<PAGE>
1994
First Quarter
F O R M 1 0 - Q / A
(Amendment No. 1 to Form 10-Q
originally filed May 3, 1994)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1994
Commission file number 1-983
NATIONAL STEEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-0687210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): 219-273-7000
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ------
The number of shares outstanding of the Registrant's Common Stock $ .01 par
value, as of April 30, 1994, was 36,361,100 shares.
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Statements of Consolidated Income -
Three Months Ended March 31, 1994 and 1993 3
Consolidated Balance Sheets -
March 31, 1994 and December 31, 1993 4
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1994 and 1993 5
Statements of Changes in Consolidated
Stockholders' Equity and Redeemable
Preferred Stock - Series B -
Three Months Ended March 31, 1994 and
Year Ended December 31, 1993 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Legal Proceedings 13
Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1994 1993 (RESTATED)
--------- ---------------
<S> <C> <C>
NET SALES $ 622,738 $587,398
Cost of products sold 571,659 557,408
Selling, general and administrative 36,426 35,429
Depreciation, depletion and amortization 34,101 33,727
Equity (income) loss of affiliates 223 (1,444)
Unusual item (110,972) --
--------- --------
INCOME (LOSS) FROM OPERATIONS 91,301 (37,722)
Financing costs
Interest and other financial income (581) (268)
Interest and other financial expense 16,196 16,175
--------- --------
15,615 15,907
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 75,686 (53,629)
Income tax provision (credit) (2,325) 36
--------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 78,011 (53,665)
Cumulative effect of accounting change -- 16,453
--------- --------
NET INCOME (LOSS) $ 78,011 $(70,118)
Less: preferred stock dividends 2,740 4,363
--------- --------
Net income (loss) applicable to Common Stock $ 75,271 $(74,481)
========= ========
PER SHARE DATA APPLICABLE TO COMMON STOCK:
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 2.07 $ (2.19)
Cumulative effect of accounting change -- (.62)
--------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 2.07 $ (2.81)
========= ========
Weighted average shares outstanding (in thousands) 36,361 26,500
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1994 1993
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 68,538 $ 5,322
Receivables - net 248,240 224,709
Inventories:
Finished and semi-finished products 248,640 246,285
Raw materials and supplies 83,464 124,812
----------- -----------
332,104 371,097
----------- -----------
Total current assets 648,882 601,128
Investments in affiliated companies 57,543 58,278
Property, plant and equipment 3,348,149 3,296,792
Less: Allowance for depreciation,
depletion and amortization (1,911,233) (1,898,055)
----------- -----------
1,436,916 1,398,737
Other assets 250,826 246,057
----------- -----------
TOTAL ASSETS $ 2,394,167 $ 2,304,200
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 182,211 $ 242,294
Accrued liabilities 324,345 303,981
Long-term obligations and related party indebtedness
due within one year 28,618 28,257
----------- -----------
Total current liabilities 535,174 574,532
Long-term obligations 402,622 344,096
Long-term indebtedness to related parties 323,327 329,995
Other long-term liabilities 800,156 797,585
Redeemable Preferred Stock - Series B 67,655 68,030
Stockholders' equity
Common Stock - par value $.01:
Class A - authorized 30,000,000 shares;
issued and outstanding 22,100,000 shares 221 221
Class B - authorized 65,000,000 shares;
issued and outstanding 14,261,100 shares 143 143
Preferred Stock - Series A 36,650 36,650
Additional paid-in-capital 360,314 360,314
Retained deficit (132,095) (207,366)
----------- -----------
Total stockholders' equity 265,233 189,962
----------- -----------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY $ 2,394,167 $ 2,304,200
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1994 1993 (RESTATED)
--------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 78,011 $(70,118)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation, depletion and amortization 34,101 33,727
Carrying charges related to facility
sales and plant closings 7,855 8,866
Equity (income) loss of affiliates 223 (1,444)
Dividends from affiliates 900 900
Cumulative effect of accounting change __ 16,453
Cash provided (used) by working capital items:
Receivables (23,531) (19,680)
Inventories 38,993 19,948
Accounts payable (60,083) (11,805)
Accrued liabilities 20,298 4,843
Other (6,062) 9,321
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 90,705 (8,989)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment (71,245) (16,458)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (71,245) (16,458)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class B Common Stock __ 130,100
Debt repayments (35,731) (6,914)
Borrowings 87,950 40,520
Payment of released Weirton benefit liabilities (5,414) (5,328)
Dividend payments on Preferred Stock-Series A (1,016) (1,015)
Dividend payments on Preferred Stock-Series B (87) (7)
Payment of unreleased Weirton liabilities and
their release in lieu of cash dividends on
Preferred Stock-Series B (1,946) (4,051)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 43,756 153,305
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 63,216 127,858
Cash and Cash Equivalents, Beginning of the Period 5,322 55,220
-------- --------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 68,538 $183,078
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK - SERIES B
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
REDEEMABLE
COMMON COMMON PREFERRED ADDITIONAL RETAINED TOTAL PREFERRED
STOCK - STOCK - STOCK - PAID-IN- EARNINGS STOCKHOLDERS' STOCK -
CLASS A CLASS B SERIES A CAPITAL (DEFICIT) EQUITY SERIES B
----------- ------- --------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $255 $ __ $36,650 $218,991 $ 70,795 $ 326,691 $137,802
Net loss (258,861) (258,861)
Redemption of Redeemable
Preferred Stock - Series B (67,804)
Amortization of excess of book
value over redemption value
of Redeemable Preferred Stock
- Series B 1,968 1,968 (1,968)
Cumulative dividends on Preferred
Stocks - Series A and B (15,332) (15,332)
Issuance of Common Stock -
Class B 109 141,323 141,432
Conversion of 3,400,000 shares
of NII Common Stock - Class A
to Common Stock - Class B (34) 34
Minimum pension liability (5,936) (5,936)
---- ---- ------- -------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1993 $221 $143 $36,650 $360,314 $(207,366) $ 189,962 $ 68,030
Net income 78,011 78,011
Amortization of excess of book
value over redemption value
of Redeemable Preferred Stock
- Series B 375 375 (375)
Cumulative dividends on Preferred
Stocks - Series A and B (3,115) (3,115)
---- ---- ------- -------- --------- --------- ---------
BALANCE AT MARCH 31, 1994 $221 $143 $36,650 $360,314 $(132,095) $ 265,233 $ 67,655
==== ==== ======= ======== ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994 (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of National Steel Corporation and its
majority owned subsidiaries (the "Company") presented herein are unaudited.
However, in the opinion of management, such statements include all adjustments
necessary for a fair presentation of the results for the periods indicated. All
such adjustments made, except for the unusual gain which is discussed in Note 2,
were of a normal recurring nature. The financial results presented for the
three-month period ended March 31, 1994 are not necessarily indicative of
results of operations for the full year. The Annual Report of the Company on
Form 10-K for the year ended December 31, 1993 (the "1993 Form 10-K") contains
additional information and should be read in conjunction with this report.
Financial information for the first quarter of 1993 has been retroactively
restated to reflect the implementation of Statement of Financial Accounting
Standards No. 112, "Employer's Accounting for Postemployment Benefits", which
the Company adopted during the fourth quarter of 1993.
Certain items in prior years have been reclassified to conform with current year
presentation.
NOTE 2 - UNUSUAL GAIN
On January 24, 1994, the United States Supreme Court denied the Bessemer & Lake
Erie Railroad's ("B&LE") petition for certiorari in the Iron Ore Antitrust
Litigation, an antitrust lawsuit with the B&LE, thus sustaining the judgment in
favor of the Company against the B&LE. On February 11, 1994, the Company
received $111.0 million, including interest, in satisfaction of this judgment,
which was recorded as an unusual gain. The Company used a portion of the
proceeds to repurchase $25.2 million aggregate principal amount of its
outstanding First Mortgage Bonds. Pursuant to the terms of the 1993 labor
agreement between the Company and the United Steelworkers of America (the
"USWA"), approximately $11 million of the proceeds will be deposited into a
Voluntary Employee Benefits Association trust (the "VEBA Trust") established to
fund the Company's retiree healthcare obligation ("OPEB") with respect to USWA
represented employees. The Company expects to use the remaining proceeds for
further debt reduction, none of which is related party indebtedness, working
capital and general corporate purposes.
The Company did not recognize any income taxes associated with these proceeds,
other than alternative minimum tax of $3.1 million, as regular federal income
tax expense was offset by the utilization of previously reserved tax assets.
NOTE 3 - LONG TERM OBLIGATIONS
In March 1992, a wholly-owned subsidiary of the Company finalized a turnkey
contract for the construction and permanent financing of a pickle line (the
"Pickle Line") servicing the Great Lakes Division. The total financing
commitment amounted to $110 million, of which $20 million was prepaid using
proceeds from the Company's 1993 initial public stock offering, reducing the
amount of construction borrowings outstanding and the total commitment to $90
million. As of December 31, 1993, the construction period financing was being
provided by the contractor and was not a liability of the Company. In January
1994, upon completion and acceptance of the Pickle Line, the permanent financing
commenced with repayment to occur over a fourteen-year period. The Pickle Line
is not subject to the lien securing the Company's First Mortgage Bonds, but is
subject to a first mortgage in favor of the lender.
On March 31, 1994, the Company utilized a portion of the proceeds from the B&LE
judgment to repurchase $25.2 million aggregate principal amount of the Company's
outstanding 8.375% First Mortgage Bonds.
7
<PAGE>
NOTE 4 - IDLING OF NATIONAL STEEL PELLET COMPANY
As discussed in the 1993 Form 10-K, National Steel Pellet Company, a wholly-
owned subsidiary of the Company ("NSPC"), was temporarily idled in October 1993,
following a strike by the USWA on August 1, 1993 and the subsequent decision to
satisfy the Company's current iron ore pellet requirements from external
sources. The Company is still in the process of determining the ultimate status
of NSPC.
The Company determined that in accordance with Statements of Financial
Accounting Standards No. 5 "Accounting for Contingencies," a contingent
liability of $108.6 million relating to the idle period had been incurred which
was recorded as an unusual charge during the fourth quarter of 1993. This charge
and the amount reserved at December 31, 1993 was primarily comprised of employee
benefits such as pensions and OPEBs, which totaled $68.6 million, along with
$40.0 million of expenses directly related to the idling of the facility. The
$40.0 million idle reserve was comprised of salary and benefits ($17.4 million),
utilities ($5.2 million), noncancellable leases ($3.3 million), production taxes
($7.3 million), supplies ($3.2 million) and other miscellaneous expenses related
to the idling ($3.6 million). Substantially all components of the $108.6 million
reserve are expected to require the future utilization of cash. Minnesota law
requires that an idled facility be maintained in a "hot idled" mode for a period
of one year, which significantly increased the cost to idle NSPC. None of the
$108.6 million reserve, including the $40.0 million related to the idle period,
related to the current or future procurement of iron ore pellets from outside
sources in the marketplace.
The following represents the components of the $108.6 million reserve recorded
at December 31, 1993, the cash utilizations during the three month period ended
March 31, 1994 and the balance at March 31, 1994:
<TABLE>
<CAPTION>
December 31, March 31,
1993 Utilizations 1994
------------ ------------ ---------
(dollars in thousands)
<S> <C> <C> <C>
Salary & Benefits............. $ 17,444 $(2,077) $ 15,367
Utilities..................... 5,170 (1,528) 3,642
Leases........................ 3,300 (745) 2,555
Production taxes.............. 7,296 -- 7,296
Supplies...................... 3,200 (300) 2,900
Other......................... 3,590 (199) 3,391
-------- ------- --------
Total idle reserve.... 40,000 (4,849) 35,151
-------- ------- --------
Special Pension Termination... 31,893 -- 31,893
OPEB Curtailment.............. 36,697 -- 36,697
-------- ------- --------
Total................. $108,590 $(4,849) $103,741
======== ======= ========
</TABLE>
A decision to permanently shut down the facility could result in additional
charges of approximately $160 million. The Company has secured its pellet
purchase requirements for 1994 and is currently working on contracts extending
beyond 1994.
The USWA recently filed its Seventh Amended Claim against NSPC with the National
Labor Relations Board (the "NLRB") in Minnesota alleging unfair labor practices.
NSPC has responded to these charges and has denied any unfair labor practices.
If the NLRB finds against NSPC, it could issue an order requiring NSPC to pay
back pay and front pay until the labor practices are corrected or to cease and
desist unfair labor practices and bargain in good faith. NSPC believes it has
bargained in good faith and that the ultimate outcome of the NLRB decision will
not have a material adverse effect on the Company's results of operations,
financial position or liquidity.
NOTE 5 - ENVIRONMENTAL AND LEGAL PROCEEDINGS
The Company's operations are subject to numerous laws and regulations relating
to the protection of human health and the environment. Because these
environmental laws and regulations are quite stringent and are generally
becoming more stringent, the Company has expended, and can be expected to expend
in the future, substantial amounts for compliance with these laws and
regulations.
It is the Company's policy to expense or capitalize, as appropriate,
environmental expenditures that relate to current operating sites. Environmental
expenditures that relate to past operations and which do not contribute to
future or current revenue generation are expensed. With respect to costs for
environmental assessments or remediation activities, or penalties or fines that
may be imposed for noncompliance with such laws and regulations, such costs are
accrued when it is probable that liability for such costs will be incurred and
the amount of such costs can be reasonably estimated.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state superfund statutes generally
impose joint and several liability on present and former owners and operators,
transporters and generators for remediation of contaminated properties
regardless of fault. The Company and certain of its subsidiaries are involved as
a potentially responsible party ("PRP") at a number of off-site CERCLA or state
superfund site proceedings. At some of these sites, any remediation costs
incurred by the Company would constitute liabilities for which NII is required
to indemnify the Company ("NII Environmental Liabilities"). In addition, at some
of these sites, the Company does not have sufficient information regarding the
nature and extent of the contamination, the wastes contributed by other PRPs, or
the required remediation activity to estimate its potential liability.
In connection with those sites involving NII Environmental Liabilities, in
January 1994, the Company received $10 million from NII as an unrestricted
prepayment for such liabilities for which the Company recorded $10 million as a
liability in its consolidated balance sheet. The Company is required to repay
NII portions of the $10 million to the extent the Company's expenditures for
such NII Environmental Liabilities do not meet specified levels by certain dates
over a twenty year period.
The Company has also recorded the reclamation and other costs to restore its
coal and iron ore mines at its shutdown locations to their original and natural
state, as required by various federal and state mining statutes.
Since the Company has been conducting steel manufacturing and related operations
at numerous locations for over sixty years, the Company potentially may be
required to remediate or reclaim any contamination that may be present at these
sites. The Company does not have sufficient information to estimate its
potential liability in connection with any potential future remediation at such
sites. Accordingly, the Company has not accrued for such potential liabilities.
As any of these environmental matters discussed above progress or the Company
becomes aware of additional matters, the Company may be required to accrue
charges in excess of those previously accrued. However, although the outcome of
any of the matters described, to the extent they exceed any applicable reserves,
could have a material adverse effect on the Company's results of operations and
liquidity for the applicable period, the Company has no reason to believe that
such outcomes, whether considered individually or in the aggregate, will have a
material adverse effect on the Company's financial condition. The Company
recorded an aggregate environmental liability of approximately $12 million at
March 31, 1994 and December 31, 1993.
In April 1993, the United States Environmental Protection Agency published a
proposed guidance document establishing minimum water quality standards and
other pollution control policies and procedures for the Great Lakes System.
Until such guidance document is finalized, the Company cannot estimate its
potential costs for compliance, and there can be no assurances that such
compliance will not have a material adverse effect on the Company's financial
condition.
The Company is involved in various non-environmental legal proceedings most of
which occur in the normal course of its business. The Company does not believe
that the proceedings will have a material adverse effect, either individually or
in the aggregate, on the Company's financial condition. However, with respect to
certain of the proceedings, if reserves prove to be inadequate and the Company
incurs a charge to earnings, such charge could have a material adverse effect on
the Company's results of operations for the applicable period. Certain other
proceedings, if decided adversely to the Company, could have a material adverse
effect on liquidity.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
During the first quarter of 1994, the Company recorded an operating loss of
$19.7 million, excluding the $111.0 million gain recognized in connection with
the B&LE judgment, which is an improvement of $18.1 million compared to the same
1993 period. This improvement was achieved despite the adverse effects the
extremely cold weather had on the Company's operations and is reflective of the
corrective action plans implemented by management in the fourth quarter of 1993.
The Company estimates the severe winter weather resulted in lost production of
approximately 50,000 tons of raw steel and unfavorably contributed approximately
$10 million to first quarter results. The Company reported a gross profit
margin of approximately $17.0 million in the first quarter of 1994, compared to
a loss of approximately $3.7 million for the corresponding 1993 period. Sales
revenues increased during the first quarter of 1994 as compared to the same 1993
period due to the realization of previously announced selling price increases as
well as an improvement in product mix. Finally, steps taken to resolve quality,
delivery and service problems have been reflected in improved ratings from a
significant portion of the Company's customer base.
Flat rolled steel demand is near its all-time high in North America, primarily
as a result of the rebound in the automotive and construction markets. The
Company is positioned to take advantage of this increase in demand as the DNN
joint venture galvanizing line, which services the automotive industry, is
running close to full capacity and another joint venture, Double G Coatings,
which services the construction market, is on schedule to commence operations
during the second quarter of this year. Management expects that a strong market
together with the continuation of improvement in operations will translate into
an operating profit in the second quarter of 1994.
9
<PAGE>
RESULTS OF OPERATIONS -- COMPARISON OF THE THREE-MONTH PERIODS ENDED MARCH 31,
1994 AND 1993
Net Sales
Net sales for the first quarter of 1994 totalled $622.7 million, a 6.0%
improvement compared to the same period in 1993. Steel shipments for the first
quarter of 1994 were 1,233,000 tons, a decrease of 5.1% compared to the
1,299,000 tons shipped during the corresponding period in 1993. The reduced
volume of shipments was more than offset by an improvement in product mix and an
increase in realized selling prices.
Raw steel production was 1,361,000 tons, a reduction of 4.1% compared to the
1,419,000 tons produced in the first quarter of 1993. This decrease was
primarily attributable to lost production of an estimated 50,000 tons resulting
from the effects of the severe cold weather on the Company's operations.
Cost of Products Sold
The Company's cost of products sold as a percentage of net sales decreased from
94.9% to 91.8% during the first quarter of 1994. This decrease is reflective of
an increase in realized selling prices and an improvement in product mix as well
as the changes implemented in the fourth quarter of 1993 to reduce costs,
improve productivity and stabilize operations.
Unusual Items
As discussed in the 1993 Form 10-K, the Company received approximately $111.0
million of proceeds, including interest, in the first quarter of 1994 from the
B&LE judgment in favor of the Company against the B&LE and, as such, recognized
an unusual gain upon its receipt. The Company utilized a portion of the proceeds
to repurchase $25.2 million aggregate principal amount of its outstanding First
Mortgage Bonds. Pursuant to the labor agreement reached between the Company and
the USWA in 1993, $11 million of the proceeds will be deposited into a VEBA
Trust established to prefund the Company's OPEB obligation with respect to USWA
represented employees. The remaining proceeds will be used for further debt
reduction, none of which is related party indebtedness, working capital and
general corporate purposes.
The Company did not recognize any income taxes associated with these proceeds,
other than alternative minimum taxes of $3.1 million, as regular federal income
tax expense was offset by the utilization of previously reserved tax assets.
Income Taxes
The Company recorded an income tax credit of $2.3 million in the first quarter
of 1994 which consisted of a $5.4 million credit pertaining to the Company's tax
effecting of non-cash OPEB charges offset by $3.1 million of alternative minimum
tax related to the B&LE proceeds.
The Company recorded an income tax provision of $.4 million in the first quarter
of 1993. Although OPEB was implemented in the first quarter of 1993, the
Company did not begin recognizing the related tax benefit until the second
quarter of that year.
National Steel Pellet Company
The Company determined that in accordance with Statements of Financial
Accounting Standards No. 5 "Accounting for Contingencies," a contingent
liability of $108.6 million relating to the idle period had been incurred which
was recorded as an unusual charge during the fourth quarter of 1993. This charge
and the amount reserved at December 31, 1993 was primarily comprised of employee
benefits such as pensions and OPEBs, which totaled $68.6 million, along with
$40.0 million of expenses directly related to the idling of the facility. The
$40.0 million idle reserve was comprised of salary and benefits ($17.4 million),
utilities ($5.2 million), noncancellable leases ($3.3 million), production taxes
($7.3 million), supplies ($3.2 million) and other miscellaneous expenses related
to the idling ($3.6 million). Substantially all components of the $108.6 million
reserve are expected to require the future utilization of cash. Minnesota law
requires that an idled facility be maintained in a "hot idled" mode for a period
of one year, which significantly increased the cost to idle NSPC. None of the
$108.6 million reserve including the $40.0 million related to the idle period,
related to the current or future procurement of iron ore pellets from outside
sources in the marketplace.
The following represents the components of the $108.6 million reserve recorded
at December 31, 1993, the cash utilizations for the three months ended March 31,
1994 and the balance at March 31, 1994:
<TABLE>
<CAPTION>
December 31, March 31,
1993 Utilizations 1994
------------ ------------ --------
(dollars in thousands)
<S> <C> <C> <C>
Salary & Benefits............. $ 17,444 $(2,077) $ 15,367
Utilities..................... 5,170 (1,528) 3,642
Leases........................ 3,300 (745) 2,555
Production taxes.............. 7,296 -- 7,296
Supplies...................... 3,200 (300) 2,900
Other......................... 3,590 (199) 3,391
-------- ------- --------
Total idle reserve.... 40,000 (4,849) 35,151
-------- ------- --------
Special Pension Termination... 31,893 -- 31,893
OPEB Curtailment.............. 36,697 -- 36,697
-------- ------- --------
Total................. $108,590 $(4,849) $103,741
======== ======= ========
</TABLE>
10
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity needs arise primarily from capital investments, working
capital requirements and principal and interest payments on its indebtedness.
In addition to utilizing the proceeds from the Company's 1993 initial public
offering of common stock, the Company has satisfied these liquidity needs with
funds provided by long-term borrowings and cash provided from operations.
On January 24, 1994, the United States Supreme Court denied the B&LE's petition
for certiorari in the Iron Ore Antitrust Litigation, thus sustaining the
Company's prior judgment in favor of the Company against the B&LE. On February
11, 1994, the Company received approximately $111.0 million, including interest,
in satisfaction of this judgment.
Cash and cash equivalents totaled $68.5 million at March 31, 1994 as compared to
$5.3 million at December 31, 1993. This increase is primarily the result of the
B&LE judgment, net of certain uses of proceeds. Most significantly, on March
31, 1994, the Company utilized $25.2 million of the proceeds to repurchase a
portion of its outstanding 8.375% First Mortgage Bonds. The Company intends to
use the remaining B&LE proceeds for working capital and general corporate
purposes.
Cash Flows from Operating Activities
For the quarter ended March 31, 1994, cash provided from operating activities
increased by $99.7 million compared to the same 1993 period, due primarily to
the receipt of the proceeds from the B&LE judgment. This was offset by the
impact of working capital items on cash flows, which reduced cash flows by $24.3
million during the first three months of 1994. Accounts payable decreased by
$60.1 million due primarily to the timing of cash disbursement clearings, which
was partially offset by a $39.0 million decrease in inventories, as raw material
levels were reduced. Accounts receivable and accrued liabilities had smaller
and largely offsetting effects. Changes in working capital items had no
significant impact on cash flows in the first quarter of 1993, as the increase
in accounts receivable, due to higher shipments during the first three months of
1993 when compared to the fourth quarter of 1992, was offset by a corresponding
decrease in inventory levels.
Cash Flows from Investing Activities
Capital investments for the quarters ended March 31, 1994 and 1993 amounted to
$71.2 million and $16.5 million, respectively. This increase is largely
attributable to the completion of a pickle line servicing the Great Lakes
Division (the "Pickle Line"), which was financed under a turnkey contract and
did not become the property of the Company until completion and acceptance of
the facility during the first quarter of 1994. The Company plans to invest an
additional $100 million during the remainder of 1994 to improve its plants and
equipment.
Cash Flows from Financing Activities
Financing activities included borrowings during the quarters ended March 31,
1994 and 1993 of $88.0 million and $40.5 million, respectively, representing
primarily the commencement of the permanent financing for the Pickle Line and
the remaining financing commitment for the rebuild of the No. 5 coke oven
battery at the Great Lakes Division, respectively. This increase in borrowings
was partially offset by the repurchase of $25.2 million aggregate principal
amount of First Mortgage Bonds during the first quarter of 1994.
During the first quarter of 1993, the Company completed its initial public
offering of common stock, which generated proceeds of $130.1 million.
Sources of Financing
The Company's available sources of liquidity include a $100 million revolving
secured credit arrangement, a $150 million subordinated loan agreement (the
"Subordinated Loan Agreement") and $25 million in uncommitted, unsecured lines
of credit (the "Uncommitted Lines of Credit"). On February 7, 1994, the Company
borrowed $20 million under the Subordinated Loan Agreement, all of which was
repaid on February 17, 1994. Additionally, in February 1994, the
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Company borrowed a maximum of $5 million under the Uncommitted Lines of Credit
which was repaid later in the month.
Total debt and redeemable preferred stock as a percentage of total
capitalization decreased to 75.6% at March 31, 1994, as compared to 80.2% at
December 31, 1993, as the Company's net income of $78.0 million more than offset
the effect of the commencement of the permanent financing of the Pickle Line.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Baker's Port, Inc. v. National Steel Corporation. With respect to the matter
reported under the heading Legal Proceedings in the 1993 Form 10-K, the Texas
Supreme Court, on March 30, 1994, denied Baker's Port Inc. and Baker Marine
Corporation ("BPI/BMC") and the State's Application for Writ of Error and
dismissed Natland, NS Land and the Company's Conditional Application for Writ of
Error. BPI/BMC has filed a Motion for Rehearing requesting the Texas Supreme
Court to reconsider its ruling on this Application for Writ of Error. The Texas
Supreme Court has refused to consider BPI/BMC and the State's appeal of the
ruling of the Appellate Court reversing and remanding this case for trial on
limited issues involving one remaining title claim.
Donner-Hanna Coke Joint Venture. With respect to the matter reported under the
heading Legal Proceedings in the 1993 Form 10-K, involving Hanna Furnace
Corporation ("Hanna") and the Donner-Hanna Coke Joint Venture ("Donner-Hanna"),
the Pension Benefit Guarantee Corporation (the "PBGC") and the Pension Committee
for the Plans did not reach agreement on the PBGC's proposed Termination
Agreement. As a result, the PBGC advised Hanna and the Pension Committee that it
would take legal action to obtain a court order terminating the Plans. To the
Company's knowledge, no such action has yet been filed by the PBGC. There has
been no funding in the first quarter of 1994 of either of the Plans. Depending
upon the date the Plans are deemed to have been terminated, Hanna's liability is
estimated to range from $12.3 million to $16.9 million. The Company has accrued
the maximum amount in the range.
Management believes that the final disposition of the Baker's Port and Donner-
Hanna Coke matters and the other legal proceedings described in the 1993
Form 10-K, either individually or in the aggregate, will not have a material
adverse effect on the Company's financial condition or results of operations but
could have a material adverse effect on liquidity.
ENVIRONMENTAL MATTERS
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA") and similar state superfund statutes generally
impose joint and several liability on present and former owners and operators,
transporters and generators for remediation of contaminated properties
regardless of fault. In addition to the inactive disposal site located at the
Great Lakes Division facility previously reported in the Company's 1993 Form
10-K, the Company and certain of its subsidiaries are involved as a potentially
responsible party ("PRP") at a number of off-site CERCLA or state superfund site
proceedings.
The following paragraphs provide updates on previously reported proceedings:
Port of Monroe. With reference to the matter concerning this landfill site,
previously reported in the Company's 1993 Form 10-K, a draft remedial
investigation/feasibility study ("RI/FS") for Phases I and II of the remediation
work has been submitted to the Michigan Department of Natural Resources (the
"MDNR") for approval. Counsel for the Port of Monroe has advised that the cost
of the RI/FS was approximately $280,000. At a recent meeting, the
generator/transporter PRPs, of which the Company is alleged to be one, were
orally advised by the owner/operator PRPs that they expect the overall cost of
the site remedy to be less than $10 million. In a March 14, 1994 letter, MDNR
demanded payment of past and future costs incurred by the State of Michigan for
responding to the release or threatened release of hazardous substances from the
site and requested the responsible parties to take the necessary and appropriate
actions to address environmental contamination at the site. The letter advised
that the State of Michigan has incurred and paid response activity costs in the
amount of $538,544, plus interest. The Company has been advised that if the
past cost demand is settled without litigation, MDNR will not seek a present
commitment with respect to future costs and work. The Company is participating,
along with other generator/transporter PRPs, in a proposal to MDNR to pay a fair
share of past MDNR costs. MDNR has advised that if this matter is not resolved
by May 13, 1994, it will initiate litigation. The Company does not yet have
sufficient information regarding the nature and extent of contamination at this
site and the nature and quantities of the wastes that the other PRPs have sent
to the site to estimate its potential liability, if any, in connection with this
site.
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Springfield Township Site. With reference to the matter concerning the disposal
site located in Springfield Township, Davisburg, Michigan, previously reported
in the Company's 1993 Form 10-K, pursuant to an Agreed Order on Consent, the
Springfield Township Steering Committee settled the demand for past response
costs made by the MDNR for $700,000. The Company has paid its share of this
settlement amount, which approximated $11,000. The Company has recorded its
overall estimated liability for this matter, which totals approximately
$175,000.
Berlin & Farro Liquid Incineration Site. With reference to the matter involving
the Berlin and Farro site located in Swartz Creek, Michigan, previously reported
in the Company's 1993 Form 10-K, the Company, a "de minimis" PRP, paid $105,171
on March 28, 1994 as its share of liability under the consent decree with the
EPA. In addition, the motion for filing of the consent decree between the State
of Michigan and the "de minimis" PRPs has been filed. Payment of the Company's
settlement share of approximately $1,500 will be due no later than thirty days
after the court signs the consent decree.
NII Sites
Buckeye Reclamation Landfill Site. With reference to the matter involving the
Buckeye site in Bridgeport, Ohio, previously reported in the Company's 1993 Form
10-K, on March 30, 1994, the Company was served with a copy of a Complaint filed
by Consolidation Coal Company, a former owner and operator of the site. Among
other claims, the Complaint seeks participation from the Federal Abandoned Mine
Reclamation Fund, joinder of certain public entities which delivered waste to
the site, and damages and indemnity from current owners of the site. One count
of the Complaint names the Company and eight other industrial PRPs and seeks a
determination of the allocation of responsibility among the alleged industrial
generators involved with this site. The Company is studying the allegations of
the Complaint and intends to defend all claims against it. Under an EPA
Administrative Order on Consent, the Company's allocated share for the cost of
the remedial design phase at the site, estimated at $3.2 million in the
aggregate, is 4.63%, or approximately $148,000. Currently estimated total costs
for remediation at the site are approximately $35 million.
As previously reported in the Company's 1993 Form 10-K, NII made a $10 million
prepayment to the Company to enable the Company, to the extent of said
prepayment, to discharge environmental liabilities, such as the Buckeye site,
for which NII has agreed to indemnify the Company. The Company has recorded a
$10 million liability to offset the $10 million prepayment.
OTHER
Great Lakes Division - 80 Inch Hot Strip Mill. With reference to the matter
involving certain outfalls located at the Great Lakes Division facility,
including the outfall at the 80-inch hot strip mill, previously reported in the
Company's 1993 Form 10-K, the U.S. Coast Guard to date has issued one new
penalty in calendar year 1994, which has been settled for $6,000.
In connection with certain of the proceedings described above and certain other
environmental proceedings which the Company is currently involved in, the
Company has only commenced investigation or otherwise does not have sufficient
information to estimate its potential liability, if any. Although the outcomes
of such proceedings or any fines or penalties that may be assessed in any such
proceedings, to the extent that they exceed any applicable reserves, could have
a material adverse effect on the Company's results of operations and liquidity
or the applicable period, the Company has no reason to believe that any such
outcomes, fines or penalties, whether considered individually or in the
aggregate, will have a material adverse effect on the Company's financial
condition. The Company's accrued environmental liabilities totaled approximately
$12 million at March 31, 1994.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed a report on Form 8-K (the "report") on January 10, 1994. The
report related to the press release issued on the same date announcing the
Company anticipated recording fourth quarter 1993 adjustments expected to range
between $120-$135 million.
There are no exhibits required to be filed with the first quarter Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL STEEL CORPORATION
BY /s/ Robert M. Greer
--------------------------------------------
Robert M. Greer, Senior Vice President,
Chief Financial Officer
BY /s/ Carl M. Apel
--------------------------------------------
Carl M. Apel, Corporate Controller, Accounting
and Assistant Secretary
Date: January 18, 1995
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