<PAGE>
1997
Third Quarter
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-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, 1997
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, 1997, was 43,288,240 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 September 30, 1997 and 1996 3
Statements of Consolidated Income -
Nine Months Ended September 30, 1997 and 1996 4
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 5
Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 1997 and 1996 6
Statements of Changes in Consolidated
Stockholders' Equity and Redeemable
Preferred Stock-Series B -
Nine Months Ended September 30, 1997 and
Year Ended December 31, 1996 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. OTHER INFORMATION
Legal Proceedings 20
Other Information 21
Exhibits and Reports on Form 8-K 21
</TABLE>
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
1997 (Restated)
--------- ----------
<S> <C> <C>
Net Sales $788,663 $735,858
Cost of products sold 654,140 644,960
Selling, general and administrative expense 37,379 40,099
Depreciation and amortization 31,201 36,501
Equity income of affiliates (301) (3,518)
-------- --------
Income from Operations 66,244 17,816
Other (Income) Expense:
Interest and other financial income (6,245) (1,645)
Interest and other financial expense 7,436 11,096
Net gain on disposal of non-core assets (28,804) (3,732)
-------- --------
(27,613) 5,719
-------- --------
Income Before Income Taxes and Cumulative Effect
of Accounting Change 93,857 12,097
Income tax provision 16,531 3,374
-------- --------
Income Before Cumulative Effect of Accounting Change 77,326 8,723
Cumulative effect of accounting change -- 11,100
-------- --------
Net Income 77,326 19,823
Less preferred stock dividends (2,740) (2,740)
-------- --------
Net income applicable to Common Stock $ 74,586 $ 17,083
======== ========
Per Share Data Applicable to Common Stock:
Income Before Cumulative Effect of Accounting Change $1.72 $ 0.13
Cumulative effect of accounting change -- 0.26
-------- --------
Net Income Applicable to Common Stock $1.72 $ 0.39
======== ========
Weighted average shares outstanding (in thousands) 43,288 43,288
</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
1997 (Restated)
---------- ----------
<S> <C> <C>
Net Sales $2,371,150 $2,187,482
Cost of products sold 2,008,245 1,954,507
Selling, general and administrative expense 106,160 104,285
Depreciation and amortization 103,336 109,111
Equity income of affiliates (1,067) (7,181)
---------- ----------
Income from Operations 154,476 26,760
Other (Income) Expense:
Interest and other financial income (12,672) (5,338)
Interest and other financial expense 26,715 32,909
Net gain on disposal of non-core assets (48,979) (3,732)
---------- ----------
(34,936) 23,839
---------- ----------
Income Before Income Taxes, Extraordinary Item and
Cumulative Effect of Accounting Change 189,412 2,921
Income tax provision (credit) 27,208 (7,723)
---------- ----------
Income Before Extraordinary Item and Cumulative Effect
of Accounting Change 162,204 10,644
Extraordinary Item (5,397) --
Cumulative effect of accounting change -- 11,100
---------- ----------
Net Income 156,807 21,744
Less preferred stock dividends (8,218) (8,222)
---------- ----------
Net income applicable to Common Stock $ 148,589 $ 13,522
========== ==========
Per Share Data Applicable to Common Stock:
Income Before Extraordinary Item and Cumulative Effect
of Accounting Change $3.55 $0.05
Extraordinary Item (0.12) --
Cumulative effect of accounting change -- 0.26
---------- ----------
Net Income Applicable to Common Stock $3.43 $0.31
========== ==========
Weighted average shares outstanding (in thousands) 43,288 43,288
</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>
December 31,
September 30, 1996
Assets 1997 (Restated)
-------------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 416,906 $ 109,041
Receivables - net 285,509 281,889
Inventories - net
Finished and semi-finished products 275,837 299,333
Raw materials and supplies 117,543 141,234
---------- ----------
393,380 440,567
---------- ----------
Total current assets 1,095,795 831,497
Investments in affiliated companies 15,818 65,399
Property, plant and equipment 3,334,335 3,664,597
Less allowances for depreciation and amortization 2,125,817 2,209,079
---------- ----------
1,208,518 1,455,518
Other assets 219,519 201,247
---------- ----------
Total Assets $2,539,650 $2,553,661
========== ==========
Liabilities, Redeemable Preferred Stock and
Stockholders' Equity
Current liabilities
Accounts payable $ 254,375 $ 234,892
Accrued liabilities 336,525 279,677
Current portion of long term obligations 34,332 37,731
---------- ----------
Total current liabilities 625,232 552,300
Long term obligations 311,679 323,550
Long term indebtedness to related parties -- 146,744
Other long term liabilities 750,088 825,880
Redeemable Preferred Stock - Series B 62,405 63,530
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 21,188,240 212 212
Preferred Stock - Series A 36,650 36,650
Additional paid-in-capital 465,359 465,359
Retained earnings 287,804 139,215
---------- ----------
Total stockholders' equity 790,246 641,657
---------- ----------
Total Liabilities, Redeemable Preferred Stock
and Stockholders' Equity $2,539,650 $2,553,661
========== ==========
</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,
1996
Cash Flows from Operating Activities: 1997 (Restated)
--------- ----------
<S> <C> <C>
Net Income $ 156,807 $ 21,744
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 103,336 109,111
Carrying charges related to facility sales
and plant closings 15,534 16,788
Net gain on disposal of non-core assets (48,979) (3,732)
Extraordinary item (net) 5,397 --
Equity income of affiliates (1,067) (7,181)
Dividends from affiliates 6,808 4,375
Postretirement benefits 15,981 20,193
Deferred income taxes (16,200) (16,200)
Cash provided (used) by working capital items:
Receivables (1,621) 45,696
Inventories 37,187 (26,666)
Accounts payable 19,232 19,661
Accrued liabilities 54,464 (10,668)
Other (49,930) (42,436)
--------- --------
Net Cash Provided by Operating Activities 296,949 130,685
--------- --------
Cash Flows from Investing Activities:
Net proceeds from sale of non-core assets 317,612 3,732
Purchases of plant and equipment (101,006) (80,752)
Other (362) --
--------- --------
Net Cash Provided (Used) by Investing Activities 216,244 (77,020)
--------- --------
Cash Flows from Financing Activities:
Prepayment of related party debt (154,328) --
Costs associated with prepayment of related party debt (4,500) --
Other repayments (30,309) (32,944)
Borrowings 2,729 --
Payment of released Weirton benefit liabilities (9,878) (11,220)
Dividend payments on Preferred Stock-Series A (3,014) (3,020)
Dividend payments on Redeemable Preferred Stock-Series B (210) --
Payment of unreleased Weirton liabilities and
their release in lieu of cash dividends on
Redeemable Preferred Stock-Series B (5,818) (6,042)
--------- --------
Net Cash Used by Financing Activities (205,328) (53,226)
--------- --------
Net Increase in Cash and Cash Equivalents 307,865 439
Cash and Cash Equivalents, Beginning of the Period 109,041 127,616
--------- --------
Cash and Cash Equivalents, End of the Period $ 416,906 $128,055
========= ========
</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>
Total
Common Common Preferred Additional Retained Stockholders' Redeemable
Stock - Stock - Stock - Paid-In Earnings Equity Preferred Stock -
Class A Class B Series A Capital (Restated) (Restated) Series B
------- ------- --------- ---------- ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995,
as previously reported $221 $212 $36,650 $465,359 $ 54,115 $556,557 $65,030
Adjustments made to correct prior period
accounting errors -- -- -- -- 43,778 43,778 --
---- ---- ------- -------- --------- -------- -------
BALANCE AT JANUARY 1, 1996, as restated 221 212 36,650 465,359 97,893 600,335 65,030
Net income, as restated 50,516 50,516
Amortization of excess of book value
over redemption value of Redeemable
Preferred Stock - Series B 1,500 1,500 (1,500)
Cumulative dividends on Preferred
Stock - Series A and B (12,459) (12,459)
Minimum pension liability 1,765 1,765
---- ---- ------- -------- --------- -------- -------
BALANCE AT DECEMBER 31, 1996 221 212 36,650 465,359 139,215 641,657 63,530
Net income 156,807 156,807
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 (9,343) (9,343)
---- ---- ------- -------- --------- -------- -------
BALANCE AT SEPTEMBER 30, 1997 $221 $212 $36,650 $465,359 $287,804 $790,246 $62,405
==== ==== ======= ======== ========= ======== =======
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 (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 Note 2 and Note 3. The financial results presented for the three
and nine month periods ended September 30, 1997 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, 1996 (the "1996 Form 10-K") contains
additional information and should be read in conjunction with this report. The
[B1996 Form 10-K will be amended to reflect changes made in accordance with the
restatement discussed in Note 2.
Certain items in prior years have been reclassified to conform with the current
year presentation.
NOTE 2 - AUDIT COMMITTEE INQUIRY AND RESTATEMENT OF PRIOR PERIODS
The Audit Committee of the Company's Board of Directors in the third quarter of
1997 was informed of allegations about managed earnings, including excess
reserves and the accretion of such reserves to income over multiple periods, as
well as allegations about deficiencies in the system of internal controls. The
Audit Committee engaged legal counsel who, with the assistance of an accounting
firm, is inquiring into these matters. The Company, based upon the inquiry to
date, has determined the need to restate its financial statements for certain
prior periods. In a press release dated October 31, 1997, the Company announced
the estimated effect of such restatements. Subsequent to that press release,
additional adjustments were identified, the aggregate effect of which was a
reduction in retained earnings at September 30, 1997 of $7.3 million. In
summary, the Company has made prior period adjustments to correct accounting
errors that increase previously reported retained earnings at December 31, 1996
by $49.7 million and at January 1, 1992 by $31.0 million.
The Audit Committee inquiry is continuing with respect to the allegations,
including those with respect to accounting irregularities and internal control
issues. Should additional matters be identified, or additional adjustments
arise, as a result of the ongoing Audit Committee inquiry, such matters will be
addressed at that time and to the extent appropriate these matters would be
reflected in the financial statements for the year ended December 31, 1997. (See
also Part II -- Other Information, Item 5)
The following tables reflect the effect of the restatement on reported net
income (loss) and retained earnings (accumulated deficit) (in millions of
dollars):
<TABLE>
<CAPTION>
1997 Restatement:
- ----------------
Income Before Extraordinary Item 1st Quarter 2nd Quarter Six Months
- -------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
As Reported $25.9 $62.5 $88.4
As Restated $25.3 $59.6 $84.9
Net Income
- ----------
As Reported $25.9 $57.1 $83.0
As Restated $25.3 $54.2 $79.5
Earnings Per Share
- ------------------
As Reported $0.53 $1.26* $1.79*
As Restated $0.52 $1.19* $1.71*
</TABLE>
8
<PAGE>
* Second Quarter 1997 reported earnings per share before extraordinary items was
$1.38; the restated amount was $1.31. Six month 1997 reported earnings per
share before extraordinary items was $1.91; the restated amount was $1.83.
- -----------------------------
The 1997 results were restated to reflect the reversal of the accretion of the
excess reserves to income. The results for the first quarter and second quarter
were also restated to reflect the revised timing of an insurance receipt. This
receipt was previously reported in the second quarter and now has been recorded
in the first quarter. The second quarter results were also adjusted to reflect
a gain from the sale of a coal mine property and to reflect the writeoff of
fixed assets that were disposed of as part of a capital project.
<TABLE>
<CAPTION>
1996 Restatement:
- ----------------
Income (Loss) Before
Accounting Change 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
- ----------------- ----------- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C>
As Reported $(15.6) $10.4 $24.3 $25.5 $44.6
As Restated $(16.0) $17.9 $ 8.7 $28.8 $39.4
Net Income (Loss)
- -----------------
As Reported $(15.6) $10.4 $24.3 $25.5 $44.6
As Restated $(16.0) $17.9 $19.8 $28.8 $50.5
Earnings (Loss) Per Share
- -------------------------
As Reported $(0.42) $0.18 $0.50 $0.52 $0.78
As Restated $(0.43) $0.35 $0.39* $0.60 $0.91*
</TABLE>
- -----------------------------
* Third Quarter 1996 restated earnings per share before cumulative effect of
accounting change was $0.14; full year was $0.66.
- -----------------------------
Net income as restated for the second quarter of 1996 increased primarily as the
result of a delay in the recognition of reduced pension and postretirement
expenses in the second quarter. These reduced pension and postretirement
expenses were previously recognized and reported in the third quarter. In
addition, the third quarter of 1996 was restated to reflect the change made in
the measurement date for the Company's pension and postretirement obligations
from December 31st to September 30th. This change has been accounted for as a
cumulative effect of an accounting change, increasing third quarter 1996 income
by $11.1 million. In the fourth quarter of 1996, the restatement reflects
adjustments relating to the Company's postemployment benefit obligations and the
allowances for bad debts and obsolete inventory. Additionally, as a result of
the previously mentioned restatements, the timing of the utilization of the
Company's alternative minimum tax net operating loss carryforwards has changed.
As a result of this change in timing, the income tax provision in the third
quarter of 1996 increased by $6.5 million.
9
<PAGE>
<TABLE>
<CAPTION>
Effect on Other Years:
- ----------------------
Income (Loss) Before
Extraordinary Item and
Accounting Change 1995 1994 1993 1992
- ----------------- ------ ------ -------- -------
<S> <C> <C> <C> <C>
As Reported $105.4 $168.5 $(242.4) $(74.7)
As Restated $102.2 $185.2 $(243.6) $(74.0)
Net Income (Loss)
- -----------------
As Reported $110.8 $168.5 $(258.9) $(48.4)
As Restated $107.5 $185.2 $(260.1) $(47.8)
Earnings (Loss) Per Share
- -------------------------
As Reported $ 2.34* $ 4.33 $ (8.04)* $(2.58)*
As Restated $ 2.26* $ 4.79 $ (8.07)* $(2.56)*
</TABLE>
- -------------------
* Reported earnings per share for 1995 before extraordinary items was $2.21; the
restated amount was $2.13. Reported earnings (loss) per share for 1993 before
cumulative effect of accounting change was $(7.55); the restated amount was
$(7.58). Reported earnings (loss) per share for 1992 before extraordinary items
and cumulative effect of accounting change was $(3.61); the restated amount was
$(3.59).
- -------------------
The major impact of the above restatements occurred in 1994 and 1995. Net
income for 1994 increased by $16.7 million, primarily as a result of adjustments
to actuarially value certain of the Company's postemployment benefit liabilities
and a redetermination of state taxes. The 1995 restatement of $3.2 million
related primarily to the deferral of grant income which had previously been
recognized as income when received.
Effect of Restatements on Retained Earnings (Accumulated Deficit)
- -----------------------------------------------------------------
As a result of the restatement, retained earnings (accumulated deficit) as of
January 1, 1992 was increased by $30.9 million. A comparison of retained
earnings (accumulated deficit) as originally reported and as restated for each
of the last five years is as follows:
<TABLE>
<CAPTION>
As Reported As Restated Cumulative Change
----------- ----------- -----------------
<S> <C> <C> <C>
January 1, 1992 $ 136.7 $ 167.7 $31.0
December 31, 1992 $ 70.8 $ 102.4 $31.6
December 31, 1993 $(207.4) $(177.0) $30.4
December 31, 1994 $ (44.0) $ 3.1 $47.1
December 31, 1995 $ 54.1 $ 97.9 $43.8
December 31, 1996 $ 89.5 $ 139.2 $49.7
</TABLE>
10
<PAGE>
NOTE 3- NET GAIN ON DISPOSAL OF NON-CORE ASSETS AND OTHER NONRECURRING ITEMS
In 1997 and 1996, the Company disposed or made provisions for disposing of
certain non-core assets. The effects of these transactions are presented as a
separate component in the Statements of Consolidated Income entitled net gain on
disposal of non core assets, except as otherwise indicated. A discussion of
these items follows.
On April 1, 1997, the Company completed the sale of its 21.73% minority equity
interest in the Iron Ore Company of Canada ("IOC") to North Limited, an
Australian mining and metals company ("North"). The Company received net
proceeds of $75.3 million from North in exchange for its interest in IOC and
recorded a $37 million gain. The Company will continue to purchase iron ore at
fair market value from IOC pursuant to the terms of long-term supply agreements.
On June 12, 1997, the Company completed the sale of a coke oven battery
servicing the Great Lakes Division and other related assets, including coal
inventories, to a subsidiary of DTE Energy Company. The Company received net
proceeds of $234.0 million in connection with the sale and recorded a $16.3
million loss. The Company utilized a portion of the proceeds to prepay the
remaining $154.3 million of the related party coke battery debt, which resulted
in a net of tax extraordinary loss of $5.4 million. As part of the arrangement,
the Company has agreed to operate the battery under an Operation and Maintenance
Agreement executed with DTE, and will purchase at fair market value the majority
of the coke produced from the battery under a requirements contract.
In the second quarter, the Company also recorded a $3.6 million charge related
to the decision to cease operations of American Steel Corporation, a wholly-
owned subsidiary which pickled and slit steel. The Company also recorded a gain
of $3.0 million related to the sale of a coal mine property.
In the third quarter of 1997, the Company sold two additional coal properties.
The Company received proceeds for the property sales of $7.7 million, $5.3
million after taxes and expenses, and in conjunction with one of the property
sales, the purchaser agreed to assume the potential environmental liabilities of
approximately $8 million related to the property. Additionally, during the third
quarter of 1997, the Company received information concerning other liabilities
related to its shutdown coal properties which resulted in a reduction of the
related accrued liabilities. As such, the Company recorded an aggregate net gain
related to its shutdown coal properties of $28.8 million during the third
quarter of 1997.
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.
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 the PBGC. Since the Company had estimated and accrued approximately
$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
products sold during the third quarter of 1996.
NOTE 4 - 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. 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.
11
<PAGE>
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 other similar state superfund statutes
generally impose joint and several liability on present and former owners and
operators, transporters and generators for remediation of contaminated
properties, regardless of fault. The Company and certain of its subsidiaries are
involved as potentially responsible parties ("PRPs") 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
Avatex Corporation ("Avatex"), formerly FoxMeyer Health Corporation, is required
to indemnify the Company ("Avatex Environmental Liabilities"). (See Note 5) 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.
The Company has also recorded the reclamation and other costs to restore its
inactive coal property 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 these matters progress or the Company becomes aware of additional matters,
the Company may be required to accrue charges in excess of those previously
accrued. 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
recorded an aggregate environmental liability of $10.0 million and $21.6 million
at September 30, 1997 and December 31, 1996, respectively. Approximately $8
million of the decrease in the environmental liability from December 31, 1996 to
September 30, 1997 was a result of the sale of certain coal properties which
took place in the third quarter of 1997. The balance of the decrease was a
result of updated information regarding other environmental proceedings.
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 these 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 and liquidity for the applicable
period.
NOTE 5 - CONTINGENCIES RELATED TO WEIRTON LIABILITIES
In 1984, the Company sold its Weirton Steel Division ("Weirton") to the
employees of the Weirton Steel Corporation. As a part of this sale, the Company
retained certain pension and other postretirement benefit liabilities of Weirton
(the "Retained Liabilities") as of the sale date.
In a series of transactions occurring after 1984, Avatex sold its interest in
the Company to NKK Corporation ("NKK") and the public. As part of those
transactions, Avatex agreed to indemnify the Company for the Retained
Liabilities and the Avatex Environmental Liabilities. In 1990, under the terms
of
12
<PAGE>
the Stock Purchase and Recapitalization Agreement between the Company and Avatex
(the "Recapitalization Agreement"), the Company received a payment of $146.6
million and released Avatex from indemnification liability for $146.6 million of
the Retained Liabilities. In 1993, the Company released Avatex from an
additional $67.8 million of pension liabilities in connection with an early
redemption of 10,000 shares of the Redeemable Preferred Stock-Series B owned by
Avatex. In 1994, Avatex prepaid $10.0 million to the Company with respect to a
portion of the Avatex Environmental Liabilities. Avatex remains liable to
indemnify the Company for Avatex Environmental Liabilities in excess of this
amount.
Upon the occurrence of certain events detailed in the Recapitalization
Agreement, prior to or coincident with the Series B Preferred Stock final
redemption, the released Retained Liabilities would be recalculated by an
independent actuary. Any adjustment (the "true-up") to bring the balance of the
released Retained Liabilities to such recalculated amount will be dealt with in
the Redeemable Preferred Stock-Series B redemption proceeds or otherwise
settled.
The Company and Avatex have been negotiating a settlement of the Retained
Liabilities and the Avatex Environmental Liabilities and, in connection with the
negotiations, the Company is considering the final redemption of the Redeemable
Preferred Stock-Series B. At this time no agreement has been reached as to the
amount of any such settlement and any settlement would be subject to approval by
the Board of Directors of the respective companies. If a settlement is reached,
adjustments are not expected to have a material effect on net income or
stockholders' equity of the Company.
Avatex has experienced operating difficulties and has recorded substantial asset
writedowns. In its filing with the Securities and Exchange Commission, dated
June 30, 1997, it reported a deficit in its consolidated stockholders' equity of
$158.7 million. Most of Avatex's operating subsidiaries have filed for
bankruptcy protection. Although Avatex, the parent company, has not been
included in the bankruptcy filing, the filing has caused the Company to have
increased concerns about Avatex's ability to honor its remaining indemnification
obligations to the Company. Should Avatex, the parent company, seek bankruptcy
protection, the Company's future cash outlays and on-going charges to operations
could be significantly increased.
Avatex 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.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pursuant to the continuing Audit Committee inquiry, the Company has determined
that certain prior period financial statements must be restated. The financial
statements for the first two quarters of 1997 and the quarters and year ended
1996 have been restated to correct accounting errors and the restated amounts
are reflected in the discussions in Item 2. (See also Note 2 to the Consolidated
Financial Statements and Item 5 in Part II - Other Information.)
Results of Operations
Comparison of the Three-Month Periods Ended September 30, 1997 and 1996
Net Sales
Net sales for the third quarter of 1997 totaled $788.7 million, an improvement
of $ 52.8 million, or 7.2%, compared to the corresponding period in 1996.
Approximately 81% of this increase was attributable to an 85,000 ton increase in
shipments, while approximately 13% can be attributed to improvements in product
and customer mix. Additionally, improved selling prices accounted for
approximately 6% of the increase in net sales.
Steel shipments for the third quarter of 1997 were 1,519,000 tons, a 5.9%
increase compared to the 1,434,000 tons shipped during the corresponding 1996
period.
Cost of Products Sold
The Company's cost of products sold of $654.1 million during the third quarter
of 1997 represented 82.9% of sales compared to 87.6% of sales for the same
period in 1996. The improved cost relationship resulted in a gross margin
improvement of approximately $43.6 million. The improvement in gross margin was
largely the result of higher production and shipment levels, as well as improved
pricing, improved customer and product mix, and the impact of the items
discussed below.
Certain other events impacted costs in each period. In 1996, an unplanned blast
furnace outage at the Company's Granite City Division increased costs by
approximately $15 million. Additionally, costs were favorably impacted in 1996
by approximately $8 million in connection with a settlement with the PBGC
relating to the Donner-Hanna Joint Venture Pension Plans. As a result of the
restatement, cost of goods sold increased by $7.5 million. This increase was
primarily due to a pension and postretirement benefit adjustment. Costs were
favorably impacted in 1997 by an insurance settlement of approximately $4
million relating to the Granite City Division third quarter 1996 unplanned blast
furnace outage, as well as, by the reversal of approximately $4 million relating
to the intra-period accrual of costs associated with the expected blast furnace
reline at the Great Lakes Division. This planned outage has been postponed until
the first quarter of 1998.
During the third quarter of 1997, the Company produced 1,658,000 net tons of
steel, a 7.5% increase compared to the 1,542,000 net tons produced during the
corresponding 1996 period.
Selling, General and Administrative Expense
Selling, general and administrative expense of $37.4 million during the third
quarter of 1997 represents a decrease of $2.7 million compared to the
corresponding 1996 period. This decrease is primarily a result of lower benefit
related expenses, partially offset by higher information systems contract
charges.
14
<PAGE>
Depreciation Expense
Depreciation expense was lower in the third quarter of 1997 as compared to the
corresponding 1996 period primarily as a result of the sale of the Company's
coke oven battery at the Great Lakes Division. (See further discussion in Part
1, Item 1, Note 3)
Financing Costs
Net financing costs of $1.2 million during the third quarter of 1997 represents
an $8.3 million decrease compared to the corresponding 1996 period. This
improvement is partially attributable to a $4.6 million increase in interest
income on short term investments. Additionally, lower interest expense resulted
from lower average debt levels, due primarily to the payoff of the related party
debt, and slightly higher capitalized interest.
Net Gain on Disposal of Non-Core Assets
During the third quarter of 1997, the Company sold two additional coal
properties. The Company received proceeds for the property sales of $7.7
million. In conjunction with one of the property sales, the purchaser agreed to
assume the potential environmental liabilities of approximately $8.0 million
related to the property. Additionally, during the third quarter of 1997, the
Company received information concerning other liabilities related to its
shutdown coal properties which resulted in a reduction of the related accrued
liabilities. As such, the Company recorded an aggregate net gain related to its
shutdown coal properties of $28.8 million during the third quarter of 1997.
During the third quarter of 1996, the Company sold certain land not used in the
operations of the Company. The sale generated a net gain of $3.7 million.
Income Taxes
During the third quarter of 1997, the Company recorded current tax provisions of
$21.9 million, offset by a deferred tax benefit of $5.4 million. This deferred
tax benefit is a result of the periodic recognition of tax benefits relating to
expectations of additional future income. The Company's effective tax rate is
lower than the federal statutory rate primarily due to the continued utilization
of available net operating loss carryforwards and the recognition of additional
deferred tax benefits.
15
<PAGE>
Comparison of the Nine-Month Periods Ended September 30, 1997 and 1996
Net Sales
Net sales for the first nine months of 1997 totaled $2.37 billion, an increase
of $183.7 million, or 8.4%, compared to $2.19 billion during the same 1996
period. Approximately 54% of the increase was the result of the 204,000 ton
increase in shipments for the period and approximately 38% was attributable to
improvements in product and customer mix. The remaining 8% of the increase was
the result of higher selling prices.
Steel shipments for the first nine months of 1997 were a record 4,645,000 tons,
a 4.6% increase compared to the 4,441,000 tons shipped during the corresponding
1996 period.
Cost of Products Sold
The Company's cost of products sold of $2.01 billion during the first nine
months of 1997 represented 84.7% of sales compared to 89.3% of sales for the
same period in 1996. This improved cost relationship resulted in a gross margin
improvement of approximately $129.9 million. This improvement was largely the
result of increases in selling prices, production and sales levels, as well as
stable operations.
Certain other events impacted costs in each period. In 1996, a kiln outage at
National Steel Pellet Company increased costs by approximately $10 million. An
unplanned 1996 blast furnace outage at the Company's Granite City Division
increased costs by approximately another $15 million. Costs were favorably
impacted in 1996 by approximately $7.5 million in connection with a settlement
with the PBGC relating to the Donner-Hanna Joint Venture Pension Plans. In 1997,
insurance recoveries aggregating approximately $6.6 million reduced cost of
products sold.
Raw steel production totaled 4,926,000 tons for the first nine months of 1997, a
.6% increase from the 4,895,000 tons produced during the nine month period ended
September 30, 1996.
Selling, General and Administrative Expense
Selling, general and administrative expense of $106.2 million during the first
nine months of 1997 represents a $1.9 million increase compared to the
corresponding 1996 period. This increase is primarily the result of increased
costs associated with expenses due to the conversion of stock options to stock
appreciation rights, legal expenses and information systems contract charges,
offset by lower benefit related expenses and lower professional service
expenses.
Depreciation Expense
Depreciation expense was lower in the first nine months of 1997 as compared to
the corresponding 1996 period primarily as a result of the sale of the Company's
coke oven battery at the Great Lakes Division. (See further discussion in Part
1, Item 1, Note 3)
Financing Costs
Net financing costs of $14.0 million for the nine months ended September 30,
1997 represents a $13.5 million decrease compared to the same 1996 period. This
improvement is partially attributable to a $7.3 million increase in interest
income on short term investments. Additionally, lower interest expense resulted
from lower average debt levels and higher capitalized interest.
16
<PAGE>
Net Gain on Disposal of Non-Core Assets
In 1997 and 1996, the Company disposed of or made provisions for disposing of
certain non-core assets. The effects of these transactions are presented as a
separate component in the income statement entitled net gain on disposal of non
core assets. A discussion of these items follows.
On April 1, 1997, the Company completed the sale of its 21.73% minority equity
interest in the Iron Ore Company of Canada ("IOC") to North Limited, an
Australian mining and metals company ("North"). The Company received net
proceeds of $75.3 million from North in exchange for its interest in IOC and
recorded a $37 million gain. The Company will continue to purchase iron ore at
fair market value from IOC pursuant to the terms of long-term supply agreements.
On June 12, 1997, the Company completed the sale of a coke oven battery
servicing the Great Lakes Division and other related assets, including coal
inventories, to a subsidiary of DTE Energy Company. The Company received net
proceeds of $234.0 million in connection with the sale and recorded a $16.3
million loss. The Company utilized a portion of the proceeds to prepay the
remaining $154.3 million of the related party coke battery debt, which resulted
in a net of tax extraordinary loss of $5.4 million. As part of the arrangement,
the Company has agreed to operate the battery under an operation and maintenance
agreement executed with DTE, and will purchase at fair market value the majority
of the coke produced from the battery under a requirements contract.
In the second quarter, the Company also recorded a $3.6 million charge related
to the decision to cease operations of American Steel Corporation, a wholly-
owned subsidiary which pickled and slit steel. The Company also recorded a gain
of $3.0 million related to the sale of a coal mine property.
In the third quarter of 1997, the Company sold two additional coal properties.
The Company received proceeds for the property sales of $7.7 million, $5.3
million after taxes and expenses, and in conjunction with one of the property
sales, the purchaser agreed to assume the potential environmental liabilities
of approximately $8 million related to the property. Additionally, during the
third quarter of 1997, the Company received information concerning other
liabilities related to its shutdown coal properties which resulted in a
reduction of the related accrued liabilities. As such, the Company recorded an
aggregate net gain related to its shutdown coal properties of $28.8 million
during the third quarter of 1997.
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.
Income Taxes
During the first nine months of 1997, the Company recorded current tax
provisions of $43.4 million, offset by a deferred tax benefit of $16.2 million.
This deferred tax benefit is a result of the periodic recognition of tax
benefits related to expectations of additional future taxable income. The
Company's effective tax rate is lower than the federal statutory rate primarily
due to the continued utilization of available net operating loss carryforwards
and the recognition of additional deferred tax benefits.
17
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity needs arise primarily from capital investments, working
capital requirements, pension funding requirements and principal and interest
payments on its indebtedness. The Company has satisfied these liquidity needs
with funds provided by long term borrowings and cash provided by operations.
Additional sources of liquidity consist of a Receivables Purchase Agreement (the
"Receivables Purchase Agreement") with commitments of up to $200.0 million and
an expiration date of September, 2002 and both a $100.0 million and a $50.0
million credit facility, which are secured by the Company's inventories (the
"Inventory Facilities") and expire in May, 2000 and July, 1998, respectively.
The Company is currently in compliance with all material covenants of, and
obligations under, the Receivables Purchase Agreement, the Inventory Facilities
and other debt instruments. On September 30, 1997, there were no cash borrowings
outstanding under the Receivables Purchase Agreement or the Inventory
Facilities, and outstanding letters of credit under the Receivables Purchase
Agreement totaled $91.0 million. During the first nine months of 1997, the
maximum availability under the Receivables Purchase Agreement, after reduction
for letters of credit outstanding, varied from $76.7 million to $111.1 million
and was $109.0 million as of September 30, 1997.
At September 30, 1997, total debt and redeemable preferred stock as a percentage
of total capitalization decreased to 34.1% as compared to 47.1% at December 31,
1996. Cash and cash equivalents totaled $416.9 million at September 30, 1997
compared to $109.0 million at December 31, 1996.
Cash Flows from Operating Activities
For the nine months ended September 30, 1997, cash provided from operating
activities totaled $296.9 million, which is primarily attributable to $156.8
million in net income earned during the period, adjusted for the impact of
working capital items and non-cash items. Additionally, in the third quarter of
1997, the Company accelerated a contribution of $40.9 million to its pension
plans.
Cash Flows from Investing Activities
Capital investments for the nine months ended September 30, 1997 totaled $101.0
million. The 1997 spending is primarily related to the modernization and
upgrading of the Company's 72 inch continuous galvanizing line and the
construction of a new 48 inch wide coating line, both of which are located at
the Midwest Division. The Company plans to invest approximately $50 million
during the remainder of 1997 for capital expenditures, including the
aforementioned Midwest Division projects and improvements at its other
facilities.
During the second quarter of 1997, the Company sold its coke oven battery at the
Great Lakes Division, as well as its minority investment in the Iron Ore Company
of Canada. The sale of these two non-core assets generated net proceeds of
$309.3 million. The Company utilized $162.5 million of these proceeds to prepay
the related party debt associated with the coke oven battery, including
prepayment costs and accrued interest. Additionally, in the second and third
quarters of 1997, certain coal mining properties were sold generating net
proceeds of $8.3 million. If the negotiations with Avatex result in a
settlement, a cash payment will be required for the settlement of the Retained
Liabilities, and the Avatex Environmental Liabilities and the redemption of
Redeemable Preferred Stock-Series B (see also Part I, Item I, Note 5). The
Company also is continuing to evaluate other possible uses of the remaining
proceeds, including additional pension and VEBA funding, retirement of Preferred
Stock Series A, additional debt retirements and capital investment
opportunities.
Cash Flows from Financing Activities
During the first nine months of 1997, the Company utilized $205.3 million of
cash for financing activities, which includes the $154.3 million prepayment of
related party debt associated with the sale of the coke oven battery servicing
the Great Lakes Division and $4.5 million of costs associated with the
prepayment of the aforementioned debt. Other areas of cash utilization for
financing activities included scheduled payments of debt, as well as dividend
payments on the Company's preferred stock.
18
<PAGE>
OTHER
Year 2000 Issues
The "Year 2000" problem is caused by software which processes years as only two
digits. In earlier periods of computer programming, programmers often developed
and maintained date fields with only two digit years in an effort to conserve
computer resources and memory. The Company is in the process of working to
correct this problem and has formed a committee consisting of executive
management to oversee all Year 2000 activities. The Company retained a third
party consulting group to assess the Company's mainframe environment and
identify the actions which need to be taken to correct any Year 2000 problems.
The Company has spent approximately $1.4 million in 1997 and is expected to
spend an additional $10 million on its mainframe projects to address the Year
2000 issue.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"). "Earnings Per Share," which
is required to be adopted on December 31, 1997. At that time, the Company will
be required to change the current presentation of primary EPS to a presentation
of basic EPS, which excludes any dilutive effect of stock options. The statement
also requires presentation of diluted EPS, which is computed similarly to fully
diluted EPS under existing accounting rules. Stock options are the Company's
only dilutive securities and are not entered into the determination of primary
EPS as their dilutive effect is less than 3%. As such, the presentation of basic
EPS will be consistent with the current primary EPS. The impact of SFAS 128 on
the calculation of fully diluted EPS is not expected to be material.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income,
which is effective for years beginning after December 15, 1997, and will be
adopted by the Company in 1998. The Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Statement will not have any impact
on the results of operations or the financial position of the Company.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Statement changes the way public
companies are required to report segment information in annual financial
statements and in interim financial reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Statement is effective for financial statements for
fiscal years beginning after December 15, 1997, and the Company anticipates
adopting the Statement in 1998. Although the Company is evaluating the impact
that this Statement will have on its financial reporting, the Company does not
expect any additional significant reporting requirements.
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,
mining and processing facilities; (4) losses of customers; (5) changes in the
levels of the Company's operating costs and expenses; (6) collective bargaining
agreement negotiations, strikes, labor stoppages or other labor difficulties;
(7) actions by the Company's competitors, including domestic integrated steel
producers, foreign competitors, mini-mills and manufacturers of steel
substitutes, such as plastics, aluminum, ceramics, glass, wood and concrete; (8)
changes in industry capacity; (9) changes in economic conditions in the United
States and other major international economies, including rates of economic
growth and inflation; (10) worldwide changes in trade, monetary or fiscal
policies, including changes in interest rates; (11) changes in the legal and
regulatory requirements applicable to the Company; and (12) the effects of
extreme weather conditions.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Environmental Matters
Great Lakes Division - Wayne County Air Pollution Control Department. With
respect to the matter involving alleged exceedances of emission and work
practice standards at the Company's Great Lakes Division, previously reported in
the Company's 1996 Form 10-K and first quarter 1997 Form 10-Q, the Wayne County
Air Pollution Control Department has issued a total of 28 notices of violation
concerning alleged noncompliance with applicable permits, regulations and orders
in 1997. No demands for penalties have been made, and the Company has responded
to the notices.
Great Lakes Division - Outfalls Proceedings. With respect to the matter
involving alleged exceedances of discharge limitations at an outfall located at
the Company's Great Lakes Division hot strip mill facility, previously reported
in the Company's 1996 Form 10-K, the Michigan Department of Environmental
Quality ("MDEQ") has presented the Company with a draft Administrative Consent
Order, which included a demand for payment of a $200,000 civil penalty and
MDEQ's costs in the amount of approximately $16,000. Negotiations are
continuing.
Additionally, with respect to the state court complaint filed by MDEQ on
February 5, 1997 alleging approximately 75 violations of two National Pollutant
Discharge Elimination System ("NPDES") water discharge permits, previously
reported in the Company's 1996 Form 10-K, MDEQ presented the Company with a
draft consent decree in which it made a demand for a civil penalty of $45,000 in
settlement of this matter. The Company has responded to MDEQ, agreeing to the
$45,000 penalty, but proposing to expand the scope of the settlement to include
all reported exceedances under the NPDES permits covering the Great Lakes
Division's Zug Island and main plant operations through the effective date of
the consent decree. Discussions are ongoing.
Great Lakes Division - Multimedia Environmental Inspection. With respect to the
matter involving a multimedia inspection of the Company's Great Lakes Division
by the United States Environmental Protection Agency (the "EPA"), previously
reported in the Company's 1996 Form 10-K, on September 24, 1997, the EPA filed a
complaint against the Company alleging violations of various environmental
requirements. An initial civil penalty of approximately $270,000 was proposed.
The Company intends to engage in settlement discussions with the EPA concerning
these matters.
20
<PAGE>
Item 5. Other Information
The Company has appointed Michael D. Gibbons as Acting Chief Financial Officer
while it conducts a search to fill the position on 2 permanent basis. In
addition to his other responsibilities, Mr. Gibbons will provide oversight and
coordinate activities relating to the Company's restatements of its prior period
financial statements and SEC filings and its continuing efforts to cooperate
with the Audit Committee of the Company's Board of Directors in its ongoing
inquiry.
The Staff of the SEC has informed the Company that the Commission has authorized
an investigation pursuant to a formal order of investigation relating to the
matters described in Note 2 of the Consolidated Financial Statements and the
Company intends to cooperate with the Staff in this matter.
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 1997.
21
<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/ John A. Maczuzak
-------------------------------------
John A. Maczuzak
President and Chief Operating Officer
BY /s/ Michael D. Gibbons
-------------------------------------
Michael D. Gibbons
Acting Chief Financial Officer
Date: November 14, 1997
22
<PAGE>
NATIONAL STEEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
For the quarterly period ended September 30, 1997
15.1 Independent Accountants' Review Report
15.2 Acknowledgement Letter on unaudited interim financial information
18 Preferability Letter on change in accounting principles
27-A Financial Data Schedule
<PAGE>
Exhibit 15.1
Independent Accountants' Review Report
Board of Directors
National Steel Corporation
We have reviewed the accompanying consolidated balance sheet of National Steel
Corporation and subsidiaries (the Company) as of September 30, 1997, and the
related statements of consolidated income for the three-month and nine-month
periods ended September 30, 1997 and 1996, of consolidated cash flows for the
nine-month periods ended September 30, 1997 and 1996, and of changes in
consolidated stockholders' equity and redeemable preferred stock--Series B for
the nine-month period ended September 30, 1997. These financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of National Steel Corporation and
subsidiaries as of December 31, 1996, and the related statements of consolidated
income, cash flows, and changes in stockholders' equity and redeemable preferred
stock--Series B for the year then ended (not presented herein), and in our
report dated January 23, 1997 (except for Note M, as to which the date is
January 31, 1997), we expressed an unqualified opinion on those consolidated
financial statements. As discussed in Note 2 to the accompanying interim
consolidated financial statements, the Company plans to restate its 1996
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 1996, and in the
accompanying statement of changes in consolidated stockholders' equity and
redeemable preferred stock--Series B for the year then ended, is fairly stated,
in all material respects, in relation to the consolidated financial statements
from which they have been derived, after giving effect to the restatement
adjustments discussed in Note 2.
Ernst & Young LLP
Fort Wayne, Indiana
November 14, 1997
<PAGE>
Exhibit 15.2
Board of Directors
National Steel Corporation
We are aware of the incorporation by reference in the following Registration
Statements:
. Form S-8, No. 33-51991, pertaining to the 1994 and 1995 Stock Grants to Union
Employees,
. Form S-8, No. 33-51081, pertaining to the 1993 National Steel Corporation
Long Term Incentive Plan,
. Form S-8, No. 33-51083, pertaining to the 1993 National Steel Corporation
Non-Employee Director's Stock Option Plan, and
. Form S-8, No. 33-61087, pertaining to the National Steel Retirement Savings
Plan and National Steel Represented Employee Retirement Savings Plan,
of our report dated November 14, 1997 relating to the unaudited interim
consolidated financial statements of National Steel Corporation and subsidiaries
that are included in its Form 10-Q for the quarter ended September 30, 1997.
Ernst & Young LLP
Fort Wayne, Indiana
November 14, 1997
<PAGE>
Exhibit 18
Board of Directors
National Steel Corporation
Mishawaka, Indiana
As discussed in Note 2 of the Notes to Consolidated Financial Statements of
National Steel Corporation and subsidiaries, included in its Form 10-Q for the
quarter ended September 30, 1997, the Company changed the measurement date used
in accounting for pensions and for postretirement benefits other than pensions
from December 31 to September 30. This change, which was made in the third
quarter of 1996, was not accounted for as a change in accounting method at that
time. The financial statements for the three-month and nine-month periods ended
September 30, 1996, included in the September 30, 1997 Form 10-Q, have been
restated to reflect this change as a change in accounting method.
Management has advised us that it believes the change is to a preferable method
in the Company's circumstances because the earlier measurement date results in
more accurate year-end disclosures pertaining to the plans and more accurate
estimates of expense for interim financial reporting and because the change
enhances comparability with other major United States integrated steel
companies.
There are no authoritative criteria for determining a "preferable" measurement
date based on the particular circumstances. However, we conclude that the
change in the method of accounting for pensions and for postretirement benefits
other than pensions by the use of an earlier measurement date (that is,
September 30) is a change to an acceptable alternative method which, based on
management's business judgment to make this change for the reasons cited above,
is preferable in the Company's circumstances. We have not conducted an audit in
accordance with generally accepted auditing standards of any financial
statements of the Company as of any date or for any period subsequent to
December 31, 1996, and therefore we do not express any opinion on any financial
statements the Company subsequent to that date.
Ernst & Young LLP
Fort Wayne, Indiana
November 14, 1997
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<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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62,405
36,650
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