net loss was $15,574. Net earnings in 1995 reflected strong Stainless Group results. Business Groups Carbon & Alloy. Business group graphs appear in this section. Carbon & Alloy net sales: 1995 $439,330 1996 $481,237 1997 $516,499 Carbon & Alloy operating earnings (loss): 1995 $ 11,946 1996 $ (2,554) 1997 $ 50,410 Net sales were up 7 percent in 1997. Shipped tons were 753,900 compared to 652,600 tons in 1996. The 16 percent increase reflected higher utilization of the Steckel Mill Advanced Rolling Technology (SMART(R)) system, evidenced by a more than 80,000 ton increase in carbon shipments. With the growth in carbon shipments in 1997, sales reflected a lower-value shipment mix. The 10 percent sales increase in 1996 compared to 1995 was largely attributable to an increase in shipments, particularly in carbon products. Shipments in 1996 were up 11 percent compared to 589,100 tons in 1995. The group recorded strong operating earnings in 1997. Earnings benefited from a continued focus on cost reduction initiatives and increased utilization of the SMART system. The operating loss in 1996 was due to unusual charges of $15,578. A work force reduction charge reduced results by $6,178 and an environmental remediation provision was $9,400. Excluding the provisions for comparison purposes, 1997 operating earnings were up $37,386 from 1996. Also impacting 1996 results was a $3,756 charge for signing bonuses associated with the new labor agreement at the Coatesville, Pennsylvania, facility, severe winter weather and disruptions associated with the commissioning of the SMART system. The operating loss in 1996 compared to operating earnings in 1995. The 1996 loss was the result of the charges discussed previously. Excluding the charges, operating earnings of $13,024 were up 9 percent from 1995. Although to a lesser extent than 1995, results in 1996 continued to be impacted by production disruptions and expenses associated with the commissioning of the SMART system. Dollars in thousands except per share amounts
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Stainless. Business group graphs appear in this section. Stainless net sales: 1995 $609,828 1996 $489,083 1997 $477,881 Stainless operating earnings (loss): 1995 $ 75,148 1996 $ (7,058) 1997 $(20,488) Selling price erosion that began in 1996 continued in 1997. Higher levels of low-priced imports continued to exert pressure on selling prices across product lines. Shipments for 1997 were 257,700 tons, down 2 percent compared to 262,100 tons in 1996. Weak stainless steel market conditions in 1996 led to a 20 percent decrease in sales compared to 1995. The sales decline reflected customer inventory corrections during the first half of the year that reduced cold rolled shipments. For the balance of 1996, the selling prices fell across all product lines. A lower-value shipment mix also contributed to the decrease. Shipments for 1996 were down slightly from 1995 shipments of 267,200 tons. Excluding lower-value conversion tonnage, shipments were down 12 percent from 1995, primarily due to decreases in hot rolled and hot band stainless product shipments. The operating loss recorded in 1997 was significantly larger than the 1996 loss. Results in 1996 included an unusual charge of $3,695 for a work force reduction. Excluding the unusual charges for comparison purposes, operating results fell by $17,125 in 1997, largely due to depressed selling prices discussed previously. Excluding the 1996 unusual charges for comparison purposes, the operating loss of $3,363 compared to earnings of $75,148 in 1995. The decline primarily reflected a significant deterioration in stainless steel market conditions as previously discussed. In 1996, a $5,933 provision to write-down idle assets and other equipment replaced as a result of capital improvements was recorded. In addition, 1996 earnings from the service center operations did not match their excellent 1995 results. Business Outlook Similar to 1997, strong market conditions should translate to solid earnings for the Carbon & Alloy Group. Selling prices will be the key to Stain-less Group profitability. A continued focus on cost reduction initiatives and increased utilization of facilities aimed at the stainless plate market should also contribute to earnings. We continue to support the imposition of trade sanctions on stainless steel imports. Without these sanctions, we do not expect that prices will rebound significantly from 1997 levels. The introduction of new production capacity by competitors will continue to exert pressure on selling prices over the next two or three years. Stainless Group results should benefit from increased stainless plate sales fueled by the continued integration of the SMART system with the wide anneal and pickle line (WAPL). However, utilization of the WAPL facility is still expected to be relatively low in 1998. Weak results are expected to continue if there is no improvement in the current market conditions. Financial Condition Capital Structure. A graph of current assets and working capital appears in this section. Current assets: 1995 $314,891 1996 $266,656 1997 $285,700 Working capital: 1995 $106,221 1996 $ 99,158 1997 $114,509 At the end of 1997, cash and cash equivalents totaled $6,629, a decrease of $3,653 from the end of 1996. Working capital of $114,509 was up $15,351 from year-end 1996. The increase primarily reflected a higher accounts receivable balance. At year-end 1997, the current ratio was 1.7 compared to 1.6 at year-end 1996. Included in other accrued expenses at the end of 1997 was an environmental reserve that was reclassified during the second quarter of 1997 from other liabilities in the long-term section of the Consolidated Balance Sheets. The reclassification reflected a tentative settlement agreement negotiated for a Superfund site where we were designated a potentially responsible party. Debt at the end of 1997 was $250,947, a slight decrease of $2,626 from year-end 1996. Included in year-end debt was $10,619 of ESOP debt, which is guaranteed by Lukens. The ratio of long-term debt to total capital was 50.3 percent at the end of 1997 and 51.7 percent at year-end 1996. The 1996 ratio included 2.6 percent from the reclassification Dollars in thousands except per share amounts
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of preferred stock and deferred ESOP compensation as redeemable stock, discussed below. Based on conditions at the end of 1997, additional borrowings of approximately $65,400 were available under the committed line of credit covenant. During the second quarter of 1997, Standard & Poor's lowered their rating on Lukens notes from BBB+ to BBB. During the third quarter of 1997, Moody's lowered their rating from Baa2 to Baa3. In 1997, the Board of Directors approved the issuance of performance vested restricted stock to certain officers and other executives as part of an incentive compensation program. During the first quarter of 1997, 134,000 restricted shares were awarded. The shares carry voting and dividend rights and were recorded at fair market value on the grant date. A corresponding charge to deferred compensation was recorded in the stockholders' investment section of the Consolidated Balance Sheets. The deferred compensation balance was subsequently adjusted for changes in the market price of Lukens common stock and for compensation expense recognized. The awards vest at the end of three years, contingent on continued employment and the achievement of performance goals that are tied to Lukens' total shareholder return relative to other steel companies. Lukens Series B Convertible Preferred Stock is redeemable in common stock, cash or a combination at the option of Lukens when the price of Lukens common stock is $20 per share or greater. If the price is below $20 per share, participants in a company-sponsored 401(k) employee savings plan have the option to redeem preferred stock in the combination above. At year-end 1996, preferred stock and the related ESOP deferred compensation were classified as redeemable stock because the price of Lukens common stock was below $20 per share on December 28, 1996, the fiscal year-end. The reclassification from stockholders' investment reflected the ability of 401(k) participants to elect a cash payout option at redemption. The classification was not made in 1997 or years prior to 1996 because the company had the ability and intention to redeem preferred stock with Lukens common stock. Lukens enters into forward exchange contracts (derivatives) with the objective to manage or hedge exposure to market price changes of certain commodities used in manufacturing. The company does not speculate or trade in these agreements for profit. These contracts generally provide for the exchange of a market price for a fixed price based on a notional quantity. Contracts are executed under the guidelines of a corporate policy. The policy specifies members of management with the authority to execute agreements and establishes limits on the amount of contracts outstanding. As of year-end 1997, Lukens was party to several agreements maturing in 1998, which are discussed in Note 8. Liquidity -- Short Term. Graphs of cash flow from operations and capital expenditures appear in this section. Cash flow from operations: 1995 $85,491 1996 $43,667 1997 $29,396 Capital expenditures: 1995 $104,120 1996 $ 57,092 1997 $ 19,369 Cash flow from operating activity was relatively low at $29,396 in 1997 compared to $43,667 in 1996. The decrease was primarily due to higher working capital requirements. Financing activity required $15,066 with net borrowings of $2,018 partially offset by dividend payments of $17,084. Investing activity required $17,983, primarily for capital expenditures of $19,369. Improving cash flows from operating activity in 1998 is dependent on reduced working capital requirements coupled with the earnings factors identified in the Business Outlook section. Capital expenditures for 1998 are expected to be relatively low at approximately $36,000. The anticipated cash flow from operating activity and low capital expenditure requirements should result in an improved capital structure compared to year-end 1997. Dollars in thousands except per share amounts
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Consolidated backlog at year-end 1997 was $167,000, up 31 percent from the beginning of the year. The increase was primarily attributable to the Carbon & Alloy Group. Liquidity -- Long Term. In the long term, Lukens relies on the ability to generate sufficient cash flows from operating activity to fund investing and financing requirements. Our target long-term debt-to-capital ratio is 35 percent. A key to reach our target will be the ability to increase utilization of facilities added during our recent capital improvement program. Lukens has generated cash from operations totaling $158,554 over the past three years.  Environmental Compliance. Capital expenditures for environmental compliance are projected to be approximately $4,279 in 1998 and $3,838 in 1999. The trend for tighter environmental standards is expected to result in higher waste disposal and monitoring costs and additional capital expenditures in the long term. Lukens has been designated a potentially responsible party (PRP) under Superfund law at certain waste disposal sites and continually monitors a range of environmental issues including the following: Helen Kramer This Superfund site, a municipal and industrial waste landfill located in New Jersey, was placed on the National Priorities List in 1983. The remedial investigation and feasibility study was completed in September of 1985. The Record of Decision was executed on September 27, 1985. The EPA completed construction of the remedial action and turned over responsibility for operation and maintenance of the site to the State of New Jersey in May 1994. In October of 1989, the EPA sued numerous parties, including generators and transporters as direct defendants, to recover its remediation costs. Lukens became a third party defendant in the Superfund case when it was sued by the direct defendants in September 1991. The direct defendants alleged that Lukens generated hazardous substances that were transported to and disposed at the Helen Kramer landfill. Through discovery, Lukens learned that its transporters allegedly transported pickle liquor, a waste acid generated in the steel manufacturing process, to the Helen Kramer landfill from approximately May 1971 to December 1974. During this period of time, Lukens believed that its transporter was hauling pickle liquor generated by Lukens to the transporter's facility in Western Pennsylvania. Lukens believed that its pickle liquor was neutralized at such facility by the transporter. The transporter was also required to suitably dispose of our pickle liquor after it completed the neutralization process. Contrary to our beliefs concerning the neutralization and suitable disposal of our pickle liquor, our transporter claimed that our pickle liquor was taken directly from our plant to the Helen Kramer landfill and was not neutralized. A preliminary waste-in report, performed by an independent consultant hired by the PRP's, was circulated in the third quarter of 1995. This report was the consultant's initial attempt to address nexus and volume issues at the site. Other allocation issues such as toxicity, generator/transporter liability, ability to pay and de minimis issues were to be addressed in subsequent reports. The preliminary waste-in report was subject to change as all participating parties were given an opportunity to provide comments on the report and submit to the consultant additional evidence regarding the issues of nexus and volume. Lukens strongly objected to the nexus and volume determinations, which were based on what Lukens considered to be unreliable evidence. In addition, Lukens believed that the consultant considered unsubstantiated evidence in making its volume calculations. We disputed the reliability of the evidence upon which the consultant's volume and nexus conclusions were based for several reasons, including the following: * The nexus time period was contradicted by a letter from the transporter to Lukens in May 1971 in which the transporter specifically stated that Lukens' pickle liquor was going to the transporter's Western Pennsylvania neutralization facility and not to the Helen Kramer landfill. * Statements by the former President of the transporter were unreliable because they were obtained approximately 25 years after
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the disposal of the pickle liquor and at a time when the transporter arguably had a motive to maximize its exposure at this site in order to minimize its exposure at other sites. * There was testimony in this case that the transporter disposed of pickle liquor at landfills other than the Helen Kramer landfill. * Although our transporter purportedly disposed of more than 10 million gallons of its customers' pickle liquor at the Helen Kramer landfill, the only contemporaneous record that it was able to produce was one customer list. This list did not refer to the types of services provided, the frequency of such services, the volume of waste transported or the nature of the waste. * In our opinion, the volume calculations were flawed because the consultant did not appropriately account for events such as bad weather and operational difficulties that could have disrupted the transportation of waste to the site. Many of the PRP's expressed significant concerns regarding this waste-in report and objected to its preliminary findings. Additionally, a substantial part of the total site costs incurred by the Federal government were the subject of a pending criminal investigation against one of the contractors that performed the remediation for the government. Recoverable cleanup costs ranged from $50,000 to $150,000 depending on the outcome of the investigation. In the fourth quarter of 1995, Lukens received a draft allocation plan from the consultant. Our percentage allocation was approximately 3% based on this plan. The purpose of this allocation plan was to further assist the PRP's in understanding the allocation approach contemplated in the case. This plan was subject to change as all participating parties were given an opportunity to provide comments and submit additional evidence regarding the determinations made in the plan. Lukens objected to this plan based on the following: * The issues and concerns we had with the preliminary waste-in report were not adequately addressed in the preliminary allocation plan. * The pickle liquor generated at Lukens had a very low toxicity level and did not drive the remedy at the site. Our pickle liquor was approximately 95% water and 5% acid. * The PRP's included many municipalities and numerous chemical companies whose waste material had toxicity levels believed by us to be significantly higher than pickle liquor. Consequently, Lukens felt strongly that the preliminary allocation report did not provide an adequate discount for the low toxicity level of its pickle liquor.
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* Our transporter had advised us that it would neutralize and suitably dispose of all of our pickle liquor. We believed that our pickle liquor was being transported to an approved site in Pittsburgh, Pennsylvania. If our transporter failed to neutralize and suitably dispose of our pickle liquor, Lukens believed that the transporter should bear virtually all of the costs arising from such failure. * Our transporter held itself out as an expert on pickle liquor and knew the composition of our pickle liquor, the available disposal facilities and, most importantly, selected the Helen Kramer landfill without our knowledge. The transporter, not Lukens, benefited financially from its failure to neutralize and suitably dispose of our pickle liquor. In addition, the transporter was financially viable. Based on the preceding facts and certain case law which supported a higher share for transporters than the allocation determined in the plan, Lukens believed that the transporter should bear virtually all of the costs attributable to the alleged disposal of pickle liquor at the Helen Kramer landfill. The PRP's continued to express significant concerns regarding this allocation plan and objected to its draft findings. Additionally, the issues surrounding the recoverable costs of remediation still had not been resolved. Based on the above facts and the significant uncertainties surrounding this matter, Lukens concluded, at the end of 1995, it was not probable that a liability had been incurred and no provision was recorded. Lukens also concluded that, while it was reasonably possible that a liability could result from this matter, management was unable to reasonably estimate the amount, if any, of such liability. In the second quarter of 1996, a final, non-binding allocation plan was received from the consultant. Our percentage allocation was approximately 4% based on this plan. We continued to have major concerns with this allocation plan and believed that we could significantly reduce our allocated percentage based on our arguments related to nexus, volume, toxicity, transporter liability, neutralization and the other allocation issues discussed above. The uncertainty of the eventual allocation was also supported by our own outside environmental consultant who advised us that (i) our pickle liquor had a low toxicity and did not drive the remedy at the site, (ii) the acid in our pickle liquor would have dissipated before the site was remediated, (iii) our pickle liquor contained only low levels of metal contaminants and (iv) the pickle liquor from Lukens and all other parties combined contributed only 0.84% to 1.15% to the total site costs. Additionally, other PRP's continued to express significant concerns with the plan. Subsequently, in the third quarter of 1996, a majority of PRP's voted to reject using the plan as a basis for further negotiations. Upon such rejection, we were faced with the distinct possibility of beginning a new allocation process or litigating the entire case, in which case Lukens believed it had substantial defenses based on the considerations discussed above. Based on this second report and the continuing uncertainties surrounding this matter, Lukens again concluded it was not probable that a liability had been incurred and no provision was recorded. Lukens also concluded that, while it was reasonably possible that a liability could result from this matter, management was unable to reasonably estimate the amount, if any, of such liability.
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On July 31, 1996, the EPA made a settlement demand on the direct defendants. On September 24, 1996, the direct defendants made an offer to the EPA. As a result of these events, in the fourth quarter of 1996, circumstances surrounding this matter changed significantly. Although the PRP's had voted to reject using the plan as a basis for further negotiations, the EPA and the direct defendants made significant progress towards reaching an agreement on the total cleanup costs to be reimbursed based on the offer submitted by the direct defendants. The EPA also strongly encouraged mediation and settlement discussions, a settlement agreement by year-end 1996 and a commitment by the third party defendants to contribute their allocated shares and to participate in the settlement process. These discussions between the EPA and the direct defendants generated significant momentum toward settlement and increased the level of pressure on the third party defendants, such as Lukens. It quickly became clear that, despite the third quarter rejection vote by the PRP's, the EPA and the direct defendants were focused on the allocations identified in the last allocation report and there appeared little probability that further allocation reports would be commissioned. Based on these new developments, the total cost of the settlement was now able to be reasonably estimated as was our estimated portion of such cost. Accordingly, we concluded late in the fourth quarter of 1996 that a liability, based on the allocation report issued in the second quarter of 1996, was probable and should be recognized. At that time, we recognized a liability of $6,000. During the second quarter of 1997, a tentative settlement was reached in the Helen Kramer Superfund matter for which we agreed to pay $5,600. We are currently negotiating with our insurance carriers for recovery of the tentative settlement amount and we are optimistic that a substantial recovery will be available. However, no receivable has been recorded for any estimated recovery, given the uncertainty surrounding such claims. Electric Arc Furnace Flue Dust Electric Arc Furnace flue dust is generated by Lukens and other steel companies from the melting of scrap steel in electric arc furnaces. We began to dispose of flue dust at a site on our premises in approximately 1961. This practice ceased in 1980 prior to the enactment of the Resource Conservation and Recovery Act ("RCRA"). The EPA defines electric arc furnace flue dust generated after the enactment of RCRA as a listed hazardous waste. This site was originally visited by the EPA in 1989, at a time when many steel mills were being reviewed, but the EPA required no further action regarding the site. Lukens was not aware of any other EPA activity related to this site until late in the first quarter of 1996, at which time the EPA conducted another inspection of the site. The results of the EPA's inspection were received in May 1996. The EPA's inspection and sampling resulted in a hazard ranking score that was greater than the threshold required for inclusion of the site on the National Priority List ("NPL"). We reviewed the EPA's sampling results and identified discrepancies between the EPA's results and our split sample results.
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The EPA concluded that the site did not require remedial action at that time. No administrative orders or consent decrees were received or entered into. However, the EPA concluded that the site warranted further investigation and indicated that it would initiate a sampling process at the site within six to nine months. This was the first step in an approximate two year process for evaluation as a potential NPL site. As part of this investigation, in the second quarter of 1996 the EPA suggested that Lukens pursue voluntary remediation under Pennsylvania Act 2. Voluntary cleanup programs such as Pennsylvania Act 2 allow site owners to identify and clean up sites, to use less extensive administrative procedures and to obtain some relief from future state liability for past contamination. We began considering this alternative and efforts to further assess the site and evaluate potential remedial alternatives and costs. On October 14, 1996, Lukens received a report, dated October 11, 1996, from an independent consulting firm hired by Lukens. The report outlined remedial alternatives and costs. The report provided four scenarios with costs ranging from $456 to $4,850, depending on the extent of the remediation. Additionally, during the quarter, we met with the Pennsylvania Department of Environmental Protection ("DEP") to initiate discussions in accordance with the EPA's recommendations to avoid the NPL process. The DEP agreed to consider whether the site was qualified for the Act 2 program. We believed that the site qualified for the Act 2 program because all disposal activities at the site occurred prior to the enactment of RCRA. Based on our decision to approach the DEP for voluntary cleanup coupled with the results of the preliminary remediation report, we concluded in the 1996 fourth quarter that a liability was probable and could be reasonably estimated. The $3,000 liability recognized was based on our best estimate from the remediation alternatives presented in the consultant's report, along with certain estimated future consulting costs and expenses. In the first quarter of 1997, we received approval from the DEP to include the site in the Act 2 program. There has been no further significant activity regarding this matter. Douglassville Lukens is a PRP at this Superfund site located in Berks County, Pennsylvania. We allegedly sent approximately 80,000 gallons of waste oil/sludge to the site for treatment and disposal. Lukens is a de minimis party with less than 1% of the total waste-in allocation at the site. Lukens agreed to pay approximately $368 pursuant to a de minimis Consent Decree in the second quarter of 1996. The Consent Decree has not yet been entered by the Court because certain PRP's are attempting to convince the EPA to reissue the Record of Decision for the site to substitute an on-site soil stabilization remedy for the current incineration remedy. Since on-site stabilization is more cost effective than incineration, we would expect our liability to decrease if the Record of Decision is reissued.
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We have accrued $375 for the Douglassville site based on the terms of our settlement. The possibility of payments in excess of the amount accrued is considered remote. Based on information currently available, management does not anticipate that its financial position will be materially affected by additional environmental remediation costs, although quarterly or annual operating results could be materially affected by future developments. Debt Financing. Lukens' notes outstanding of $150,000 are due in 2004. The Medium-Term Notes, Series A, outstanding of $75,000 are due in 2006. Supporting both short- and long-term liquidity needs are agreements for a committed line of credit. Other Commitments. A contract for the supply of oxygen and related products to a Carbon & Alloy Group manufacturing facility runs until 2007 and includes take-or-pay provisions totaling $24,087 over the remaining term. A software modification program is in process to address programming requirements related to the year 2000. Inflation. On average, inflation rates for the domestic economy have been relatively low over the past few years. Although long-term inflation rates are difficult to predict, Lukens believes it has the flexibility in operations and capital structure to maintain a competitive position.  Dividends. A graph of net earnings per common share and dividends per common share appears in this section. Net earnings (loss) per common share: 1995 $ 2.18 1996 $(2.06) 1997 $( .45) Dividends per common share: 1995 $1.00 1996 $1.00 1997 $1.00 Lukens paid $1.00 per share in common stock dividends in 1997. A quarterly common dividend of $.25 per share was paid on February 20, 1998. It is the company's objective to pay common dividends approximating 35 percent of net earnings over the long term. The merger agreement with Bethlehem Steel Corporation discussed in Note 1, limits the quarterly dividend to $.25 per share. As of February 6, 1998, there were approximately 4,600 common stockholders of record. The Series B Convertible Preferred Stock held by the ESOP carries a cumulative annual dividend of $4.80 per share. Lukens common stock is listed and traded on the New York Stock Exchange, symbol LUC. Dividends and stock market price ranges for the last two years are included in the table on page 21. Dollars in thousands except per share amounts
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated Statements of Earnings for the 52 weeks ended December 27, 1997, December 28, 1996, and December 30, 1995 [Enlarge/Download Table] 1997 1996 1995 Net Sales $ 994,380 970,320 1,049,158 Operating Costs and Expenses (Notes 1, 4, 6, 8 and 10) Cost of products sold 925,984 921,046 922,667 Selling and administrative expenses 54,992 55,145 58,511 Unusual items (Note 3) Work force reduction provision -- 10,782 -- Environmental remediation provision -- 9,400 -- ---------- ------- --------- Total operating costs and expenses 980,976 996,373 981,178 Operating Earnings (Loss) 13,404 (26,053) 67,980 Interest expense (Note 8) 19,073 16,735 13,471 ---------- ------- --------- Earnings (Loss) Before Income Taxes (5,669) (42,788) 54,509 Income tax expense (benefit) (Note 5) (1,049) (14,377) 20,495 ---------- ------- --------- Net Earnings (Loss) $ (4,620) (28,411) 34,014 ---------- ------- --------- Dividend requirements for preferred stock (Note 9) (2,015) (1,994) (1,962) Net Earnings (Loss) Applicable to Common Stock $ (6,635) (30,405) 32,052 ---------- ------- --------- Earnings (Loss) Per Common Share (Note 1) Basic $ (.45) (2.06) 2.18 Diluted $ (.45) (2.06) 2.05 Common Shares and Equivalents Outstanding (Note 1) Basic 14,806 14,784 14,696 Diluted 16,244 16,278 16,334 Cash Dividends on Common Stock-- Per Share $ 1.00 1.00 1.00 ---------- ------- --------- The notes are an integral part of these statements. Dollars and shares in thousands except per share amounts
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Consolidated Balance Sheets as of December 27, 1997, and December 28, 1996 [Enlarge/Download Table] Assets 1997 1996 Current Assets Cash and cash equivalents (Note 1) $ 6,629 10,282 Receivables, less allowance of $6,716 in 1997 and $7,750 in 1996 118,026 92,356 Inventories (Notes 1 and 7) 145,587 148,925 Deferred income taxes (Note 5) 13,725 13,129 Prepaid expenses and other 1,733 1,964 --------- ------- Total current assets 285,700 266,656 Plant and Equipment (Notes 1 and 10) Land 12,237 11,880 Buildings 88,918 87,875 Machinery and equipment 850,419 842,334 Construction in progress 9,249 11,664 --------- ------- 960,823 953,753 Less accumulated depreciation 463,264 420,427 --------- ------- Net plant and equipment 497,559 533,326 Intangible Assets, net of accumulated amortization of $11,352 in 1997 and $9,114 in 1996 (Notes 1 and 4) 58,139 57,158 Deferred Income Taxes (Note 5) 34,599 29,937 Other Assets 1,433 1,674 --------- ------- Total Assets $ 877,430 888,751 --------- ------- Liabilities & Stockholders' Investment Current Liabilities Accounts payable $ 87,618 92,252 Accrued employment costs (Notes 3, 4 and 6) 43,787 46,603 Other accrued expenses (Note 10) 33,510 23,765 Current maturities of long-term debt (Note 8) 6,276 4,878 --------- ------- Total current liabilities 171,191 167,498 Long-Term Debt (Note 8) 244,671 248,695 Retirement Benefits (Notes 3 and 4) Pensions 53,690 43,995 Medical and life insurance 151,307 148,479 Other Liabilities (Notes 3 and 10) 14,821 22,015 --------- ------- Total liabilities 635,680 630,682 Commitments and Contingencies (Note 10) Redeemable Stock (Note 9) Series preferred stock -- 28,801 Deferred compensation-- ESOP -- (15,374) --------- ------- Total redeemable stock -- 13,427 Stockholders' Investment Series preferred stock (Note 9) 28,218 -- Common stock (Note 9) 158 158 Capital in excess of par value 88,444 86,002 Earnings invested 150,140 171,730 Foreign currency translation adjustments (1,739) (1,332) Deferred compensation-- ESOP (Notes 6 and 9) (10,619) -- Deferred compensation-- restricted stock (Note 6) (2,574) -- Repurchased stock, at cost (10,278) (11,916) --------- ------- Total stockholders' investment 241,750 244,642 --------- ------- Total Liabilities & Stockholders' Investment $ 877,430 888,751 --------- ------- The notes are an integral part of these statements. Dollars in thousands
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Consolidated Statements of Stockholders' Investment for the 52 weeks ended December 27, 1997, December 28, 1996, and December 30, 1995 [Enlarge/Download Table] 1997 1996 1995 Shares Dollars Shares Dollars Shares Dollars Series Preferred Stock (Note 9) (1,000,000 shares authorized) Series B Balance at beginning of year -- $ -- 494,413 $ 29,665 510,592 $ 30,635 Reversal of redeemable stock classification (Note 9) 480,018 28,801 -- -- -- -- Conversion (9,718) (583) (14,395) (864) (16,179) (970) Redeemable stock classification (Note 9) -- -- (480,018) (28,801) -- -- -------------------------------------------------------------------------------------------------------------------------------- Balance at end of year 470,300 28,218 -- -- 494,413 29,665 Common Stock (Note 9) (40,000,000 shares authorized) 15,813,259 158 15,813,259 158 15,813,259 158 Capital in Excess of Par Value Balance at beginning of year 86,002 85,204 84,088 Stock option activity (Note 6) 124 565 716 Conversion of Series B preferred stock 37 233 400 Restricted stock activity (Note 6) 2,281 -- -- -------------------------------------------------------------------------------------------------------------------------------- Balance at end of year 88,444 86,002 85,204 Earnings Invested Balance at beginning of year 171,730 216,934 199,586 Net earnings (loss) (4,620) (28,411) 34,014 Dividends declared Preferred ($4.80 per share) (2,266) (2,339) (2,405) Common ($1.00 per share) (14,805) (14,781) (14,696) Restricted stock ($1.00 per share) (134) -- -- Tax benefit on ESOP preferred stock dividends 235 327 435 -------------------------------------------------------------------------------------------------------------------------------- Balance at end of year 150,140 171,730 216,934 Foreign Currency Translation Adjustments Balance at beginning of year (1,332) (1,141) (1,303) Effect of rate changes (407) (191) 162 -------------------------------------------------------------------------------------------------------------------------------- Balance at end of year (1,739) (1,332) (1,141) Deferred Compensation -- ESOP (Note 6) Balance at beginning of year -- (19,404) (22,767) Reversal of redeemable stock classification (Note 9) (15,374) -- -- Allocations to employees 4,755 4,030 3,363 Redeemable stock classification (Note 9) -- 15,374 -- -------------------------------------------------------------------------------------------------------------------------------- Balance at end of year (10,619) -- (19,404) Deferred Compensation -- Restricted Stock (Note 6) Balance at beginning of year -- -- -- Restricted stock activity (3,861) -- -- Amortization of deferred compensation 1,287 -- -- -------------------------------------------------------------------------------------------------------------------------------- Balance at end of year (2,574) -- -- Repurchased Stock, at cost Balance at beginning of year 1,010,988 (11,916) 1,077,305 (12,697) 1,161,460 (13,340) Stock option activity (Note 6) -- -- (36,750) 433 (35,675) 74 Conversion of Series B preferred stock (4,956) 59 (29,567) 348 (48,480) 569 Issuance of restricted stock (Note 6) (134,000) 1,579 -- -- -- -- -------------------------------------------------------------------------------------------------------------------------------- Balance at end of year 872,032 (10,278) 1,010,988 (11,916) 1,077,305 (12,697) Stockholders' Investment $ 241,750 $ 244,642 $ 298,719 -------------------------------------------------------------------------------------------------------------------------------- The notes are an integral part of these statements. Dollars in thousands except per share amounts
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Consolidated Statements of Cash Flows for the 52 weeks ended December 27, 1997, December 28, 1996, and December 30, 1995 [Download Table] 1997 1996 1995 Operating Activity Net earnings (loss) $ (4,620) (28,411) 34,014 Adjustments to Reconcile Net Earnings (Loss) to Cash Flow from Operating Activity Depreciation and amortization 51,831 48,949 41,304 Income taxes deferred (2,393) (18,323) 9,270 Provision for uncollectible accounts 5,130 11,348 10,044 Retirement benefit funding less than expense 9,208 12,078 4,859 Environmental remediation provision -- 9,400 -- Fixed asset write-downs -- 5,933 -- Changes in working capital affecting operations Accounts receivable (27,178) 26,897 (25,102) Inventories 3,338 14,200 (29,746) Prepaid expenses and other 231 (297) 144 Accounts payable (4,622) (29,654) 36,585 Accrued expenses (3,527) (11,901) 1,894 Other, net 1,998 3,448 2,225 -------- ------ ------ Cash flow from operating activity 29,396 43,667 85,491 Financing Activity Long-term debt Proceeds from issuance of notes -- 74,538 -- Other borrowed 27,800 -- 70,350 Other repaid (25,782) (45,230) (47,346) Dividends paid (17,084) (17,137) (17,121) Proceeds from stock options exercised -- 802 408 Other, net -- (537) (12) -------- ------ ------ Net from (for) financing activity (15,066) 12,436 6,279 Investing Activity Capital expenditures (19,369) (57,092) (104,120) Proceeds from sale of assets/subsidiaries 987 466 17,106 Other, net 399 (251) (3,506) -------- ------ ------ Net for investing activity (17,983) (56,877) (90,520) Cash and Cash Equivalents Increase (decrease) (3,653) (774) 1,250 Start of year 10,282 11,056 9,806 -------- ------ ------ End of year $ 6,629 10,282 11,056 -------- ------ ------ The notes are an integral part of these statements. Dollars in thousands
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policies Merger Agreement and Change in Control. On December 15, 1997, Lukens entered into a merger agreement with Bethlehem Steel Corporation. The agreement was subsequently amended as of January 4, 1998. Under the merger agreement, Bethlehem Steel Corporation would acquire Lukens outstanding common and preferred stock (converted to common) for $30 per share. Consideration is a combination of cash and Bethlehem stock. At year-end 1997, the number of common shares outstanding, combined with the conversion of outstanding preferred stock, would total 16,352,127 shares and result in proceeds of $490,564 in cash and Bethlehem stock. The merger is contingent on shareholder approval. A special meeting of stockholders is expected to be held during the second quarter of 1998. The Consolidated Financial Statements and the Notes to Consolidated Financial Statements were prepared assuming a going-concern basis and did not recognize the impact of the merger. For a discussion of the contingent liabilities associated with the merger, see Note 10. Basis of Presentation. The consolidated financial statements include the accounts of Lukens Inc. and all majority-owned subsidiaries. Our fiscal year is the 52- or 53-week period that ends on the last Saturday of December. Certain subsidiaries are consolidated on a calendar year basis. The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts and contingency disclosures. Cash and Cash Equivalents. Highly liquid investments with maturities of three months or less when purchased are recognized as cash equivalents. Inventories. Inventories are recorded at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for most product and raw material inventories. The service center operations of the Stainless Group determine cost by the first-in, first-out (FIFO) method. Supplies are valued at the lower of average cost or market. Additional disclosures are included in Note 7. Plant and Equipment. Plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful life. The useful life ranges from 30 to 40 years for buildings and from 10 to 18 years for most production machinery and equipment. The cost of plant and equipment retired in the normal course of business is generally charged against accumulated depreciation. Gains and losses on other retirements are reflected in earnings. Intangible Assets. Intangible assets consist primarily of goodwill resulting from the Washington Steel Corporation acquisition in 1992. Goodwill from the acquisition is amortized on a straight-line basis over 25 years. Also included in intangible assets are pension related assets, discussed in Note 4. Derivative Financial Instruments. Derivative financial instruments, such as forward exchange contracts, are used to manage or hedge exposure to changes in market conditions for certain raw material purchases. Gains or losses on these contracts are deferred and recognized as a component of the raw material cost based on the maturities of the contracts. Any gains or losses from the early termination of these derivative financial instruments are deferred and recognized over the original term of the contract. Additional disclosures are included in Note 8. Environmental Remediation. Environmental liabilities recognized represent our best estimate of remediation expenditures, including legal, consulting and other professional fees, that are probable and that can be reasonably estimated. Environmental costs are expensed unless they increase the value of the related asset and/or prevent or mitigate future contamination. In November 1996, the American Institute of Certified Public Accountants issued guidance on accounting for environmental liabilities. The adoption of this guidance in 1997 did not have a material effect on the company's consolidated financial condition or results of operations. Additional disclosures are included in Notes 3 and 10. Start-Up Costs. Costs incurred in the start-up of a facility, including training and production testing, are expensed as incurred. Software Modification Costs for Year 2000 Compliance. Costs incurred to modify software packages to operate in the year 2000 and beyond are expensed as incurred. Dollars in thousands except per share amounts
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Stock-Based Compensation. In 1996, Lukens adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." This statement provided for an implementation option, reflecting the controversy surrounding the measurement of compensation expense for stock options and other stock-based compensation. One option was to recognize compensation expense in the consolidated financial statements using a fair-value based method, applied to virtually all stock-based compensation. The alternative did not change the current intrinsic-value approach of expense recognition, but required pro forma disclosure in the notes to consolidated financial statements using the fair-value method. We elected to continue the intrinsic-value method of expense recognition and to provide the pro forma disclosures required under SFAS No. 123. Additional disclosures are included in Note 6.  Earnings Per Share. In 1997, Lukens adopted SFAS No. 128, "Earnings per Share." This statement specified the computation, presentation and disclosure requirements for earnings per share (EPS). The main objectives of the statement were to simplify the EPS calculation and to make EPS comparable on an international basis. Effective in 1997, primary and fully diluted EPS were replaced by basic and diluted EPS. Prior period results were restated for comparative purposes. A significant difference compared to the prior method is that basic EPS does not assume potentially dilutive securities in the computation. Basic earnings per common share are calculated by dividing net earnings applicable to common stock by the average number of common shares outstanding. On a diluted basis, both net earnings and shares outstanding are adjusted to reflect the conversion of convertible preferred stock. Shares outstanding in the diluted calculation also assume common stock equivalents, such as stock options. Diluted common shares and equivalents outstanding disclosed in the Consolidated Statements of Earnings reflect the maximum dilution possible. Adjustments that would be antidilutive or reduce a loss per share are not recognized. Also in 1997, Lukens adopted SFAS No. 129, "Disclosure of Information about Capital Structure." This statement was issued in conjunction with the earnings per share statement discussed above and was intended to centralize capital structure disclosure requirements and to expand the number of companies subject to the requirements. Since we were in compliance with the existing capital structure disclosure requirements, we did not materially change our disclosures under the new standard. Future Accounting Changes -- Comprehensive Income. In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was released. Comprehensive income is a concept that includes the total of net earnings (loss) reported in the Consolidated Statements of Earnings, plus revenues, expenses, gains and losses that are recognized directly in the stockholders' investment section of the Consolidated Balance Sheets. The purpose of the statement was to more prominently highlight comprehensive income items and to report a total amount for a reporting period. Effective in 1998, Lukens will be required to disclose comprehensive income and its components within our financial statements. Prior period financial statements will be restated for comparative purposes. Future Accounting Changes -- Business Segments. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was also issued in June of 1997. Beginning in 1998, disclosures will be based on the way management organizes business segments to make decisions about resource allocation and to measure performance. Disclosures will include interim reporting requirements. Previously reported information will be restated for comparative purposes. We do not expect to materially change our segment disclosures under the new standard. 2. Business Groups Listed below is a description of our business groups, which operate primarily in the United States. Sales to foreign countries are not significant. Carbon & Alloy Group -- specializes in the production of carbon, alloy and clad plate steels. The group operates in a wide range of markets in the capital goods sector of the economy. Steel service centers, the largest market for the group, accounted for approximately 48 percent of annual sales in 1997 and averaged approximately 38 percent of sales in 1996 and 1995. The primary facilities are located in Coatesville and Conshohocken, Pennsylvania. The labor contract for the Coatesville plant expires in 2000. Stainless Group -- specializes in the production of stainless steel sheet, strip, plate, hot band and slabs. Manufacturing facilities located in Houston and Washington, Pennsylvania, and Massillon, Ohio, primarily serve the capital goods and consumer durables sectors of the economy. Labor contracts for these facilities expire in 1999 and 2000. The group also operates stainless steel service centers in the United States and Canada. The primary market for the group is service centers, which averaged approximately 37 percent of annual sales in the last three years. Dollars in thousands except per share amounts
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Summary business group information is included in the following chart. 1997 1996 1995 Net sales Carbon & Alloy $ 516,499 481,237 439,330 Stainless 477,881 489,083 609,828 --------- ------- --------- $ 994,380 970,320 1,049,158 Operating earnings (loss) Carbon & Alloy(a) $ 50,410 (2,554) 11,946 Stainless(b) (20,488) (7,058) 75,148 Corporate(c) (16,518) (16,441) (19,114) --------- ------- --------- $ 13,404 (26,053) 67,980 Assets Carbon & Alloy $ 426,405 421,034 420,665 Stainless 418,830 440,711 468,515 Corporate(d) 32,195 27,006 30,483 --------- ------- --------- $ 877,430 888,751 919,663 Depreciation and amortization Carbon & Alloy $ 24,061 23,453 18,696 Stainless 27,007 24,505 21,994 Corporate 763 991 376 Discontinued Operations -- -- 238 --------- ------- --------- $ 51,831 48,949 41,304 Capital expenditures Carbon & Alloy $ 6,213 13,747 36,940 Stainless 6,049 40,298 63,803 Corporate 7,107 3,047 3,236 Discontinued Operations -- -- 141 --------- ------- --------- $ 19,369 57,092 104,120 --------- ------- --------- a. Carbon & Alloy Group Operating Results: 1996 -- Results included a $3,756 charge for signing bonuses associated with the bargaining unit contract. Unusual items discussed in Note 3 included a $6,178 work force reduction charge and a provision for environmental remediation of $9,400. b. Stainless Group Operating Results: 1996 -- As discussed in Note 3, results included a provision of $3,695 for a work force reduction. Fixed assets write-downs also reduced results by $5,933. c. Corporate Expenses: 1997 -- Merger related expenses (Note 1) totaled $2,215. 1996 -- Expenses included a $909 work force reduction charge (Note 3) and environmental expenses, offset by reduced professional fees and incentive compensation expense. 1995 -- Results included higher incentive compensation expense and environmental expenses. Corporate environmental expenses are associated with properties retained from divested subsidiaries. d. Corporate Assets: Corporate assets consist primarily of cash and cash equivalents, properties held for sale, office facilities and deferred income taxes. 3. Unusual Items Work Force Reduction. During the second quarter of 1996, Lukens announced a work force reduction program of approximately 150 salaried positions. The program was primarily aimed at reducing costs by integrating administrative functions. Termination benefits accrued and charged to expense in the second quarter totaled $10,782. On an after-tax basis, the provision reduced results by $6,859, or $.46 per share. The charge included severance related benefits of $6,784. Termination benefits paid and charged against the liability were essentially completed during 1997. Pension related benefits included $3,998 from the combination of pension plan benefits that are triggered at termination and from the recognition of a curtailment loss. Pension benefits were measured at a 7.75 percent discount rate. Environmental Remediation. During the fourth quarter of 1996, $9,400 of expenses for environmental remediation were recognized. The provision represented our best estimate of costs for a Superfund site and other waste disposal sites. On an after-tax basis, the charge reduced results by $5,978, or $.40 per share. As discussed in Note 10, during the second quarter of 1997, a tentative settlement was reached at a Superfund site where Lukens was designated a potentially responsible party. 4. Retiree Benefits Pensions. Lukens has defined benefit plans that provide pension and survivor benefits for most employees. Benefits are primarily based on the combination of years of service and compensation. Plans are funded in accordance with applicable regulations. Pension benefits triggered by a change in control (Note 1) are discussed in Note 10. Dollars in thousands except per share amounts
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The components of pension expense are listed below. 1997 1996 1995 Service cost for benefits earned(a) $ 8,642 8,246 6,829 Interest cost on projected benefit obligation 31,674 30,298 29,279 Actual return on assets (64,200) (44,870) (67,841) Amortization and deferrals Deferred return on assets 31,092 13,894 41,770 Prior service cost(a) 4,195 4,263 2,900 Other, net 35 100 25 ------- ------ ------ Net pension expense(a) $11,438 11,931 12,962 ======= ====== ====== a. The increase in service cost and amortization of prior service cost, beginning in 1996, reflected plan improvements to the bargaining unit plan in the Carbon & Alloy Group and improvements to the Lukens Inc. salary plan. The following table reconciles the net funded status of our plans to amounts recognized in the Consolidated Balance Sheets. 1997 1996 Actuarial present value of Vested benefit obligation(a) $(403,807) (365,780) Nonvested benefit obligation(a) (43,968) (33,013) --------- -------- Accumulated benefit obligation(a) (447,775) (398,793) Effect of projected future compensation(a) (33,703) (24,765) --------- -------- Projected benefit obligation(a) (481,478) (423,558) Plan assets at fair value(b) 403,802 365,083 --------- -------- Plan assets less than projected benefit obligation (77,676) (58,475) --------- -------- Unrecognized net loss (gain) 1,652 (15,735) Unrecognized prior service cost(a) 37,108 41,642 Unrecognized net obligation at transition 144 178 Adjustment to recognize minimum liability(c) (20,421) (14,503) --------- -------- Net pension liability $ (59,193) (46,893) --------- -------- a. The increase in the 1997 benefit obligations primarily reflected a lower discount rate and another actuarial assumption change. b. Plan assets primarily consist of stocks, bonds and short-term investments. Contributions to defined benefit plans were $4,029 in 1997 and $7,563 in 1996. c. The minimum liability was recognized in intangible assets in the Consolidated Balance Sheets. The net pension liability was recognized in the following accounts in the Consolidated Balance Sheets. 1997 1996 Accrued employment costs $ (7,908) (7,753) Retirement benefits -- pensions (53,690) (43,995) Intangible assets 2,405 4,855 -------- ------- Net pension liability $(59,193) (46,893) -------- ------- Significant assumptions used in the calculation of expense and obligations are listed below. 1997 1996 1995 Discount rate % 6.8 7.5 7.0 Rate of compensation increase % 3-7 3-7 3-7 Long-term rate of return on plan assets % 9.5 9.5 9.5 Retiree Medical and Life Insurance Benefits. Lukens provides retiree medical and life insurance benefits for most employees if they continue to work for the company until they reach retirement age. As required under the 1996 contract for bargaining unit employees at Coatesville, Pennsylvania, a Voluntary Employees' Beneficiary Association (VEBA) Trust was established to provide funding for retiree medical and life insurance programs. The trust agreement requires an annual contribution of $2,500 during the four-year term of the contract. At the end of 1997, two contributions are remaining. Benefit payments from the trust are restricted until required funding levels are achieved. Based on current conditions, benefit payments from the trust are not anticipated in the short term. In addition to the VEBA requirement, benefits are funded as claims are submitted. The components of retiree medical and life insurance expense are listed below. 1997 1996 1995 Service cost for benefits earned $2,405 2,794 2,074 Interest cost on accu- mulated postretirement benefit obligation 10,192 10,939 10,433 Actual return on assets (214) (67) -- Net amortization and deferrals (339) (49) (500) ------- ------ ------ Net postretirement benefit expense $12,044 13,617 12,007 ------- ------ ------ Dollars in thousands except per share amounts
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The following table reconciles the net funded status of our obligations to the liability recognized in the Consolidated Balance Sheets. 1997 1996 Accumulated postretirement benefit obligation Retirees(a) $ (92,629) (83,179) Fully eligible active participants(a) (24,035) (21,398) Other active participants(a) (41,392) (37,888) --------- -------- Total accumulated postretirement benefit obligation(a)(b) (158,056) (142,465) Plan assets at fair value(c) 5,281 2,567 --------- -------- Plan assets less than accumulated postretirement benefit obligation (152,775) (139,898) Unrecognized gain (1,032) (11,081) --------- -------- Net postretirement benefit liability(d) $(153,807) (150,979) --------- -------- a. The increase in 1997 benefit obligations primarily reflected a lower discount rate. b. Obligations include life insurance benefits of $16,495 in 1997 and $15,109 in 1996. c. Plan assets consist of short-term investments. d. At year-end 1997 and 1996, $2,500 was included in current liabilities -- accrued employment costs for the VEBA contribution. Significant assumptions used in the calculation of expense and obligations are listed below. 1997 1996 1995 Discount rate % 6.8 7.5 7.0 Health-care cost increase(a) % 6.5-7.6 6.7-8.1 6.9-8.6 Long-term rate of return on plan assets % 5.0 5.0 -- a. Health-care cost increase assumptions are reduced to a rate of 5% beginning in 2003. A one-percentage point increase in the medical cost trend rate for each year would increase the accumulated postretirement benefit obligation by approximately $19,265 and would increase net postretirement benefit expense by approximately $2,087. 5. Income Taxes The effective tax rate that determined the income tax expense (benefit) recognized is listed below. Essentially all earnings and losses are from United States sources. 1997 1996 1995 Federal statutory rate % (35.0) (35.0) 35.0 State income taxes net of federal tax benefit 8.3 .1 2.4 State income tax changes -- -- .2 Non-deductible expenses 16.0 1.9 1.5 ESOP dividends (9.6) (1.2) (.8) Other 1.8 .6 (.7) ------- ----- ---- Effective income tax rate % (18.5) (33.6) 37.6 ------- ----- ---- The components of the deferred income tax assets (liabilities) are listed below. 1997 1996 Deferred tax assets Retirement benefits $ 81,926 75,330 Tax credit carryforwards 28,613 17,500 Other deductible temporary differences 23,965 24,210 Valuation allowance (2,770) (2,705) ------- ------- 131,734 114,335 Deferred tax liabilities Plant and equipment (73,758) (61,612) Other taxable temporary differences (9,652) (9,657) ------- ------- (83,410) (71,269) ------- ------- Net deferred tax assets $ 48,324 43,066 ------- ------- The current and deferred components of the income tax expense (benefit) are listed below. 1997 1996 1995 Current U.S. Federal $4,542 3,272 11,439 State and other 551 865 1,609 -------- ------- ------ 5,093 4,137 13,048 Deferred to future years U.S. Federal (7,299) (18,720) 4,870 State and other 1,092 76 2,494 -------- ------- ------ (6,207) (18,644) 7,364 Change in tax rate -- -- 83 Change in valuation allowance 65 130 -- -------- ------- ------ Income tax expense (benefit) $ (1,049) (14,377) 20,495 -------- ------- ------ On a cash basis, the following amounts of income taxes were paid. 1997 1996 1995 $5,315 $4,938 $13,018 At year-end 1997, $28,613 of alternative minimum tax credit carryforwards were available. During 1997, settlements were reached in the Internal Revenue Service audits of 1993, 1994 and 1995. Management believes that the outcome of the outstanding audits will not have a material adverse effect on the financial condition, liquidity or results of operations of the company. Dollars in thousands except per share amounts
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During the third quarter of 1997, the 1997 Taxpayer Relief Act (1997 TRA) was enacted. Changes to the Federal tax structure included a restructuring of the depreciable lives used in the alternative minimum tax calculation. Additionally, the net operating loss carryback period was reduced to two years and the carryforward period was increased to 20 years. These changes will become effective in the coming years and will likely have a favorable impact on the tax position of Lukens. The enactment of the 1997 TRA did not require any recognition in the 1997 tax provision for the remeasurement of our deferred tax balances or for changes to the estimated amount of 1997 Federal taxes payable. 6. Compensation Plans Stock Options. The 1985 Stock Option and Appreciation Plan provides for the issuance of non-qualified stock options and incentive stock options (ISOs) to officers and other executives. At the Annual Meeting of Stockholders on April 24, 1996, stockholders approved an amendment to the plan that increased the number of shares of common stock available for issuance by 900,000 to a total of 2,737,500. These options to purchase Lukens common stock were available for grant until February 26, 1998, at an exercise price not less than the fair market value on the grant date. Options were also issued as part of an executive incentive compensation program. These options vest after three years and expire in seven years. All other options vest after one year and expire in 10 years. The Lukens Inc. Stock Option Plan for Non-Employee Directors provides for the issuance of up to 75,000 non-qualified options to purchase Lukens common stock at an exercise price based on the fair market value on the grant date. These options vest after one year and expire in 10 years. During 1991, 330,000 non-qualified stock options were granted to Mr. Van Sant as part of his employment agreement. These options become exercisable ratably over 11 years. The options carry an exercise price of $23.38 per share, which was 85 percent of the fair market value on the grant date. Compensation expense from this discount from fair market value is being recognized on a straight-line basis over the term of his employment agreement. During 1996, Lukens adopted a new stock-based compensation accounting standard, discussed in Note 1. As provided for in the statement, the company elected to continue the intrinsic-value method of expense recognition. If compensation cost for these plans had been determined using the fair-value method prescribed by SFAS No. 123, the company's results would have been reduced to the pro forma amounts indicated below. 1997 1996 1995 Net earnings (loss) $ (5,717) (29,703) 33,028 Earnings (loss) per share-- basic $ (.52) (2.14) 2.11 Earnings (loss) per share-- diluted $ (.52) (2.14) 1.99 The pro forma effect on results may not be representative of the impact in future years because the fair-value method was not applied to options granted before 1995. The fair value of each option was estimated on the grant date using the Black-Scholes option pricing model. Based on the assumptions presented below, the weighted average fair value of options granted was $4.33 per option in 1997, $7.26 per option in 1996 and $8.76 per option in 1995. 1997 1996 1995 Expected life in years 8.0 7.0 7.0 Risk-free interest rate % 6.6 5.6 7.7 Volatility % 30.6 27.4 28.5 Dividend yield % 5.4 3.6 3.6 Dollars in thousands except per share amounts
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A summary of stock option activity is presented below. Weighted Average Shares Exercise Price 1995 Outstanding, beginning of year 767,818 $ 27.99 Granted 246,347 $ 28.19 Exercised (50,525) $ 18.23 Forfeited/canceled (28,445) $ 35.02 --------- ------------- Outstanding, end of year 935,195 $ 28.35 --------- ------------- Exercisable, end of year 487,643 $ 30.58 --------- ------------- Available for grant, end of year 436,873 --------- 1996 Outstanding, beginning of year 935,195 $ 28.35 Granted 308,942 $ 27.81 Exercised (36,750) $ 21.82 Forfeited/canceled (33,800) $ 32.26 --------- ------------- Outstanding, end of year 1,173,587 $ 28.30 --------- ------------- Exercisable, end of year 618,893 $ 29.93 --------- ------------- Available for grant, end of year 1,061,731 --------- 1997 Outstanding, beginning of year 1,173,587 $ 28.30 Granted 326,110 $ 18.45 Exercised -- $ -- Forfeited/canceled (121,450) $ 29.61 --------- ------------- Outstanding, end of year 1,378,247 $ 25.86 --------- ------------- Exercisable, end of year 746,043 $ 28.88 --------- ------------- Available for grant, end of year 857,071 --------- For options outstanding at the end of 1997, exercise prices ranged from $16.625 to $47.25 and the weighted average remaining life was approximately 6.5 years. Restricted Stock. In 1997, the Board of Directors approved the issuance of performance vested restricted stock to officers as part of an incentive compensation program. During the first quarter of 1997, 134,000 restricted shares were awarded. The shares carry voting and dividend rights and were recorded at fair market value on the grant date. A corresponding charge to deferred compensation was recorded in the stockholders' investment section of the Consolidated Balance Sheets. The deferred compensation balance was subsequently adjusted for changes in the market price of Lukens common stock and for compensation expense recognized. The awards vest at the end of three years, contingent on continued employment and the achievement of performance goals that are tied to Lukens' total shareholder return relative to other steel companies. Compensation expense recognized for these awards totaled $1,287 in 1997. Incentive Compensation. Most Lukens employees participate in incentive compensation plans. These plans are based on the consolidated results of Lukens Inc., and on the results and performance measures of various subsidiaries. Compensation expense under these plans is listed below. 1997 1996 1995 $12,754 $9,944 $24,875 Employee Stock Ownership Plan (ESOP). The Lukens ESOP was designed to provide 401(k) employer matching benefits to most salaried employees in the form of convertible preferred stock. The stock was acquired with the proceeds from a $33,075 term loan (Note 8). The stock is released for allocation to participants' accounts based on the relationship of debt and interest payments to the total of all scheduled debt and interest payments. Dividends on allocated stock are paid, in-kind, with preferred stock. As discussed in Note 8, the quarterly payments of the ESOP debt were restructured in 1996. The projected maturities of the ESOP loan over the remaining term are listed below. 1998 1999 $5,828 $4,791 The loan is guaranteed by Lukens, and the outstanding balance is recognized as debt in the Consolidated Balance Sheets. An offsetting amount, representing deferred compensation measured by the stated value of convertible preferred stock, was recognized in the stockholders' investment section in 1997. In 1996, this account was classified as redeemable stock, discussed in Note 9. Debt service requirements of the ESOP are met by the combination of Lukens' cash contributions to the ESOP and dividends on the preferred stock. Regarding expense recognition, cash contributions to the ESOP are recorded as compensation expense, and preferred stock dividends reduce retained earnings. This recognition results in interest expense incurred on the ESOP debt not being recognized as interest expense on Lukens' financial statements. Cash contributions are listed below. 1997 1996 1995 $3,563 $3,187 $2,784 Change in Control. Compensation liabilities triggered by a change in control (Note 1) are discussed in Note 10. Dollars in thousands except per share amounts
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7. Inventories The components of inventory are listed below. 1997 1996 Products finished and in process $117,455 116,477 Raw materials 23,326 27,762 Supplies 4,806 4,686 -------- ------- Inventories(a) $145,587 148,925 -------- ------- a. The percent of inventories accounted for under the LIFO inventory valuation method was approximately 80% in 1997 and 1996. The estimated cost to replace inventories at year-end was $185,000 in 1997 and $192,000 in 1996. 8. Financial Instruments Long-Term Debt. Listed below is a summary of long-term debt outstanding. Years Due 1997 1996 Notes payable, face amount 2004 $ 150,000 150,000 Unamortized discount (422) (486) Coupon interest at 7.625% Effective interest at 7.691% Medium-term notes, face amount 2006 75,000 75,000 Unamortized discount (373) (419) Coupon interest at 6.5% Effective interest at 6.585% Short-term notes(a) 2002 9,300 10,700 Industrial revenue bonds 1998-2009 6,823 3,404 ESOP debt guarantee(b) 1998-1999 10,619 15,374 Total debt(c) 250,947 253,573 -------------------------------------------------------------------------- Less current portion 6,276 4,878 -------------------------------------------------------------------------- Long-term debt $ 244,671 248,695 -------------------------------------------------------------------------- a. The weighted-average interest rate was 5.8% at year-end 1997 and 5.7% at year-end 1996. Short-term notes are classified as long term because they are supported by the revolving credit agreement discussed below. b. The ESOP debt, guaranteed by Lukens, carries an 8.26% interest rate on $6,691 as of December 27, 1997. The remaining ESOP debt carries a variable rate of 80.5% of the Prime Rate. For a discussion on ESOP accounting, see Note 6. During 1996, the quarterly payments of the ESOP debt were restructured to align anticipated benefits with the release of preferred stock (Note 9). The terms of the variable-interest rate portion of the ESOP debt were not changed. c. Annual maturities of long-term debt, excluding the ESOP debt guarantee, over the next five years are listed below. 1998 1999 2000 2001 2002 $448 $418 $350 $361 $9,672 Notes Payable. There are $150,000 of notes due in 2004 and $75,000 of Medium-Term Notes, Series A, due in 2006. Interest is payable semi-annually. During the second quarter of 1997, Standard & Poor's lowered their rating from BBB+ to BBB on these notes and during the third quarter of 1997, Moody's lowered their rating from Baa2 to Baa3. Lukens also has $25,000 of notes available for issuance under a shelf registration. The notes were structured to provide Lukens with flexibility in maturities, from nine months to 30 years, and flexibility in interest rate structures. Revolving Credit Agreement. Lukens' revolving credit agreement provides for a $150,000 committed line of credit. Interest is based on one of the following rates: * the higher of the Prime Rate or the Federal Funds Rate plus .5% * London Inter-Bank Offered Rate (LIBOR) adjusted for applicable reserves plus .225% to .5% depending on the Standard & Poor's or Moody's rating of the long-term notes of Lukens * competitively bid rates from lenders. A facility fee is required on the total line of credit and ranges from .125% to .3% based on the lower of Standard & Poor's or Moody's rating of Lukens long-term notes. The agreement includes covenants that require a maximum leverage ratio (defined in the agreement) of 55% and restrictions on additional debt and asset dispositions. At year-end 1997, additional borrowings of approximately $65,400 were available under these covenants. Interest Expense. Interest costs include interest on obligations and amortization of debt set-up costs. For a discussion of ESOP debt accounting, see Note 6. Interest components are listed below. 1997 1996 1995 Costs incurred $19,073 19,005 16,395 Interest capitalized -- (2,270) (2,924) ------- ------ ------ Interest expense $19,073 16,735 13,471 ------- ------ ------ Interest paid $18,796 17,436 16,107 ------- ------ ------ Derivative Financial Instruments -- Commodity Hedges. As of year-end 1997, Lukens was party to several commodity hedge agreements maturing in 1998. Based on year-end market conditions, the value of Lukens' contractual obligations for these commodity hedges was $15,020 and the obligation of the counterparties to the agreements was $12,645. Gains and losses on these contracts are recognized as a component of cost of products sold. Lukens is exposed to credit risk from nonperformance by the counterparties to these agreements. Dollars in thousands except per share amounts
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Fair Value of Financial Instruments. The following table presents the fair value of certain financial instruments as of year-end 1997 and 1996. Asset (Liability) Book Value Fair Value 1997 Debt(a) $(250,947) (257,376) Commodity hedges(b) $ -- (2,168) 1996 Debt(a) $(253,573) (254,201) Commodity hedges(b) $ -- (1,956) a. Fair value was determined by discounting cash flows using comparable year-end market interest rates. b. Fair value was estimated by using quotes from brokers. 9. Stockholders' Investment and Redeemable Stock Common Stock. There are 40,000,000 common shares authorized with a par value of $.01 per share. Under the stock option plans discussed in Note 6, 3,142,500 shares of common stock have been reserved. Preferred Stock. There are 1,000,000 shares of series preferred stock, par value $.01 per share, authorized. An ESOP was established in 1989 with the issuance of 551,250 shares of Series B Convertible Preferred Stock. The preferred stock is stated at its liquidation preference of $60 per share and carries an annual cumulative dividend of $4.80 per share. Each share may be converted into three shares of common stock within the guidelines of an employee 401(k) savings plan (Note 6). Holders of the Series B preferred stock are entitled to vote upon all matters submitted to the holders of common stock for a vote. The number of votes is equal to the number of common shares into which the preferred shares are convertible. Lukens' redemption price of $61.80 per share declines gradually each year to $60 per share on or after July 2, 2000. Under the terms of the 401(k) plan, when the price of Lukens common stock is $20 per share or greater, the preferred stock is redeemable in common stock, cash or a combination at the option of Lukens. If the price is below $20 per share, the 401(k) participants have the option to redeem preferred stock in the combination above. Redeemable Stock. At year-end 1996, Series B Convertible Preferred Stock and the related ESOP deferred compensation (Note 6) were classified as redeemable stock because the price of Lukens common stock was below $20 per share at the fiscal year-end, December 28, 1996. The reclassification from stockholders' investment reflected the ability of 401(k) participants to elect a cash payout option at redemption. The classification was not made in 1997 or in years prior to 1996 because the company had the ability and intention to redeem preferred stock with Lukens common stock. Shareholder Rights Plan. Lukens has a Shareholder Rights Plan designed to deter coercive or unfair takeover tactics and to prevent a buyer from gaining control of Lukens without offering a fair price to stockholders. The plan entitles each outstanding share of common stock to one right. Each right entitles stockholders to buy one one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $80. The rights become exercisable if a person or group acquires or makes a tender or exchange offer for 15 percent or more of common stock outstanding. The rights can also become exercisable if the Board of Directors determines, with the concurrence of outside directors, that a person has certain interests adverse to Lukens and has acquired at least 10 percent of common stock outstanding. If the company is then acquired in a merger or other business combination transaction, each right will entitle the holder to receive, upon exercise, common stock of either Lukens or the acquiring company having a value equal to two times the exercise price of a right. Lukens will generally be entitled to redeem the rights at $.01 per right at any time until the tenth day following public announcement that a 15 percent position has been acquired. The purchase rights will expire on September 25, 2006. Of the 1,000,000 shares of series preferred stock authorized, 75,000 have been reserved for the Series A preferred stock discussed above. As of December 27, 1997, there were 6,580,990 rights outstanding. In connection with the Bethlehem merger agreement discussed in Note 1, the Shareholder Rights Plan was amended to make the provisions of the plan not applicable to the proposed merger. 10. Commitments and Contingencies Change in Control. As discussed in Note 1, Lukens entered into a merger agreement with Bethlehem Steel Corporation. In the event that the merger is approved by stockholders, a change in control liability totaling approximately $56,000, subject to fluctuations in the market value of Bethlehem common stock, would be triggered. Components of the liability include obligations for severance, pension, stock options and performance vested restricted stock. Dollars in thousands except per share amounts
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Leases. Lukens has various operating leases primarily for real estate and production equipment. At year-end 1997, minimum rental payments under noncancelable leases totaled $21,292. Listed below are the scheduled payments over the next five years for these leases. 1998 1999 2000 2001 2002 $5,576 $5,074 $2,755 $1,905 $1,715 Rent expense for all operating leases is listed below. 1997 1996 1995 $7,961 $8,091 $7,177 Environmental Remediation. Lukens has been designated a potentially responsible party (PRP) under Superfund law at certain waste disposal sites and continually monitors a range of other environmental issues. Superfund designations are made regardless of the extent of the company's direct or indirect involvement. These claims are in various stages of administrative or judicial proceedings, and include demands for recovery of incurred costs and for future investigation or remedial actions. The company accrues costs associated with environmental matters when they become probable and can be reasonably estimated. In assessing environmental liability, the company considers the extent and type of hazardous substances at a site, the range of technologies that can be used for remediation, evolving laws and regulations, the allocation of costs among potentially responsible parties, and the number and financial strength of those parties. The Helen Kramer Superfund Site is a municipal and industrial waste landfill for which remediation was performed over several years by the EPA. This remediation process was completed in 1994. Lukens became a third party defendant in 1991 as the direct defendants associated with this site alleged that Lukens generated hazardous substances that were transported to and disposed at this landfill. A preliminary waste-in report was circulated among the PRP's in the third quarter of 1995. Many of the PRP's expressed significant concerns regarding this report and objected to its preliminary findings. Additionally, a substantial part of the total site costs incurred by the Federal government were the subject of a pending criminal investigation, and recoverable clean-up cost estimates ranged from $50,000 to $150,000, depending on the outcome of the investigation. In the fourth quarter of 1995, Lukens received a draft allocation plan. The draft allocation plan attributed a percentage allocation of approximately 3% to Lukens. This plan was subject to change as all participating parties were given an opportunity to provide comments and submit additional information regarding the determinations made. Lukens objected strongly to this plan based on issues related to nexus, volume, toxicity, transporter liability, neutralization and other allocation issues. At the end of 1995, based on the significant uncertainties surrounding this matter, Lukens concluded that it was not probable that a liability had been incurred and no provision was recorded. Lukens also concluded that, while it was reasonably possible that a liability could result from this matter, management was unable to reasonably estimate the amount, if any, of such liability. In the second quarter of 1996 a final non-binding allocation plan was received. Lukens' percentage allocation was approximately 4% based on this plan. We continued to have major concerns with this allocation plan and believed we could significantly reduce our allocation percentage based on the issues described above. In the third quarter of 1996, a majority of PRP's voted to reject using the final allocation plan as a basis for further negotiation. In the fourth quarter of 1996, circumstances surrounding this matter changed significantly. The EPA and the direct defendants made significant progress towards reaching an agreement on the total cleanup costs to be reimbursed based on a proposal submitted by the direct defendants. The EPA strongly encouraged a settlement agreement by year-end 1996 including a commitment by the third party defendants to contribute their allocated shares and to participate in the settlement process. These discussions between the EPA and the direct defendants generated significant momentum toward settlement and increased the level of pressure on the third party defendants, such as Lukens. It quickly became clear that, despite the third quarter rejection vote by the PRP's, the EPA and the direct defendants were focused on the allocations identified in the last allocation report and there appeared little probability that further allocation reports would be commissioned. Based on these new developments, the total cost of the settlement was now able to be reasonably estimated, as was our estimated portion of such cost. Accordingly, we concluded late in the fourth quarter of 1996 that a liability, based on the allocation report issued in the second quarter of 1996, was probable and should be recognized. At that time, we recognized a liability of $6,000. During the second quarter of 1997, a tentative settlement was reached in the Helen Kramer Superfund matter for which we agreed to pay $5,600.
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We are currently negotiating with our insurance carriers for recovery of the tentative settlement amount and we are optimistic that a substantial recovery will be available. However, no receivable has been recorded for any estimated recovery, given the uncertainty surrounding such claims. Lukens disposed of Electric Arc Furnace flue dust at a site on our premises from approximately 1961 to 1980. Flue dust is listed by the EPA as a hazardous waste. This site was originally visited by the EPA in 1989, but the EPA required no further action at that time. Lukens was not aware of any other EPA activity related to this site until late in the first quarter of 1996, at which time the EPA conducted another inspection of the site. The EPA's inspection results, received in May 1996, resulted in a hazard ranking score that was greater than the threshold required for inclusion of the site on the National Priority List ("NPL"). We reviewed the EPA's sampling results and identified discrepancies between the EPA's results and our sample results. The EPA concluded that the site did not require remedial action at that time. Additionally, no administrative orders or consent decrees were received or entered into. However, the EPA concluded that the site warranted further investigation and indicated that it would initiate a sampling process at the site within six to nine months. During the fourth quarter of 1996, a preliminary report outlining remedial alternatives and costs was issued by an independent consulting firm, hired by Lukens. The report provided four scenarios with costs ranging from $456 to $4,850, depending on the extent of the remediation. Additionally, during the fourth quarter, we met with the Pennsylvania Department of Environmental Protection ("DEP") to initiate discussions, in accordance with a recommendation from the EPA in the second quarter of 1996, to pursue voluntary remediation under Pennsylvania Act 2. This would, among other items, avoid the NPL process. The DEP agreed to consider whether the site was qualified for the Act 2 program. Based on our decision to approach the DEP for voluntary cleanup coupled with the results of the preliminary remediation report, we concluded in the 1996 fourth quarter that a liability was probable and could be reasonably estimated. The $3 million liability recognized was based on our best estimate from the remediation alternatives presented in the consultant's report, along with certain estimated future consulting costs and expenses. In the first quarter of 1997, we received approval from the DEP to include the site in the Act 2 program. There has been no further significant activity regarding this matter. Based on information currently available, the liability recorded for environmental remediation costs was approximately $16,950 at year-end 1997 and $16,800 at year-end 1996 (Note 3). Due to their uncertain nature, amounts accrued could differ, perhaps significantly, from the actual costs that will be incurred. No potential insurance recoveries were taken into account in determining the company's cost estimates or reserves. Management does not anticipate that its financial position will be materially affected by additional environmental remediation costs, although quarterly or annual operating results could be materially affected by future developments.
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Litigation. The company is party to various claims, disputes, legal actions and other proceedings involving negligence, contracts, equal employment opportunity, occupational safety and various other matters. In the opinion of management, the outcome of these matters should not have a material adverse effect on the consolidated financial condition or results of operations of the company. Commitments. At year-end 1997, purchase commitments for capital expenditures were approximately $5,000. Capital expenditures projected for 1998 are approximately $36,000. Lukens Steel Company has a long-term contract for the supply of oxygen and related products to its facility in Coatesville, Pennsylvania. The contract runs until 2007 and has take-or-pay provisions totaling $24,087 for the remaining term. Annual minimum commitments of $2,604 can be adjusted for inflation and are representative of amounts expensed in the prior three years. Report of Independent Public Accountants To the Stockholders and Board of Directors, Lukens Inc.: We have audited the accompanying consolidated balance sheets of Lukens Inc. (a Delaware Corporation) and subsidiaries as of December 27, 1997 and December 28, 1996 and the related consolidated statements of earnings, stockholders' investment and cash flows for each of the three fiscal years in the period ended December 27, 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 financial position of Lukens Inc. and subsidiaries as of December 27, 1997 and December 28, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 27, 1997 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Philadelphia, Pennsylvania January 19, 1998 Dollars in thousands except per share amounts
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Quarterly Financial Data (Unaudited) [Enlarge/Download Table] First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year Results of Operations 1997 Net sales $ 248,118 258,247 243,371 244,644 994,380 Cost of products sold $ 233,837 238,253 225,583 228,311 925,984 Net earnings (loss) $ (1,978) 1,181 133 (3,956) (4,620) ---------- ------- ------- ------- ------- 1996 Net sales $ 264,172 255,955 234,421 215,772 970,320 Cost of products sold $ 252,464 236,343 223,192 209,047 921,046 Net earnings (loss) $ (4,375) (5,733)c (4,087) (14,216)d (28,411) ---------- ------- ------- ------- ------- Per Common Share 1997 Basic earnings (loss)(a) $ (.17) .05 (.03) (.30) (.45) Diluted earnings (loss)(a) $ (.17) .05 (.03) (.30) (.45) Dividends $ .25 .25 .50 b -- 1.00 ---------- ------- ------- ------- ------- 1996 Basic earnings (loss)(a) $ (.33) (.42)c (.31) (.99)d (2.06) Diluted earnings (loss)(a) $ (.33) (.42)c (.31) (.99)d (2.06) Dividends $ .25 .25 .50 b -- 1.00 ---------- ------- ------- ------- ------- Market Prices of Common Stock 1997 High $ 21 7/8 20 3/8 21 13/16 29 29 Low $ 17 3/8 16 7/8 18 15 15 Close $ 17 3/8 19 1/8 19 9/16 28 13/16 ---------- ------- ------- ------- ------- 1996 High $ 30 1/4 27 3/8 24 1/8 19 1/4 30 1/4 Low $ 24 1/4 23 3/4 18 1/8 13 1/2 13 1/2 Close $ 24 7/8 23 7/8 18 1/8 19 1/8 ---------- ------- ------- ------- ------- a. Earnings (loss) per share calculations were based on the weighted-average shares and equivalents (diluted) outstanding during the period reported. No adjustments were made that would be antidilutive or reduce the loss per share. Consequently, the sum of the quarterly earnings per share amounts may not equal the annual per share amounts. See Note 1 for a discussion regarding the impact of a new accounting statement issued that addressed the earnings per share calculations. Quarterly amounts have been restated under the new standard. b. Due to the timing of the Board of Directors meetings, two quarterly common stock dividends were declared in the third quarter, totaling $.50 per share. c. A $10,782 work force reduction charge reduced results by $6,859, or $.46 per share (Note 3). d. Results include unusual charges of $15,333 for an environmental remediation provision (Note 3) and fixed asset write-downs (Note 3). On an after-tax basis, the provisions reduced results by $9,814, or $.66 per share. Dollars in thousands except per share amounts and market prices of common stock
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. LUKENS INC. (Registrant) Date: April 16, 1998 By /s/ R. W. Van Sant ------------------ R. W. Van Sant Chairman and Chief Executive Officer
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in this Form 10-K, and have issued our report thereon dated January 19, 1998. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedule referred to in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Arthur Andersen LLP Philadelphia, Pennsylvania January 19, 1998 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated January 19, 1998 included or incorporated by reference in this annual report on Form 10-K, as amended, into the Company's previously filed: Form S-8 Registration Statements File Numbers 33-6673, 33-23405, 33-29105, 33-54269, 33-54271, 33-54371, 33-69780 and 333-09451, and Form S-3 Registration Statement File Number 33-53681. /s/ Arthur Andersen LLP Arthur Andersen LLP Philadelphia, Pennsylvania April 23, 1998

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This 10-K405/A Filing   Date First   Last      Other Filings
12/30/95192210-K405
4/24/9628DEF 14A
7/31/9616
9/24/9616
10/11/9617
10/14/9617
12/28/96123410-K
12/15/972238-K
12/23/977
For The Period Ended12/27/9713410-K405, NT 10-K
12/29/977
1/4/982238-K
1/6/987
1/19/983437
2/6/9818
2/20/9818SC 13D
2/26/9828
3/2/981
3/11/987
3/27/987
4/16/9836
4/23/9837
Filed On / Filed As Of4/24/98
7/2/0031
9/25/0631
 
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