<PAGE>
1996
THIRD QUARTER
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-983
NATIONAL STEEL CORPORATION
(Exact name of registrant as specified in its charter)
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 October 31, 1996, was 43,288,240 shares.
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Statements of Consolidated Income -
Three Months Ended September 30, 1996 and 1995 3
Statements of Consolidated Income -
Nine Months Ended September 30, 1996 and 1995 4
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 5
Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 1996 and 1995 6
Statements of Changes in Consolidated
Stockholders' Equity and Redeemable
Preferred Stock-Series B -
Nine Months Ended September 30, 1996 and
Year Ended December 31, 1995 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Legal Proceedings 16
Exhibits and Reports on Form 8-K 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
1996 1995
-------- --------
<S> <C> <C>
NET SALES $735,858 $724,798
Cost of products sold 637,006 634,435
Selling, general and administrative 38,943 36,810
Depreciation, depletion and amortization 36,501 36,731
Equity income of affiliates (3,518) (2,543)
-------- --------
INCOME FROM OPERATIONS 26,926 19,365
Other (Income) Expense:
Interest and other financial income (1,645) (3,252)
Interest and other financial expense 11,096 12,073
Gain on sale of asset (3,732) --
-------- --------
5,719 8,821
-------- --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 21,207 10,544
Income tax credit (3,082) (5,064)
-------- --------
INCOME BEFORE EXTRAORDINARY ITEM 24,289 15,608
Extraordinary item -- 5,373
-------- --------
NET INCOME 24,289 20,981
Less preferred stock dividends (2,740) (2,739)
-------- --------
Net income applicable to Common Stock $ 21,549 $ 18,242
======== ========
PER SHARE DATA APPLICABLE TO COMMON STOCK:
INCOME BEFORE EXTRAORDINARY ITEM $ .50 $ .30
Extraordinary item -- .12
-------- --------
NET INCOME APPLICABLE TO COMMON STOCK $ .50 $ .42
======== ========
Weighted average shares outstanding (in thousands) 43,288 43,286
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
1996 1995
---------- ----------
<S> <C> <C>
NET SALES $2,187,482 $2,214,085
Cost of products sold 1,953,643 1,873,955
Selling, general and administrative 102,822 108,386
Depreciation, depletion and amortization 109,111 108,912
Equity income of affiliates (7,181) (4,066)
Unusual charge -- 5,336
---------- ----------
INCOME FROM OPERATIONS 29,087 121,562
Other (Income) Expense:
Interest and other financial income (5,338) (9,884)
Interest and other financial expense 32,909 40,215
Gain on sale of asset (3,732) --
---------- ----------
23,839 30,331
---------- ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 5,248 91,231
Income tax provision (credit) (13,857) 612
---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 19,105 90,619
Extraordinary Item -- 5,373
---------- ----------
NET INCOME 19,105 95,992
Less preferred stock dividends (8,222) (8,218)
---------- ----------
Net income applicable to Common Stock $ 10,883 $ 87,774
========== ==========
PER SHARE DATA APPLICABLE TO COMMON STOCK:
INCOME BEFORE EXTRAORDINARY ITEM $ .25 $ 1.94
Extraordinary Item -- .12
---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK $ .25 $ 2.06
========== ==========
Weighted average shares outstanding (in thousands) 43,288 42,513
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets $ 128,055 $ 127,616
Cash and cash equivalents 270,966 316,662
Receivables (net)
Inventories:
Finished and semi-finished products 286,872 276,162
Raw materials and supplies 152,022 135,852
---------- ----------
438,894 412,014
---------- ----------
Total current assets 837,915 856,292
Investments in affiliated companies 63,388 59,885
Property, plant and equipment 3,622,322 3,540,214
Less allowances for depreciation, depletion and
amortization 2,180,721 2,071,511
---------- ----------
1,441,601 1,468,703
Other assets 307,740 282,999
---------- ----------
TOTAL ASSETS $2,650,644 $2,667,879
========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 275,235 $ 255,574
Accrued liabilities 325,378 341,242
Current maturities of long term obligations 37,456 35,750
---------- ----------
Total current liabilities 638,069 632,566
Long term obligations 320,131 339,613
Long term indebtedness to related parties 146,744 161,912
Other long term liabilities 914,355 912,201
Redeemable Preferred Stock--Series B 63,905 65,030
Stockholders' equity
Common Stock--par value $.01:
Class A--authorized 30,000,000 shares; issued
and outstanding 22,100,000 221 221
Class B--authorized 65,000,000 shares; issued
and outstanding 21,188,240 shares in 1996
and 21,176,156 shares in 1995 212 212
Preferred Stock--Series A 36,650 36,650
Additional paid-in-capital 465,359 465,359
Retained earnings 64,998 54,115
---------- ----------
Total stockholders' equity 567,440 556,557
---------- ----------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY $2,650,644 $2,667,879
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995
-------- ---------
<S> <C> <C>
Net Income $ 19,105 $ 95,992
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 109,111 108,912
Carrying charges related to facility sales
and plant closings 16,788 18,231
Extraordinary item (net) -- (5,373)
Equity income of affiliates (7,181) (4,066)
Dividends from affiliates 4,375 900
Postretirement benefits 22,353 33,884
Deferred income taxes (16,200) (23,215)
Changes in working capital items:
Receivables 45,696 (24,709)
Inventories (26,880) (49,594)
Accounts payable 19,661 1,078
Accrued liabilities (16,149) 36,835
-------- ---------
Other (36,262) (804)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 134,417 188,071
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment (net) (80,752) (154,616)
-------- ---------
NET CASH USED BY INVESTING ACTIVITIES (80,752) (154,616)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options -- 169
Issuance of Class B Common Stock -- 104,734
Prepayment of related party debt -- (125,624)
Debt repayment (32,944) (33,290)
Payment of released Weirton benefit liabilities (11,220) (11,268)
Dividend payments on Preferred Stock--Series A (3,020) (3,016)
Dividend payments on Preferred Stock--Series B -- (867)
Payment of unreleased Weirton liabilities and
their release in lieu of cash dividends on
Preferred Stock--Series B (6,042) (5,163)
-------- ---------
NET CASH USED BY FINANCING ACTIVITIES (53,226) (74,325)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 439 (40,870)
Cash and Cash Equivalents, Beginning of the Period 127,616 161,946
-------- ---------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $128,055 $ 121,076
======== =========
</TABLE>
See notes to consolidated financial statements.
6
<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>
COMMON COMMON PREFERRED ADDITIONAL RETAINED TOTAL REDEEMABLE
STOCK - STOCK - STOCK - PAID-IN EARNINGS STOCKHOLDERS' PREFERRED STOCK -
CLASS A CLASS B SERIES A CAPITAL (DEFICIT) EQUITY SERIES B
------- ------- --------- ---------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $221 $143 $36,650 $360,525 $(43,958) $353,581 $66,530
Net income 110,796 110,796
Amortization of excess of book value
over redemption value of Redeemable
Preferred Stock - Series B 1,500 1,500 (1,500)
Cumulative dividends on Preferred
Stock - Series A and B (12,458) (12,458)
Issuance of Common Stock - Class B 69 104,665 104,734
Exercise of stock options 169 169
Minimum pension liability (1,765) (1,765)
---- ---- ------- -------- -------- -------- -------
BALANCE AT DECEMBER 31, 1995 221 212 36,650 465,359 54,115 556,557 65,030
Net income 19,105 19,105
Amortization of excess of book value
over redemption value of Redeemable
Preferred Stock - Series B 1,125 1,125 (1,125)
Cumulative dividends on Preferred
Stock - Series A and B (9,347) (9,347)
---- ---- ------- -------- -------- -------- -------
BALANCE AT SEPTEMBER 30, 1996 $221 $212 $36,650 $465,359 $ 64,998 $567,440 $63,905
==== ==== ======= ======== ======== ======== =======
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 (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 were of a normal recurring nature, except for the items
discussed in Notes 3 and 4. The financial results presented for the three and
nine month periods ended September 30, 1996 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, 1995 (the "1995 Form 10-K") contains
additional information and should be read in conjunction with this report.
NOTE 2 - ACCOUNTING CHANGES
During the third quarter of 1996, the Company changed the measurement date for
pensions from December 31 to September 30 in order to provide for more timely
information. The change in measurement date had no effect on 1996 expense and is
expected to have an immaterial impact on the funded status of the Plan at
December 31, 1996.
During the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
adoption of SFAS 121 did not have an impact on the Company's financial
statements.
The Company also adopted Statement of Financial Accounting Standards No. 123
("SFAS 123") "Accounting for Stock-Based Compensation" during the first quarter
of 1996. SFAS 123 requires the Company to either adopt a fair value based method
of expense recognition for all stock compensation based awards, or provide
proforma net income and earnings per share information as if the recognition and
measurement provisions of SFAS 123 had been adopted. The Company will continue
to account for its stock based compensation awards following the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25") and will provide the
required fair value based proforma information in its annual financial
statements. APB 25 requires compensation expense to be recognized only if the
market price of the underlying stock exceeds the exercise price on the date of
grant. The Company's stock based awards consist of stock options with an
exercise price equal to market price on the date of grant. As such, the Company
has not recorded compensation expense in connection with these awards.
NOTE 3 - NONRECURRING ITEMS
During the third quarter of 1996, the Company settled two disputes that resulted
in aggregate gains totaling $11.2 million. On September 12, 1996, following the
closing of the settlement agreement between the Company and Bakers Port, Inc.,
the Company sold 213 acres out of a total of 2,338 acres of land received in
connection with the settlement. The sale generated a net gain of $3.7 million,
which was recorded as other income in the statement of consolidated income. On
August 15, 1996, the Company finalized the settlement agreement with the Pension
Benefit Guaranty Corporation ("PBGC") relating to the Donner-Hanna Joint Venture
pension plans. As a part of the settlement, the Company paid $8.5 million to
8
<PAGE>
the PBGC. Since the Company had estimated and accrued $16 million for this
liability, a gain of $7.5 million was recorded in connection with the
settlement. This gain was recorded as a reduction to cost of goods sold during
the third quarter of 1996. In addition, the Company made a $4.5 million
contribution to the Hanna Iron Ore Division Pension Plan. (See Part II. Other
Information, Item 1. Legal Proceedings.)
During the fourth quarter of 1994, the Company finalized and implemented a plan
that resulted in a workforce reduction of approximately 400 salaried
nonrepresented employees. Accordingly, a restructuring charge of $34.2 million,
or $25.6 million net of tax, was recorded during the fourth quarter of 1994.
During the first quarter of 1995, the Company recorded an additional
restructuring charge of $5.3 million, or $3.6 million net of tax, as a result of
the various elections made by the terminated employees during the first quarter
of 1995. This charge was comprised of retiree postemployment benefits of $4.5
million, severance of $1.6 million, and a pension credit of $.8 million. The
restructuring charges were recorded as unusual items.
NOTE 4 - PRIMARY OFFERING OF CLASS B COMMON STOCK AND USE OF PROCEEDS TO PREPAY
DEBT
On February 1, 1995, the Company completed a primary offering of 6,900,000
shares of Class B Common Stock, bringing the total number of shares of Class B
Common Stock issued and outstanding to 21,176,156 at that time. Subsequent to
the offering, NKK Corporation, through its ownership of all 22,100,000 issued
and outstanding shares of Class A Common Stock, holds 67.6% of the combined
voting power of the Company. The remaining 32.4% of the combined voting power is
held by the public. The issuance of the additional shares of Class B Common
Stock generated net proceeds of approximately $104.7 million, all of which was
used for related party debt reduction during the third quarter of 1995.
NOTE 5 - ENVIRONMENTAL
The Company's operations are subject to numerous laws and regulations relating
to the protection of human health and the environment. Because these
environmental laws and regulations are quite stringent and are generally
becoming more stringent, the Company has expended, and can be expected to expend
in the future, substantial amounts for compliance with these laws and
regulations. Due to the possibility of future changes in circumstances or
regulatory requirements, the amount and timing of future environmental
expenditures could vary from those currently anticipated.
It is the Company's policy to expense or capitalize, as appropriate,
environmental expenditures that relate to current operating sites. Environmental
expenditures that relate to past operations and which do not contribute to
future or current revenue generation are expensed. With respect to costs for
environmental assessments or remediation activities, or penalties or fines that
may be imposed for noncompliance with such laws and regulations, such costs are
accrued when it is probable that liability for such costs will be incurred and
the amount of such costs can be reasonably estimated.
The 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 of
contaminated sites and parties whose waste was disposed of at the sites,
regardless of fault. The Company and certain of its subsidiaries, as well as
unrelated third parties, are involved as potentially responsible parties (each a
"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 FoxMeyer Health Corporation ("FOX") is required
to indemnify the Company ("FOX 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.
9
<PAGE>
In connection with those sites involving FOX Environmental Liabilities, in
January 1994 the Company received $10.0 million from FOX as an unrestricted
prepayment for such liabilities for which the Company recorded $10.0 million as
a liability in its consolidated balance sheet. The Company is required to repay
FOX portions of the $10.0 million to the extent the Company's expenditures for
such FOX Environmental Liabilities do not meet specified levels by certain dates
over a twenty year period. At September 30, 1996 and December 31, 1995, the
balance, including accrued interest and insurance settlements, recorded as
prepaid FOX Environmental Liabilities totaled $8.4 million and $7.2 million,
respectively. The failure of FOX to satisfy its indemnity obligations in excess
of the $10.0 million prepayment could have a material adverse effect on the
Company's liquidity or results of operations. The Company's ability to fully
realize the benefits of FOX's indemnification above the $10 million prepayment
is necessarily dependent upon FOX's financial condition at the time of any claim
with respect to such obligations. On August 20, 1996, FOX filed a Form 10-Q for
its quarter ended June 30, 1996 in which it reported a writedown of $238.7
million in its investment in FoxMeyer Drug Company, its principal operating
subsidiary. Primarily as a result of this writedown, the consolidated
stockholders' equity of FOX was reported as a deficit of $88.4 million. On
August 27, 1996, most of FOX's operating subsidiaries (including FoxMeyer Drug
Company) filed for relief under Chapter 11 of the United States Bankruptcy Code
in the U.S. Bankruptcy Court in Delaware. Although FOX, the parent company, was
not included in the Chapter 11 filing, the Chapter 11 filing has caused the
Company to have increased concerns about FOX's ability to honor its remaining
indemnification obligations to the Company. FOX is subject to the informational
requirements of the Securities Exchange Act of 1934 and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission.
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 progresses or the Company
becomes aware of additional matters, the Company may be required to accrue
charges in excess of those previously accrued. 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; however, 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 has
recorded an aggregate environmental liability of approximately $20.7 million and
$18.6 million at September 30, 1996 and December 31, 1995, respectively.
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 cash flows. (See Part II. Other Information, Item 1. Legal
Proceedings.)
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- -----------------------
RESULTS OF OPERATIONS - COMPARISON OF THE THREE-MONTH PERIODS ENDED SEPTEMBER
30, 1996 AND 1995
Net Sales
- ---------
Net sales for the third quarter of 1996 totaled $735.9 million, an improvement
of $11.1 million, or 1.5%, compared to the corresponding period in 1995. This
increase was primarily attributable to a 98,000 ton increase in shipments and an
improvement in product mix from hot rolled products to cold rolled and coated
products. These improvements were partially offset by a decrease in average
selling prices.
Steel shipments for the third quarter of 1996 were 1,434,000 tons, a 7.3%
increase compared to the 1,336,000 tons shipped during the corresponding 1995
period.
Cost of Products Sold
- ---------------------
The Company's cost of products sold of $637.0 million during the third quarter
of 1996 represents a slight increase compared to the same period in 1995.
Increases in costs resulting from higher shipments and unplanned blast furnace
outages at the Granite City Division were offset by lower raw material sales, a
settlement gain, discussed below, and a reduction in several employee benefit
related accruals, along with the Company's cost reduction programs.
During the third quarter of 1996, the Company produced 1,542,000 net tons of
steel, a slight increase compared to the 1,532,000 net tons produced during the
corresponding 1995 period.
Selling, General and Administrative Expense
- -------------------------------------------
Selling, general and administrative expense of $38.9 million during the third
quarter of 1996 represents an increase of $2.1 million compared to the
corresponding 1995 period. This increase is primarily a result of an increase in
certain employee benefit related items and was partially offset by less spending
on professional services.
Financing Costs
- ---------------
Net financing costs of $9.5 million during the third quarter of 1996 represents
a $.6 million increase compared to the corresponding 1995 period. The August
1995 prepayment of $133.3 million of debt resulted in a $2.0 million reduction
in interest expense during the quarter. However, this was more than offset by a
decrease in capitalized interest expense as well as a reduction in interest
income as a result of lower average cash balances.
Settlement of Legal Proceedings
- -------------------------------
During the third quarter of 1996, the Company settled two disputes that resulted
in aggregate gains totaling $11.2 million. On September 12, 1996, following the
closing of the settlement agreement between the Company and Bakers Port, Inc.,
the Company sold 213 acres out of a total of 2,338 acres of land received in
connection with the settlement. The sale generated a net gain of $3.7 million,
which was recorded as other income in the statement of consolidated income.
11
<PAGE>
On August 15, 1996, the Company finalized the settlement agreement with the PBGC
relating to the Donner-Hanna Joint Venture Plans. As a part of the settlement,
the Company paid $8.5 million to the PBGC. Since the Company had estimated and
accrued $16 million for this liability, a gain of $7.5 million was recorded in
connection with the settlement. This gain reduced cost of goods sold during the
third quarter of 1996. (See Part II. Other Information, Item 1. Legal
Proceedings.)
Labor Negotiations
- ------------------
In 1993, the Company and the United Steelworkers of America ("USWA") negotiated
a six year labor agreement continuing through July 1999, with a reopener
provision in 1996 for specified payroll items and employee benefits. Under the
terms of the reopener, if the parties could not reach a settlement, they were to
submit final offers to an arbitrator who would, after a hearing, consider the
information and fashion a remedy in his award. On October 30, 1996, the
arbitrator handed down his award regarding the arbitration of the reopener.
Under the arbitrator's award, USWA employees will receive an immediate wage
increase of fifty cents an hour retroactive to August 1, 1996, with increases of
twenty five cents an hour on each of August 1, 1997 and 1998. In addition, $500
lump sum bonuses will be paid on each of May 1, 1998 and 1999.
The Company estimates that these items, along with certain other provisions in
the agreement, will increase employee related expenses by approximately $4
million, $7 million, $15 million and $18 million for the years ended December
31, 1996, 1997 and 1998, and 1999, respectively.
12
<PAGE>
COMPARISON OF THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
Net Sales
- ---------
Net sales for the first nine months of 1996 totaled $2.19 billion compared to
$2.21 billion during the same 1995 period. Net sales declined despite a 335,000
net ton increase in steel shipments primarily as a result of a decrease in
average selling prices. The increased tonnage, however, favorably impacted the
Company's income from operations. Steel shipments for the first nine months of
1996 were 4,441,000 tons, an 8.2% increase compared to the 4,106,000 tons
shipped during the corresponding 1995 period.
Cost of Products Sold
- ---------------------
The Company's cost of products sold for the first nine months of 1996 totaled
$1.95 billion, a $79.7 million increase compared to the same 1995 period. This
increase is primarily attributable to the 335,000 net ton increase in steel
shipments, unplanned blast furnace outages at the Granite City Division, as well
as a shift in product mix to more costly but higher value added products. Higher
natural gas prices due to extreme cold weather earlier in the year also
increased costs. These increases were partially offset by the Company's cost
reduction programs.
Raw steel production totaled 4,895,000 tons for the first nine months of 1996, a
9.9% increase from the 4,455,000 tons produced during the nine month period
ended September 30, 1995.
Selling, General and Administrative Expense
- -------------------------------------------
Selling, general and administrative expense of $102.8 million during the first
nine months of 1996 represents a $5.6 million decrease compared to the
corresponding 1995 period. This decrease is a result of the favorable settlement
of a lawsuit earlier in the year, along with a reduction in the level of
spending for professional services.
Unusual Item
- ------------
During the fourth quarter of 1994, the Company recorded an unusual charge of
$34.2 million related to a reduction of the salaried nonrepresented workforce.
During the first quarter of 1995, an additional charge of $5.3 million was
recorded as an unusual item as a result of various elections made by the
terminated employees during that quarter.
Financing Costs
- ---------------
Net financing costs of $27.6 million for the nine months ended September 30,
1996 represents a $2.7 million decrease compared to the same 1995 period. The
August 1995 prepayment of $133.3 million of debt resulted in a $9.4 million
reduction in interest expense during the first nine months of 1996, which was
partially offset by a reduction in interest income as a result of lower cash
balances, as well as a decrease in capitalized interest expense.
Primary Offering of Class B Common Stock
- ----------------------------------------
On February 1, 1995, the Company completed a primary offering of 6,900,000
shares of Class B Common Stock, bringing the total number of shares of Class B
Common Stock issued and outstanding to 21,176,156 at that time. Subsequent to
the offering, NKK Corporation, through its ownership of all 22,100,000 issued
and outstanding shares of Class A Common Stock, holds 67.6% of the combined
voting power of the Company. The remaining 32.4% of the combined voting power is
held by the public. The issuance of the additional shares of Class B Common
Stock generated net proceeds of approximately $104.7 million. On August 7, 1995,
the Company utilized these proceeds, along with an additional amount of $20.9
million funded from the Company's available cash, to prepay $133.3 million
principal amount of the outstanding $323.3 million related party debt associated
with the rebuild of the No. 5 Coke Oven Battery serving the Great Lakes
Division. This transaction resulted in an extraordinary item of $5.4 million,
net of related income tax expense of $.5 million, or $.12 per share.
13
<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.
The Company has satisfied these liquidity needs with funds provided by long term
borrowings and cash provided by operations. One source of liquidity consists of
a Receivables Purchase Agreement (the "Receivables Purchase Agreement") with
commitments of up to $200 million. During July 1996, the Company amended the
Receivables Purchase Agreement extending the expiration date to May 2001. Also
during July 1996, the Company entered into a new $100 million credit facility
and a new $50 million credit facility, which will expire in May 2000 and July
1997, respectively, both of which are secured by the Company's inventories (the
"Inventory Facilities").
The Company is currently in compliance with all material covenants of, and
obligations under, the Receivables Purchase Agreement, the Inventory Facilities
and other debt instruments. On September 30, 1996, there were no cash borrowings
outstanding under the Receivables Purchase Agreement or the Inventory
Facilities, and outstanding letters of credit under the Receivables Purchase
Agreement totaled $89.6 million. During the first nine months of 1996, the
maximum availability under the Receivables Purchase Agreement, after reduction
of letters of credit outstanding, varied from $59.3 million to $108.9 million
and was $72.3 million as of September 30, 1996. At September 30, 1996, the
Company's available sources of liquidity totaled $350 million.
At September 30, 1996, total debt and redeemable preferred stock as a percentage
of total capitalization decreased to 50.0% as compared to 52.0% at December 31,
1995. Cash and cash equivalents totaled $128.0 million at September 30, 1996 as
compared to $127.6 million at December 31, 1995.
Cash Flows from Operating Activities
- ------------------------------------
For the nine months ended September 30, 1996, cash provided from operating
activities totaled $134.4 million. This is primarily attributable to the impact
of working capital items and noncash charges for depreciation and postretirement
benefits, as well as net income of $19.1 million. An increase in accounts
payable and a decrease in accounts receivable had the most significant positive
effects upon cash provided by working capital, due primarily to the timing of
cash disbursement clearings and cash receipts. The above mentioned favorable
effects were offset by an increase in inventories, both in finished steel and
raw materials, along with a decrease in accrued liabilities.
Cash Flows from Investing Activities
- ------------------------------------
Capital investments for the nine months ended September 30, 1996 and 1995
amounted to $80.8 million and $154.6 million, respectively. The 1996 spending is
primarily due to the 72" continuous galvanizing line upgrade and the
construction of the new 48" galvanizing line, both at the Midwest Division,
along with the completion of the coating line at the Granite City Division. The
Company plans to invest approximately $40.0 million during the remainder of 1996
for expenditures which include the above mentioned projects.
Cash Flows from Financing Activities
- ------------------------------------
During the first nine months of 1996, the Company utilized $53.2 million for
financing activities which included scheduled repayments of debt, as well as
dividend payments on the Company's preferred stock. During the first quarter of
1995, the Company completed a primary offering of 6,900,000 million shares of
Class B Common Stock. The issuance of this stock generated net proceeds of
$104.7 million, which was used along with cash from operations during the third
quarter of 1995 to prepay related party debt.
14
<PAGE>
OTHER
- -----
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Statements made by the Company in reports, such as this Form 10-Q, in press
releases and in statements made by employees in oral discussions, that are not
historical facts, constitute "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995.
Forward looking statements, by their nature, involve risk and uncertainty. A
variety of factors could cause business conditions and the Company's actual
results and experience to differ materially from those expected by the Company
or expressed in the Company's forward looking statements. These factors include,
but are not limited to, the following: (1) changes in market prices and market
demand for the Company's products; (2) changes in the costs or availability of
the raw materials and other supplies used by the Company in the manufacture of
its products; (3) equipment failures or outages at the Company's steelmaking and
processing facilities; (4) losses of customers; (5) changes in the levels of the
Company's operating costs and expenses; (6) collective bargaining agreement
negotiations, strikes, labor stoppages or other labor difficulties; (7) actions
by the Company's competitors, including domestic integrated steel producers,
foreign competitors, mini-mills and manufacturers of steel substitutes, such as
plastics, aluminum, ceramics, glass, wood and concrete; (8) changes in industry
capacity; (9) changes in economic conditions in the United States and other
major international economies, including rates of economic growth and inflation;
(10) worldwide changes in trade, monetary or fiscal policies; (11) changes in
the legal and regulatory requirements applicable to the Company; and (12) the
effects of extreme weather conditions.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Baker's Port, Inc. v. National Steel Corporation. With reference to the matter
involving claims arising out of the sales of land in Texas to Baker's Port, Inc.
("BPI"), previously reported in the 1995 Form 10-K, the settlement agreement was
finalized and executed by the parties on September 12, 1996. As a part of the
settlement, the lawsuit brought by BPI and Baker Marine Corporation has been
dismissed with prejudice.
Donner-Hanna Coke Joint Venture. With reference to the matter involving The
Hanna Furnace Corporation ("Hanna"), Donner-Hanna-Coke Joint Venture ("Donner-
Hanna") and the Pension Benefit Guaranty Corporation ("PBGC"), previously
reported in the 1995 Form 10-K, the settlement agreement was finalized and
executed by the parties on August 15, 1996. As a part of the settlement, the
Company paid the PBGC $8.5 million in cash and made a supplemental contribution
to the Hanna Iron Ore Division Pension Plan of $4.5 million, and the Company and
its subsidiaries and affiliates were given a full release from any liability in
connection with the Donner-Hanna salaried and hourly pension plans (the
"Plans"). The lawsuit filed by the PBGC in the Western District of New York was
terminated by the entry of an agreed judgment on September 30, 1996. In
addition, Hanna and the Company entered into a settlement agreement with the
Internal Revenue Service (the "IRS") dated August 9, 1996, whereby the IRS
released its claims against Hanna for the excise tax liability and related
penalties arising from the failure to meet minimum funding standards for the
Plans prior to their termination, in exchange for the payment to the IRS of
$25,000.
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. The Company and certain of its subsidiaries are involved as
a potentially responsible party ("PRP") in a number of off-site CERCLA or state
superfund site proceedings.
Iron River (Dober Mine) Site. With reference to the matter involving the Iron
River (Dober Mine) Site located in Iron County, Michigan, previously reported in
the 1995 Form 10-K and second quarter 1996 Form 10-Q, the State of Michigan has
revised its response costs claim upward to approximately $487,000 and its
natural resource damages claim upward to $4,000,000. Settlement discussions with
the State and with third party defendants are ongoing.
Great Lakes Division---Wayne County Air Pollution Control Department. With
reference to the matter involving alleged exceedances of certain particulate
emissions standards at the Company's Great Lakes Division, previously reported
in the 1995 Form 10-K, the Company and the Wayne County Air Pollution Control
Department have agreed upon the terms of a Consent Order pursuant to which the
Company would pay a $250,000 civil penalty and would implement an environmental
credit program valued at $250,000. Entry of the Consent Order and payment of the
civil penalty are expected to occur in the fourth quarter of 1996.
National Mines Corporation---Isabella Mine. With reference to the matter
involving certain reclamation obligations at the former National Mines
Corporation ("NMC") Isabella Mine, previously reported in the Company's second
quarter 1996 Form 10-Q, on August 13, 1996, the Pennsylvania Department of
Environmental Protection ("DEP") revoked the mining permit for the Isabella Mine
held by Global Coal
16
<PAGE>
Recovery, Inc. ("Global"). Additionally, the DEP advised that it intends to
forfeit the $1,200,000 reclamation bond posted by NMC in the form of a letter of
credit. On August 22, 1996, NMC representatives met with DEP and presented a
proposed reclamation plan for the mine site. This reclamation plan was presented
as an alternative to forfeiture of the bond. DEP has indicated a willingness to
consider NMC's proffered alternative and negotiations of specific terms and
conditions are ongoing.
Granite City Division - Illinois Environmental Protection Agency Violation
Notice. On October 18, 1996, the Illinois Environmental Protection Agency
("IEPA") issued a Violation Notice to the Company alleging (1) releases to the
environment between 1990 and 1996; (2) violations of solid waste requirements
and (3) violations of the National Pollutant Discharge Elimination System
("NPDES") water permit limitations, at the Company's Granite City Division. No
demand or proposal for penalties or other sanctions was contained in the Notice;
however, the Notice does contain a recommendation by IEPA that the Company
conduct an investigation of these releases and, if necessary, remediate any
contamination discovered during that investigation. The Company has 45 days from
its receipt of the Notice to respond to the IEPA. The Company is reviewing the
specific allegations in connection with preparing its response, but does not
currently believe that any additional remediation will be necessary.
FOX SITES.
- ----------
As previously reported in the 1995 Form 10-K, FoxMeyer Health Corporation
("FOX") has agreed to indemnify the Company for remediation costs incurred by
the Company with respect to operations at the Company's former Weirton Steel
Division (including the Weirton Steel Site and the Tex Tin Site described
below), as well as with respect to the operations of Donner-Hanna Coke Joint
Venture, The Hanna Furnace Corporation and the Alumet Partnership. As stated in
the 1995 Form 10-K, the failure of FOX to satisfy its indemnity obligations in
excess of the $10.0 million prepayment made to the Company could have a material
adverse effect on the Company's liquidity and results of operations. The
Company's ability to fully realize the benefits of FOX's indemnification
obligation in excess of the $10 million prepayment is necessarily dependent upon
FOX's financial condition at the time of any claim with respect to such
obligations. On August 20, 1996, FOX filed a Form 10-Q for its quarter ended
June 30, 1996 in which it reported a writedown of $238.7 million in its
investment in FoxMeyer Drug Company, its principal operating subsidiary.
Primarily as a result of this writedown, the consolidated stockholders' equity
of Fox at June 30, 1996 was reported as a deficit of $88.4 million. On August
27, 1996, most of FOX's operating subsidiaries (including FoxMeyer Drug Company)
filed for relief under Chapter 11 of the United States Bankruptcy Code in the
U.S. Bankruptcy Court in Delaware. Although FOX, the parent company, was not
included in the Chapter 11 filing, the Chapter 11 filing has caused the Company
to have increased concerns about FOX's ability to honor its remaining
indemnification obligations to the Company. FOX is subject to the informational
requirements of the Securities Exchange Act of 1934 and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission.
Weirton Steel Site. With reference to the matter involving the Weirton Steel
Site described in the 1995 Form 10-K, Weirton Steel Corporation has rejected the
Company's offer of settlement to cap the Company's liability for the Brown's
Island emergency lagoon at $480,000, and is seeking $210,000 in reimbursement
for remediation costs expended at the site to date. In addition, the United
States Environmental Protection Agency ("EPA") has issued an administrative
unilateral order under the Resource Conservation and Recovery Act ("RCRA"),
requiring Weirton Steel Corporation to undertake certain investigative
activities with regard to clean-up of possible environmental contamination on
Weirton Steel property. Weirton Steel Corporation has informed the Company that
the Mainland Coke Plant, Brown's Island, and the Avenue H Disposal Site are
likely to be included within the areas of investigation required by EPA and that
Weirton Steel Corporation considers these areas to be within the scope of
certain indemnity provisions of the Assignment and Assumption Agreement between
Weirton Steel and the Company. At this time, the Company is unable to determine
if activities resulting from EPA's unilateral order to Weirton Steel will result
in an indemnity obligation on the part of the Company.
17
<PAGE>
Tex-Tin Site. On or about August 12, 1996, Amoco Chemical Company ("Amoco")
filed a cost recovery and contribution civil suit pursuant to sections 107 and
113(f) of CERCLA in the United States District Court for the Southern District
of Texas. Plaintiff Amoco has been involved in investigations of the
contamination at the former Tex-Tin Superfund Site in Texas City, Galveston
County, Texas, pursuant to an Administrative Order and Consent ("AOC") entered
into with the EPA. Plaintiff alleges that the Company is one of approximately
100 defendants jointly and severally liable under CERCLA Section 107 for
plaintiff's cost of those investigations and future response costs. Amoco has
spent approximately $9 million pursuant to the AOC at the Tex-Tin Superfund
Site. The Company is unable to ascertain the extent of its liability, if any, at
the Tex-Tin site at this time.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See attached Exhibit Index
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the third
quarter of 1996.
19
<PAGE>
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/ William E. McDonough
------------------------------------------------------
William E. McDonough, Acting Chief Financial Officer
and Treasurer
BY /s/ Carl M. Apel
------------------------------------
Carl M. Apel, Corporate Controller
Date: November 12, 1996
20
<PAGE>
NATIONAL STEEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
10-A Amendment No. 2 and Consent to the Receivables Purchase Agreement,
dated as of July 18, 1996, among the Company, National Steel Funding
Corporation and Morgan Guaranty Trust Company of New York
10-B Supplement to Employment Contract dated July 30, 1996 between National
Steel Corporation and George D. Lukes
10-C Supplement to Employment Contract dated July 30, 1996 between National
Steel Corporation and David L. Peterson
27-A Financial Data Schedule
<PAGE>
EXHIBIT 10.A
CONFORMED COPY
AMENDMENT NO. 2 AND CONSENT
AMENDMENT NO. 2 AND CONSENT dated as of July 18, 1996 (the
"Amendment") to the Receivables Purchase Agreement, dated as of May 16, 1994 (as
amended to date, the "Receivables Purchase Agreement") among MORGAN GUARANTY
TRUST COMPANY OF NEW YORK ("Morgan Guaranty"), in its capacity as Administrative
Agent, NATIONAL STEEL FUNDING CORPORATION, a Delaware corporation ("NSFC"),
NATIONAL STEEL CORPORATION, a Delaware corporation, ("NSC") the financial
institutions party thereto, as buyers (the "Buyers"), the Letter of Credit
Issuing Banks party thereto, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
structuring and collateral agent (the "Receivables Collateral Agent").
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into the
Receivables Purchase Agreement;
WHEREAS, the parties hereto desire to amend the Receivables Purchase
Agreement to provide for the pledging of inventory by NSC under an Inventory
Security Agreement dated as of the date hereof (the "Inventory Security
Agreement") between NSC and The Long-Term Credit Bank of Japan, Ltd. ("LTCB") as
Collateral Agent to secure its obligations under an Inventory Credit Agreement
dated as of the date hereof (the "Inventory Credit Agreement") among NSC, the
lenders listed therein, and LTCB as structuring agent and collateral agent, and
under the Credit Agreement dated as of the date hereof (the "Fuji Credit
Agreement") between NSC and the Fuji Bank and Trust Company; and
WHEREAS, it is further necessary to evidence the consent and
instruction of the Buyers with respect to the related Intercreditor Agreement;
<PAGE>
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Receivables
Purchase Agreement shall have the meaning assigned to such term in the
Receivables Purchase Agreement.
SECTION 2. Amendment to Section 1.01 of the Receivables Purchase
Agreement. Section 1.01 of the Receivables Purchase Agreement is amended by (i)
replacing "May 16, 2000" in the definition of "Expiry Date" with "May 16, 2001"
and (ii) adding, in their appropriate alphabetical positions, the following
definitions:
"Fuji Credit Agreement" means the Credit Agreement dated as of July
18, 1996 between NSC and The Fuji Bank and Trust Company, as amended from time
to time.
"Inventory Credit Agreement" means the Inventory Credit Agreement
dated as of July 18, 1996 among NSC, the Lenders listed therein, The Long-Term
Credit Bank of Japan, Ltd., ("LTCB") as Administrative Agent, and LTCB as
Structuring Agent and Collateral Agent, as amended from time to time.
"Inventory Security Agreement" means the Inventory Security Agreement
dated as of July 18, 1996 between NSC, and The Long-Term Credit Bank of Japan,
Ltd., as Structuring Agent and Collateral Agent, as amended from time to time.
SECTION 3. Amendment to Section 6.01 of the Receivables Purchase
Agreement. Section 6.01 of the Receivables Purchase Agreement is amended by
replacing "." at the end of paragraph (u) with"; or", and adding the following
new paragraph (v):
(v) an Automatic Release Termination (as defined in the Inventory
Security Agreement) shall occur under the Inventory Security Agreement, or
an Event of Default specified in clause (g) or (h) of Section 6.1 of the
Inventory Credit Agreement or clause (g) or (h) of Section 6.1 of the Fuji
Credit Agreement shall occur with respect to the Borrower thereunder, or an
Enforcement Notice (as defined in the Inventory Security Agreement) shall
be given to the Borrower under the Inventory
2
<PAGE>
Security Agreement; or a Release Termination Notice is given under the
Intercreditor Agreement; or any of the provisions of the Inventory Security
Agreement, the Inventory Credit Agreement or the Fuji Credit Agreement
relating to the automatic release of Proceeds of Inventory (as defined in
the Inventory Security Agreement) including, without limitation, any
defined terms or other provisions incorporated therein shall be waived or
amended or otherwise have been modified or limited in force and effect
without the consent of all of the Buyers and the Reserve L/C Bank.
SECTION 4. Amendment to Section 6.02 of the Receivables Purchase
Agreement. Section 6.02 of the Receivables Purchase Agreement is amended by
adding immediately following the text "Section 6.01(n)" the following new text:
"or a Termination Event under Section 6.01(v)"
SECTION 5. Amendment to Schedule I of the Receivables Purchase
Agreement. Schedule I of the Receivables Purchase Agreement is amended to read
in its entirety as set forth in Exhibit A attached hereto.
SECTION 6. Changes in Commitments. With effect from and including the
date this Amendment No. 2 and Consent becomes effective in accordance with
Section 9 hereof, the Commitment of each Buyer shall be the amount set forth
opposite the name of such Buyer on the signature page hereof.
SECTION 7. Consent to the Intercreditor Agreement. The Buyers party
hereto hereby consent to, and instruct Morgan Guaranty Trust Company of New York
as Collateral Agent to enter into, on behalf of the Buyers, an Intercreditor
Agreement substantially in the form attached as Exhibit B hereto.
SECTION 8. Governing Law. This Amendment and Consent shall be governed
by and construed in accordance with the laws of the State of New York.
3
<PAGE>
SECTION 9. Counterparts; Effectiveness. This Amendment and Consent may
be signed in any number of counterparts, each of which shall be an original with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Amendment and Consent shall become effective as of the date
hereof when the Administrative Agent shall have received (i) duly executed
counterparts hereof signed by NSFC and all of the Buyers (or, in the case of any
party as to which an executed counterpart shall not have been received, the
Administrative Agent shall have received telegraphic, telex or other written
confirmation from such party of execution of a counterpart hereof by such party)
and (ii) notice from NSC that each of the Inventory Credit Agreement and Fuji
Credit Agreement have become effective.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
NATIONAL STEEL FUNDING CORPORATION
By: /s/ William E. McDonough
-------------------------------------
Title: Treasurer
NATIONAL STEEL CORPORATION,
as Servicer
By: /s/ William E. McDonough
-------------------------------------
Title: Treasurer
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK,
as Administrative Agent
By: /s/ Laura E. Reim
-------------------------------------
Title: Vice President
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK,
as Structuring and Collateral Agent and
Reserve Letter of Credit Issuing Bank
By: /s/ Robert J. Henchey
-------------------------------------
Title: Vice President
5
<PAGE>
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Letter of
Credit Issuing Bank
By: /s/ Laura E. Reim
-------------------------------------
Title: Vice President
THE FUJI BANK AND TRUST COMPANY,
as Letter of Credit Issuing Bank
By: /s/ Yuichi Tsuchiko
-------------------------------------
Title: Vice President
BANK OF TOKYO-MITSUBISHI, LTD.,
as Letter of Credit Issuing Bank
By: /s/ Akihiko Hagura
-------------------------------------
Title: Vice President
COMERICA BANK, as Letter of
Credit Issuing Bank
By: /s/ David L. Morrison
-------------------------------------
Title: Assistant Vice President
6
<PAGE>
BUYERS:
$30,000,000 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/ Laura E. Reim
-------------------------------------
Title: Vice President
$30,000,000 THE FUJI BANK AND TRUST COMPANY
By: /s/ Yuichi Tsuchiko
-------------------------------------
Title: Vice President
$25,000,000 COMERICA BANK
By: /s/ David L. Morrison
-------------------------------------
Title: Assistant Vice President
$25,000,000 BANK OF TOKYO-MITSUBISHI, LTD.
By: /s/ Akihiko Hagura
-------------------------------------
Title: Vice President
$20,000,000 THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
By: /s/ Taisuke Hitomi
-------------------------------------
Title: Deputy General Manager
7
<PAGE>
$15,000,000 THE DAI-ICHI KANGYO BANK, LTD.,
NEW YORK BRANCH
By: /s/ Gregg Silver
-------------------------------------
Title: Vice President and Group Leader
$15,000,000 THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY
By: /s/ Noburu Himata
-------------------------------------
Title: Senior Vice President
$15,000,000 NBD BANK
By: /s/ Mark A. Weitzel
-------------------------------------
Title: Second Vice President
$15,000,000 THE YASUDA TRUST AND BANKING CO., LTD.
By: /s/ Tetsuro Miyazawa
-------------------------------------
Title: Vice President and Manager
$10,000,000 MELLON BANK, N.A.
By: /s/ Roger N. Stanier
-------------------------------------
Title: Vice President
8
<PAGE>
EXHIBIT A
Additions, Changes, Deletions to National Steel Funding Corp. RPA - Amendment
No.2
<TABLE>
<CAPTION>
Schedule 1
Special Obligors and Concentration Limits
-----------------------------------------
Rating
------
Obligor A-1 A-2 A-3 Unrated
------- ---- ---- ---- --------
<S> <C> <C> <C> <C>
General Motors Corporation 20% 16% 10% 4%
Ford Motor Company 15% 8% 7% 4%
Chrysler Motors Corporation 15% 8% 7% 4%
Silgan Containers Corporation 10% 8% 7% 6%
Heidtman Steel Products, Inc. 10% 8% 6% 5%
Ball Heekin Corporation 10% 8% 7% 6%
</TABLE>
The rating referred to above at any time is the rating then assigned by S&P to
the short-term unsecured debt of the Obligor.
9
<PAGE>
EXECUTION COPY
INTERCREDITOR AGREEMENT
INTERCREDITOR AGREEMENT, dated as of July 18, 1996 (as amended, modified or
supplemented from time to time, this "Agreement), among THE LONG-TERM CREDIT
BANK OF JAPAN, LTD., acting through its New York Branch ("LTCB"), as
Administrative Agent (the "Administrative Agent") for the lenders listed in the
Inventory Credit Agreement, dated as of the date hereof (as amended, modified as
supplemented from time to time, to "Inventory Credit Agreement"), LTCB in its
capacity as collateral agent and structuring agent (the "Collateral Agent) under
the Inventory Security Agreement, dated as of the date hereof (as amended,
modified or supplemented from time to time, the "Inventory Security Agreement"),
between National Steel Corporation, a Delaware corporation ("NSC"), and LTCB as
Collateral Agent, MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("Morgan Guaranty"),
in its capacity as Administrative Agent, under the Receivables Purchase
Agreement, dated as of May 16, 1994 (as amended, modified or supplemented from
time to time, the "Receivables Facility"), among National Steel Funding
Corporation, a Delaware corporation ("NSFC"), NSC, as Servicer, the financial
institutions party thereto (the "Buyers"), certain letter of credit issuing
banks, J.P. MORGAN DELAWARE, as reserve letter of credit bank, MORGAN GUARANTY,
as Administrative Agent, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
structuring and collateral agent (the "Receivables Collateral Agent"), and THE
FUJI BANK AND TRUST COMPANY, acting through its New York Branch ("FUJI").
W I T N E S S E T H:
--------------------
WHEREAS, pursuant to and subject to the terms and conditions set forth in
an Inventory Credit Agreement, the Lenders listed therein (the "LTCB Lenders"),
have agreed to make extensions of credit to NSC, which extensions of credit are
to be secured by a first priority security interest in the Inventory (as defined
in the Inventory Security Agreement) of NSC and the proceeds thereof (such
inventory and such proceeds thereof, collectively, the "Inventory Collateral"),
granted pursuant to the Inventory Security Agreement;
WHEREAS, pursuant to and subject to the terms and conditions set forth in a
Credit Agreement, dated as of the date hereof (as amended, modified or
supplemented from time to time, the "Fuji Credit Agreement"), between NSC and
Fuji, Fuji has agreed to make extensions of credit to NSC, which extensions of
credit are to be secured by a second priority security interest in the Inventory
Collateral, pursuant to the Inventory Security Agreement;
WHEREAS, pursuant to and subject to the terms of the Receivables Facility,
the Buyers have agreed to make extensions of credit to NSFC, in order to enable
NSFC to purchase certain eligible accounts receivable from NSC, and in
connection therewith, the Buyers have purchased undivided interests in the
receivables of NSC;
WHEREAS, it is a condition precedent to the agreement of the LTCB Lenders
to extend credit under the Inventory Credit Agreement and to the agreement of
Fuji to extend credit
-10-
<PAGE>
EXECUTION COPY
under the Fuji Credit Agreement (collectively, the "Inventory Facilities"), that
the Collateral Agent and the LTCB Lenders have a first priority security
interest in the Inventory Collateral and the Collateral Agent and Fuji have a
second priority security interest in the Inventory Collateral; and
WHEREAS, the Collateral Agent, the LTCB Lenders, Fuji, Morgan Guaranty, and
the Receivables Collateral Agent desire to enter into this Agreement to
establish their respective relative rights concerning the Inventory Collateral.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
Section 1. Security Interest Priorities; Release.
-------------------------------------
a. Notwithstanding (i) the date, manner or order of perfection of the
security interests in and liens on the Inventory Collateral or the lien notation
or filing of financing statements or continuation statements, and (ii) any
provisions of the Uniform Commercial Code of any applicable jurisdiction or any
other applicable law or judicial decision, each of the Collateral Agent, the
LTCB Lenders, Fuji, Morgan Guaranty and the Receivables Collateral Agent agrees
that the security interests of the Collateral Agent, on behalf of the LTCB
Lenders and Fuji, in the Inventory Collateral shall have priority over the
security interest of the Receivables Collateral Agent in the Inventory
Collateral to the full extent of NSC's obligations outstanding from time to time
to the respective Lenders under the Inventory Facilities (the "NSC Inventory
Obligations"); provided, however, that such security interest in the proceeds of
the Inventory shall be automatically released upon the sale of such Inventory
until the earliest of (i) an event of default specified in clauses (g) or (h) of
Section 6.1 of the Inventory Credit Agreement or clauses (g) or (h) of the Fuji
Credit Agreement, (ii) the second Business Day after notice (a "Release
Termination Notice") has been given by the Collateral Agent to the Receivables
Collateral Agent that an event of default under clause (a) of Section 6.1 of the
Inventory Credit Agreement or clause (a) of Section 6.1 of the Fuji Credit
Agreement has occurred and is then continuing, and that the Collateral Agent has
been instructed under the Inventory Security Agreement to give such notice, or
(iii) the second Business Day after a Release Termination Notice has been given
by the Collateral Agent to the Receivables Collateral Agent that any other event
of default has occurred and is continuing under either the Inventory Credit
Agreement or the Fuji Credit Agreement if the Release Termination Notice sets
forth that, at the date of such notice, the Borrowing Base (as determined under
the Inventory Credit Agreement) is less than the aggregate Secured Obligations
(as defined in the Inventory Security Agreement).
b. The parties hereto acknowledge and agree that the interest of the
Receivables Collateral Agent and the Buyers in the Inventory Collateral is
limited to the extent set forth in the definition of "Related Security"
contained in the Receivables Facility.
Section 2. Representation. By its execution and delivery of this
Agreement, the Receivables Collateral Agent represents and warrants that it has
received the consent of the necessary Buyers and the other parties to the
Receivables Facility to the execution and delivery by the Receivables Collateral
Agent of this Agreement for and on behalf of the Buyers and such other parties
to the Receivables Facility.
Section 3. Miscellaneous.
-------------
-11-
<PAGE>
EXECUTION COPY
(a) Notices. All notices and other communications provided for herein
(including, without limitation, any modifications of, or waivers or consents
under, this Agreement) shall be given or made by telex, telecopy, telegraph,
cable or in writing and telexed, telecopied, telegraphed, cabled, mailed or
delivered to the intended recipient at the "Address for Notices" specified below
its name on the signature pages hereof; or, as to any party, at such other
address as shall be designated by such party in a notice to each other party.
Except as otherwise provided in this Agreement, all such communications shall be
deemed to have been duly given when transmitted by telex or telecopier (with
receipt confirmed either mechanically or in writing by a person at the office of
the recipient), personally delivered or, in the case of a mailed notice, upon
receipt, in each case given or addressed as aforesaid.
(b) Amendments. This Agreement sets forth the entire understanding of
the parties hereto with respect to the subject matter hereof. Neither this
Agreement nor any term hereof may be amended, supplemented, modified, waived or
terminated except in a written instrument signed by all of the parties hereto.
(c) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
(d) Severability. Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
(e) Termination. This Agreement shall terminate upon the termination
of the Inventory Facilities or Receivables Facility, and the satisfaction in
full of all obligations due thereunder.
(f) Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
(g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.,
New York Branch
as Collateral Agent under the Inventory Security
Agreement
By
Title:
Address for Notices:
165 Broadway
New York, New York 10006
-12-
<PAGE>
EXECUTION COPY
Facsimile No.: (212) 608-2529
Telephone No.: (212) 335-4605
Attention: Mitsuo Ueno
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.,
New York Branch
as Administrative Agent under the Inventory
Credit Agreement
By
Title:
Address for Notices:
165 Broadway
New York, New York 10006
Facsimile No.: (212) 608-2529
Telephone No.: (212) 335-4605
Attention: Mitsuo Ueno
-13-
<PAGE>
EXECUTION COPY
THE FUJI BANK AND TRUST COMPANY
By
------------------------------------
Title:
Address for Notices:
--------------------
Two World Trade Center
New York, New York 10048
Facsimile No.: (212) 321-9649
Telephone No.: (212) 898-2411
Attention: T. Umezawa
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Administrative Agent under the Receivables Purchase
Agreement
By
------------------------------------
Title:
Address for Notices:
--------------------
60 Wall Street
New York, New York 10260
Facsimile No.: (212) 648-5336
Telephone No.: (212) 648-6793
Attention: Laurie Reim
-14-
<PAGE>
EXECUTION COPY
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as structuring and collateral agent under the
Receivables Purchase Agreement
By
---------------------------------
Title:
Address for Notices:
--------------------
Morgan Christiana Center
500 Stanton Christiana Road
Newark, Delaware 19713
Facsimile No.: (302) 634-5490
Telephone No.: (302) 634-5488
Attention: Robert Henchey
ACKNOWLEDGED AND AGREED:
NATIONAL STEEL CORPORATION
By
------------------------
Title:
Address for Notices:
4100 Edison Lakes Parkway
Mishawaka, Indiana 46545-3440
Facsimile No.: (219) 273-7478
Telephone No.: (219) 273-7414
-15-
<PAGE>
EXHIBIT 10.B
July 30, 1996
Mr. George D. Lukes
4101 Brentwood Drive
Valparaiso, Indiana 46383
Dear Mr. Lukes:
Re: Supplemental Death and Disability Benefits
This letter supplements your Employment Agreement with National Steel
Corporation (the "Company") dated and effective as of April 30, 1996. In
addition to the benefits and other commitments set forth in the Employment
Agreement, the Company agrees to provide you with supplemental death and
disability benefits on the following conditions. Capitalized terms have the
same meanings as set forth in the Employment Agreement.
1. If you die during the Term of the Employment Agreement, the
Company will provide to your designated beneficiary a death benefit in an
amount which, when aggregated with death benefits under any other plan,
program or arrangement sponsored or maintained by the Company without
charge to you (other than death benefits under any tax qualified retirement
or savings plan or under any nonqualified deferred compensation plan
designed to supplement any such tax qualified retirement or savings plan),
equals three times your annual base salary in effect as of the date of this
letter. Your designated beneficiary for purposes of this death benefit
will be the beneficiary or beneficiaries you have designated for purposes
of the Company's group term life insurance plan.
2. If you incur a Disability during the Term of the Employment Agreement,
the Company will provide you with a payment each month, beginning with the
month in which occurs your Disability Effective Date and continuing until
the earliest of your death, your 65th birthday or the date your Disability
ceases, in an amount equal to 50% of your monthly base salary in effect as
of the date of this letter, reduced by any disability benefits provided
under any long term disability plan, program or arrangement sponsored or
maintained by the Company, including but not limited to the Long Term
Disability Program of National Steel Corporation or any successor plan or
arrangement.
National Steel Corporation
By:
V. John Goodwin
President and Chief Executive Officer
<PAGE>
EXHIBIT 10.C
July 30, 1996
Mr. David L. Peterson
906 Coldspring
Northville, MI 46167
Dear Mr. Peterson:
Re: Supplemental Death and Disability Benefits
This letter supplements your Employment Agreement with National Steel
Corporation (the "Company") dated and effective as of April 30, 1996. In
addition to the benefits and other commitments set forth in the Employment
Agreement, the Company agrees to provide you with supplemental death and
disability benefits on the following conditions. Capitalized terms have the
same meanings as set forth in the Employment Agreement.
1. If you die during the Term of the Employment Agreement, the
Company will provide to your designated beneficiary a death benefit in an
amount which, when aggregated with death benefits under any other plan,
program or arrangement sponsored or maintained by the Company without
charge to you (other than death benefits under any tax qualified retirement
or savings plan or under any nonqualified deferred compensation plan
designed to supplement any such tax qualified retirement or savings plan),
equals three times your annual base salary in effect as of the date of this
letter. Your designated beneficiary for purposes of this death benefit
will be the beneficiary or beneficiaries you have designated for purposes
of the Company's group term life insurance plan.
2. If you incur a Disability during the Term of the Employment Agreement,
the Company will provide you with a payment each month, beginning with the
month in which occurs your Disability Effective Date and continuing until
the earliest of your death, your 65th birthday or the date your Disability
ceases, in an amount equal to 50% of your monthly base salary in effect as
of the date of this letter, reduced by any disability benefits provided
under any long term disability plan, program or arrangement sponsored or
maintained by the Company, including but not limited to the Long Term
Disability Program of National Steel Corporation or any successor plan or
arrangement.
National Steel Corporation
By:
V. John Goodwin
President and Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 128,055
<SECURITIES> 0
<RECEIVABLES> 291,299
<ALLOWANCES> 20,333
<INVENTORY> 438,894
<CURRENT-ASSETS> 837,915
<PP&E> 3,622,322
<DEPRECIATION> 2,180,721
<TOTAL-ASSETS> 2,650,644
<CURRENT-LIABILITIES> 638,069
<BONDS> 466,875
<COMMON> 433
63,905
36,650
<OTHER-SE> 530,357
<TOTAL-LIABILITY-AND-EQUITY> 2,650,644
<SALES> 735,858
<TOTAL-REVENUES> 735,858
<CGS> 637,006
<TOTAL-COSTS> 637,006
<OTHER-EXPENSES> 66,413
<LOSS-PROVISION> 1,781
<INTEREST-EXPENSE> 9,451
<INCOME-PRETAX> 21,207
<INCOME-TAX> (3,082)
<INCOME-CONTINUING> 24,289
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,289
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
</TABLE>
