<PAGE>
1998
Second 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 June 30, 1998
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 July 31, 1998, was 43,288,240 shares, consisting of 22,100,000
shares of Class A Common Stock and 21,188,240 shares of Class B Common Stock.
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Consolidated Statements of Income -
Three Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Income -
Six Months Ended June 30, 1998 and 1997 4
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 6
Consolidated Statements of Changes in
Stockholders' Equity and Redeemable
Preferred Stock-Series B -
Six Months Ended June 30, 1998 and
Year Ended December 31, 1997 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Legal Proceedings 16
Submission of Matters to a Vote of Security Holders 16
Other Information 16
Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
1998 1997
---- ----
<S> <C> <C>
Net Sales $747,846 $824,869
Cost of products sold 655,420 700,051
Selling, general and administrative expense 33,501 36,937
Depreciation 32,444 36,984
Equity income of affiliates (318) (672)
-------- --------
Income from Operations 26,799 51,569
Other (Income) Expense
Interest and other financial income (4,055) (4,712)
Interest and other financial expense 6,974 9,390
Net gain on disposal of non-core assets (2,685) (25,385)
-------- --------
234 (20,707)
-------- --------
Income Before Income Taxes and Extraordinary Item 26,565 72,276
Income tax provision 106 7,351
-------- --------
Income Before Extraordinary Item 26,459 64,925
Extraordinary item (net of applicable tax) -- (5,397)
-------- --------
Net Income 26,459 59,528
Less preferred stock dividends -- 2,737
-------- --------
Net Income Applicable to Common Stock $ 26,459 $ 56,791
======== ========
Basic Earnings Per Share:
Income before extraordinary item $ 0.61 $ 1.43
Extraordinary item -- (0.12)
-------- --------
Net Income Applicable to Common Stock $ 0.61 $ 1.31
======== ========
Weighted average shares outstanding (in thousands) 43,288 43,288
Diluted Earnings Per Share:
Income before extraordinary item $ 0.61 $ 1.42
Extraordinary item -- (0.12)
-------- --------
Net Income Applicable to Common Stock $ 0.61 $ 1.30
======== ========
Weighted average shares outstanding (in thousands) 43,354 43,620
Dividends paid per Common Share $ 0.07 $ --
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998 1997
---------- ----------
<S> <C> <C>
Net Sales $1,456,275 $1,582,487
Cost of products sold 1,292,847 1,353,255
Selling, general and administrative expense 71,538 69,381
Depreciation 63,524 72,135
Equity income of affiliates (236) (766)
---------- ----------
Income from Operations 28,602 88,482
Other (Income) Expense
Interest and other financial income (9,498) (6,427)
Interest and other financial expense 13,200 19,279
Net gain on disposal of non-core assets (2,685) (25,385)
---------- ----------
1,017 (12,533)
---------- ----------
Income Before Income Taxes and Extraordinary Item 27,589 101,015
Income tax provision (credit) (4,822) 9,425
---------- ----------
Income Before Extraordinary Item 32,407 91,590
Extraordinary item (net of applicable tax) -- (5,397)
---------- ----------
Net Income 32,407 86,193
Less preferred stock dividends -- 5,478
---------- ----------
Net Income Applicable to Common Stock $ 32,407 $ 80,715
========== ==========
Basic Earnings Per Share:
Income before extraordinary item $ 0.75 $ 1.98
Extraordinary item -- (0.12)
---------- ----------
Net Income Applicable to Common Stock $ 0.75 $ 1.86
========== ==========
Weighted average shares outstanding (in thousands) 43,288 43,288
Diluted Earnings Per Share:
Income before extraordinary item $ 0.75 $ 1.97
Extraordinary item -- (0.12)
---------- ----------
Net Income Applicable to Common Stock $ 0.75 $ 1.85
========== ==========
Weighted average shares outstanding (in thousands) 43,340 43,463
Dividends paid per Common Share $ 0.14 $ --
========== ==========
</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>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 229,202 $ 312,642
Investments 10,000 25,000
Receivables - net 270,405 284,306
Inventories - net:
Finished and semi-finished products 304,592 261,648
Raw materials and supplies 129,011 112,554
---------- ----------
433,603 374,202
Deferred tax assets 8,597 8,597
---------- ----------
Total current assets 951,807 1,004,747
Investments in affiliated companies 16,015 15,709
Property, plant and equipment 3,432,056 3,378,131
Less accumulated depreciation 2,204,760 2,149,107
---------- ----------
1,227,296 1,229,024
Other assets 216,942 203,979
---------- ----------
Total Assets $2,412,060 $2,453,459
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 273,202 $ 246,085
Accrued liabilities 272,688 359,749
Current portion of long term debt 29,919 31,533
---------- ----------
Total current liabilities 575,809 637,367
Long-term debt 299,973 310,976
Other long-term liabilities 672,953 668,138
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
Additional paid-in-capital 491,835 491,835
Retained earnings 372,223 345,876
Accumulated other comprehensive income:
Minimum pension liability (1,166) (1,166)
---------- ----------
Total stockholders' equity 863,325 836,978
---------- ----------
Total Liabilities and Stockholders' Equity $2,412,060 $2,453,459
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998 1997
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 32,407 $ 86,193
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 63,524 72,135
Carrying charges related to facility sales and plant closings 2,686 10,356
Net gain on disposal of non-core assets (2,685) (25,385)
Equity income (236) (766)
Dividends from affiliates 1,800 6,808
Postretirement benefits 15,883 7,988
Extraordinary item (net) -- 5,397
Deferred income taxes (10,800) (10,800)
Changes in working capital items:
Investments 15,000 --
Receivables 13,901 (1,816)
Inventories (59,401) 48,257
Accounts payable 27,117 35,607
Accrued liabilities (87,061) 30,619
Other (16,903) 3,068
-------- ---------
Net Cash Provided by (Used in) Operating Activities (4,768) 267,661
-------- ---------
Cash Flows from Investing Activities:
Proceeds from the sale of non-core assets 3,278 312,306
Purchases of plant and equipment (63,273) (71,593)
Other -- (362)
-------- ---------
Net Cash Provided by (Used in) Investing Activities (59,995) 240,351
-------- ---------
Cash Flows from Financing Activities:
Prepayment of related party debt -- (154,328)
Costs associated with prepayment of related party debt -- (4,500)
Other debt repayment (19,817) (18,664)
Borrowings 7,200 --
Dividend payments on Common Stock (6,060) --
Dividend payments on Preferred Stock-Series A -- (1,998)
Dividend payments on Preferred Stock-Series B -- (210)
Payment of released Weirton benefit liabilities -- (6,684)
Payment of unreleased Weirton liabilities and their release in lieu of
cash dividends on Preferred Stock-Series B -- (3,785)
-------- ---------
Net Cash Used in Financing Activities (18,677) (190,169)
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (83,440) 317,843
Cash and cash equivalents at beginning of the period 312,642 109,041
-------- ---------
Cash and cash equivalents at end of the period $229,202 $ 426,884
======== =========
</TABLE>
See notes to consolidated financial statements.12
6
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK - SERIES B
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Common Preferred Additional Other
Stock - Stock - Stock - Paid-In Comprehensive
Class A Class B Series A Capital Income
------- ------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 $221 $212 $36,650 $465,359 $ (505)
Comprehensive Income:
Net income
Other comprehensive income:
Minimum pension liability (661)
Comprehensive income
Amortization of excess of book value
over redemption value of Redeemable
Preferred Stock - Series B
Cumulative dividends on Preferred
Stock - Series A and B
Redemption of Preferred Stock - Series A (36,650)
Redemption of Redeemable Preferred
Stock - Series B and related settlement
with Avatex 26,476
---- ---- ------- -------- -------
BALANCE AT DECEMBER 31, 1997 221 212 --- 491,835 (1,166)
Net income and comprehensive income
Dividends paid
---- ---- ------- -------- -------
BALANCE AT JUNE 30, 1998 $221 $212 $ ---- $491,835 $(1,166)
==== ==== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Total Redeemable
Retained Stockholders' Preferred Stock -
Earnings Equity Series B
-------- ------------ -----------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 $142,625 $644,562 $ 63,530
Comprehensive Income:
Net income 213,503 213,503
Other comprehensive income:
Minimum pension liability (661)
Comprehensive income --------
212,842
--------
Amortization of excess of book value
over redemption value of Redeemable
Preferred Stock - Series B 1,354 1,354 (1,354)
Cumulative dividends on Preferred
Stock - Series A and B (11,606) (11,606)
Redemption of Preferred Stock - Series A (36,650)
Redemption of Redeemable Preferred
Stock - Series B and related settlement
with Avatex 26,476 (62,176)
-------- -------- -------
BALANCE AT DECEMBER 31, 1997 345,876 836,978 ----
Net income and comprehensive income 32,407 32,407
Dividends paid (6,060) (6,060)
-------- -------- -------
BALANCE AT JUNE 30, 1998 $372,223 $863,325 $ ----
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (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. The financial results
presented for the three and six month periods ended June 30, 1998 are not
necessarily indicative of results of operations for the full year. The Annual
Report of the Company on Form 10-K, as amended, for the year ended December 31,
1997 (the "1997 Form 10-K") contains additional information and should be read
in conjunction with this report.
The Company has engaged Ernst & Young LLP to conduct a review of the
consolidated financial statements presented herein, in accordance with standards
established by the American Institute of Certified Public Accountants. Their
review report is included as an exhibit to this Form 10-Q.
Certain items in prior years have been reclassified to conform with the current
year presentation.
NOTE 2 - AUDIT COMMITTEE INQUIRY AND SECURITIES AND EXCHANGE COMMISSION INQUIRY
In the third quarter of 1997, the Audit Committee of the Company's Board of
Directors was informed of allegations about managed earnings, including excess
reserves and the accretion of such reserves to income over multiple periods, as
well as allegations about deficiencies in the system of internal controls. The
Audit Committee engaged legal counsel who, with the assistance of an accounting
firm, inquired into these matters. The Company, based upon the inquiry, restated
its financial statements for certain prior periods. On January 29, 1998, the
Company filed a Form 10-K/A for 1996 and Forms 10-Q/A for the first, second and
third quarters of 1997 reflecting the restatements. See these Forms for
information about the restatement, the report of legal counsel to the Audit
Committee and the recommendations, approved by the Board of Directors, to
improve the Company's system of internal controls contained in the
aforementioned report.
The Securities and Exchange Commission (the "Commission") has authorized an
investigation pursuant to a formal order of investigation relating to the
matters described above. The Company has been cooperating with the staff of the
Commission and intends to continue to do so.
Additionally, a complaint has been filed seeking shareholder class action status
and alleging violations of the federal securities laws generally relating to the
matters described above. The Company believes that the lawsuit is without merit
and intends to defend against it vigorously.
NOTE 3 - 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.
8
<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. Costs for
environmental assessments or remediation activities, or penalties or fines that
may be imposed for noncompliance with environmental laws and regulations, are
accrued when it is probable that liability for such costs will be incurred and
the amount of such costs can be reasonably estimated.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state superfund statutes generally
impose joint and several liability on present and former owners and operators,
transporters and generators for remediation of contaminated properties,
regardless of fault. The Company and certain of its subsidiaries are involved
as potentially responsible parties ("PRPs") at a number of off-site CERCLA or
state superfund site proceedings. At some of these sites, the Company does not
have sufficient information regarding the nature and extent of the
contamination, the wastes contributed by other PRPs, or the required remediation
activity to estimate its potential liability.
The Company has also recorded the reclamation and other costs to restore its
coal 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 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 approximately $18.3 million and
$18.7 million at June 30, 1998 and December 31, 1997, 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 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 4 - EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income available to
common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is computed by dividing net income
available to common stockholders by the weighted average number of common stock
shares outstanding during the period plus dilutive stock options which are
determined through the application of the treasury stock method.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Comparative operating results for the six and three month periods ending June
30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Six Months ended June 30, Three Months ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in millions) (Dollars in millions)
<S> <C> <C> <C> <C>
Net Sales $1,456.3 $1,582.5 $747.8 $824.9
Gross margin 99.9 157.1 60.0 87.8
Gross margin as a percentage
of net sales 6.9% 9.9% 8.0% 10.6%
Tons shipped (in thousands) 2,869 3,125 1,450 1,605
</TABLE>
Net Sales
Net sales for the first six months of 1998 totaled $1,456.3 million, an 8.0%
decrease compared to the net sales of $1,582.5 million during the corresponding
1997 period. Tons shipped in the first six months of 1998 and 1997 were
2,869,000 and 3,125,000, respectively. The decrease in tons shipped is the
primary reason for the $126.2 million decrease in sales for the first half of
the year and was mainly caused by the Great Lakes Division "A" blast furnace
reline during much of the first quarter as well as part of the second quarter
and adverse weather conditions affecting shipments to the construction and
container markets in the second quarter.
Net sales for the second quarter of 1998 totaled $747.8 million, a 9.3% decrease
compared to net sales of $824.9 million during the corresponding 1997 period.
Tons shipped in the second quarter of 1998 and 1997 were 1,450,000 and
1,605,000, respectively. The 155,000 ton decrease in shipments in the second
quarter of 1998 was primarily a result of adverse weather conditions affecting
shipments to the construction and container markets as well as the blast furnace
reline. This resulted in a decrease in sales of approximately $79.0 million
when compared to the second quarter of 1997. Also contributing to the sales
decrease was a $9 per ton decrease in average selling price, which reduced sales
by approximately $14.0 million. Product, market and customer mix improvements
amounting to approximately $16.0 million, or $11 per ton, partially offset the
decreases described above.
Gross Margin (net sales less cost of products sold and depreciation)
Gross margin in the first six months of 1998 was $99.9 million, or 6.9% of net
sales, compared to gross margin of $157.1 million, or 9.9% of net sales, during
the corresponding 1997 period. The decrease in gross margin in the first half
of 1998 is primarily the result of lower net sales due to a lower number of tons
shipped and lower sales realizations amounting to approximately $61.0 million.
The Great Lakes Division "A" blast furnace outage along with higher maintenance
costs and other manufacturing costs lowered margins by approximately $39.0
million when compared to the corresponding 1997 period. The other costs
referred to above include the effects of a late winter storm that affected the
Company's Midwest Division and an unplanned outage at the National Steel Pellet
Company, both of which occurred in the first quarter of 1998. This was
partially offset by improved operating unit yield performances, lower
depreciation expense as a result of the second quarter 1997 sale of the Great
Lakes Division No. 5 coke battery and lower costs due to the results of the
fourth quarter 1997 settlement with Avatex Corporation. These offsetting items
amounted to approximately a $32.0 million increase in gross margin. In
addition, outside steel purchases were lower by $10.0 million compared to the
corresponding 1997 period.
10
<PAGE>
Gross Margin - (Continued)
Gross margin in the second quarter of 1998 was $60.0 million, or 8.0% of net
sales, compared to gross margin of $87.8 million, or 10.6% of net sales, during
the corresponding 1997 period. The decrease in gross margin in the second
quarter of 1998 when compared to the second quarter of 1997 is primarily the
result of lower net sales due to lower shipments and lower selling prices, as
described in the net sales discussion above, impacting gross margins by
approximately $36.0 million. In addition, the Company's Great Lakes Division
"A" blast furnace outage which extended into the second quarter of 1998, as well
as higher maintenance, raw material and energy costs, reduced gross margins by
an additional $20.0 million.
The above mentioned second quarter events were partially offset by improved
product and customer mix, improved operating unit yield performances, lower
depreciation expense as a result of the second quarter 1997 sale of the Great
Lakes Division No. 5 coke battery and lower costs due to the results of the 1997
settlement with Avatex Corporation. These offsetting items amounted to
approximately $23.0 million. In addition, outside steel purchases were lower by
$6.0 million compared to the same period in 1997.
Selling, General and Administrative Expense
Selling, general and administrative expense in the first half of 1998 was $71.5
million, or 4.9% of net sales, compared to $69.4 million, or 4.4% of net sales,
in the corresponding 1997 period. This $2.1 million increase is primarily a
result of higher expenses associated with stock appreciation rights and higher
professional and legal service costs, partially offset by lower information
systems costs.
Selling, general and administrative expense in the second quarter of 1998 was
$33.5 million, or 4.5% of net sales, compared to $36.9 million, or 4.5% of net
sales, in the corresponding 1997 period. This $3.4 million decrease is
primarily a result of lower expenses associated with stock appreciation rights
and lower information systems costs partially offset by higher legal expenses
when compared to the second quarter of 1997.
Net Financing Costs
In the six months ended June 30, 1998, net financing costs represented a $9.2
million decrease compared to the same 1997 period. Lower interest expense of
$6.1 million resulted from lower average debt levels while income on short-term
investments increased by $3.1 million due to higher average cash balances when
compared to the same 1997 period.
Net financing costs of $2.9 million for the three months ended June 30, 1998
represented a $1.8 million decrease compared to the same 1997 period. This
improvement is primarily attributable to a $2.4 million decrease in interest
expense which resulted from lower average debt levels and was partially offset
by lower income on short term investments of $0.6 million.
Net Gain On Disposal of Non-Core Assets and Other Related Activities
During the second quarter of 1998, the Company sold certain non-core land and
property at its Midwest Division and recorded a net gain of $2.7 million related
to the sale.
During the second quarter of 1997, the Company disposed of certain non-core
business assets that resulted in a net gain of $25.3 million. The assets
included the sale of the Company's 21.73% minority equity interest in the Iron
Ore Company of Canada which netted a gain of $37.0 million, the sale of its
Great Lakes Division No. 5 coke oven battery and related coal inventories which
netted a loss of $11.1 million and the sale of a coal mine property which netted
a gain of $3.0 million. Additionally, the Company 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.
11
<PAGE>
Income Taxes
The Company recorded current taxes payable of $6.0 million and $20.2 million in
the six month period ending June 30, 1998 and 1997, respectively. The Company
also recorded a deferred tax benefit of $10.8 million in the first six months of
both 1998 and 1997.
The Company recorded current taxes payable of $5.5 million and $12.8 million in
the second quarter of 1998 and 1997, respectively. The Company also recorded a
deferred tax benefit of $5.4 million in the second quarters of both 1998 and
1997.
The Company's effective tax rate is lower than the combined federal and state
statutory rates primarily because of continued utilization of available federal
and state net operating loss carryforwards and the recognition of additional
deferred tax benefits.
Other
The Company anticipates the resumption of regular shipments to General Motors
following the settlement of its strike. The Company is closely monitoring
increased imports from Asia and Eastern Europe as well as the continued impact
of adverse weather on the food container market.
12
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity needs arise primarily from capital investments, working
capital requirements, pension funding requirements, principal and interest
payments on its indebtedness and common stock dividend payments. 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
a $100.0 million and a $50.0 million credit facility, both of which are secured
by the Company's inventories (the "Inventory Facilities") and expire in May 2000
and July 1999, 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 June 30, 1998, 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 $86.2 million. During the first six months of 1998, the
maximum availability under the Receivables Purchase Agreement, after reduction
of letters of credit outstanding, varied from $76.3 million to $113.8 million
and was $113.8 million as of June 30, 1998.
At June 30, 1998, total debt as a percentage of total capitalization decreased
to 27.7% as compared to 29.0% at December 31, 1997. Cash and cash equivalents
totaled $229.2 million at June 30, 1998 compared to $312.6 million at December
31, 1997.
The Company continues to evaluate possible uses of any excess cash reserves,
including additional pension funding, additional debt retirement, a common stock
repurchase program and additional strategic investment opportunities.
Cash Flows from Operating Activities
For the six months ended June 30, 1998, cash used in operating activities
amounted to $4.8 million, which is primarily attributable to the impact of
working capital items. These items include decreases in accrued liabilities
mainly due to the timing of pension and bonus payments and increases in
inventories partially offset by noncash charges for depreciation and
postretirement benefits along with net income of $32.4 million.
Cash Flows from Investing Activities
Capital investments for the six months ended June 30, 1998 amounted to $63.3
million. The 1998 spending is mainly attributable to the construction of the new
coating line at the Midwest Division and the reline of the Great Lakes Division
"A" blast furnace.
Cash Flows from Financing Activities
During the first six months of 1998, the Company utilized $18.7 million of cash
for financing activities which included scheduled payments of debt, as well as
dividend payments on the Company's common stock.
13
<PAGE>
OTHER
Year 2000 Issues
The "Year 2000" computer software problem is caused by programming
practices that were originally intended to conserve computer memory, thus
allowing only two "digits" in the date field with the assumption being that the
first two date digits would be "19." If not corrected, this error could cause
computers to fail or give erroneous results as the computer processes data
before or during the year 2000. The Company has been active in trying to correct
this problem under the oversight of an executive steering committee.
Thus far during 1998, the Company has spent approximately $1.3 million on
Year 2000 projects. Additionally, the Company spent $1.8 million in 1997. The
Company expects to spend up to an additional $8.7 million in 1998 and 1999 to
complete its Year 2000 projects, and anticipates the final completion of these
projects to occur in the second quarter of 1999. These projects include business
software and other information technology items, as well as non-information
technology items, such as process control software and embedded software in
hardware devices. The Company is also reviewing with its major vendors and
suppliers their efforts in becoming Year 2000 compliant. The Company continues
to assess its various systems, electronic commerce and business associates, and
intends to make whatever modifications are necessary to prevent business
interruption.
The cost and time for completion of the Year 2000 projects are management's
best estimates and were derived utilizing certain industry standards, as well as
actual analysis of software programs. Assumptions have been made relative to the
timing of future events and availability of resources. Various factors could
cause expected cost and completion times to differ from those anticipated.
However, the Company does not currently believe that Year 2000 issues will have
a material adverse impact on the Company's financial condition or results of
operations.
Great Lakes Division Property Tax Appeal
In 1991, the Company filed a lawsuit in the Michigan Tax Tribunal against
the cities of River Rouge and Ecorse seeking a reduction in the assessed value
of the real estate and personal property at the Company's Great Lakes Division.
The lawsuit was amended year by year to cover the tax years 1991 through 1994.
Following a decision by the Michigan Tax Tribunal in August 1996 reducing the
assessed values, all parties appealed this decision. In January 1998, the Court
of Appeals issued a written opinion in which it affirmed in part, vacated in
part and remanded the case to the Michigan Tax Tribunal. A second case involving
tax years 1995 through 1997 is also pending in the Michigan Tax Tribunal. A
proposed settlement of both cases is currently under review by, and is subject
to the approval of, the Michigan Tax Tribunal. Any settlement is not expected to
have a material impact on the financial position of the Company.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
The Statement changes the way public companies are required to report operating
segment information in annual financial statements and in interim financial
reports to stockholders. Operating segments are determined consistent with the
way management organizes and evaluates financial information internally for
making decisions and assessing performance. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Statement is effective for financial statements for fiscal years
beginning after December 15, 1997, and the Company will adopt the Statement, as
required, effective December 31, 1998. Although the Company continues to
evaluate the impact that this Statement will have on its financial reporting,
the Company does not expect significant additional reporting requirements.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, which is effective for fiscal
years beginning after December 15, 1997, and will be adopted by the Company, as
required, effective December 31, 1998. The statement will standardize
disclosures about pensions and other postretirement benefits in an effort to
make the information more understandable. Implementation of this disclosure
standard will not affect the financial position or results of operations of the
Company.
14
<PAGE>
Dividend on Common Stock
On July 20, 1998, the Company's board of directors declared a regular
quarterly common stock dividend of $0.07 per share, payable on September 9,
1998, to shareholders of record on August 21, 1998.
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 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.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Steinmetz v. National Steel Corporation, et. al.
A complaint was filed on May 13, 1998 in the United States District Court for
the Northern District of Indiana by named plaintiff Hyman Steinmetz seeking
shareholder class action status and alleging violations of the federal
securities laws against the Company; its majority shareholder, NKK U.S.A.
Corporation; Osamu Sawaragi, the Company's chairman and chief executive officer;
and a former officer of the Company. The complaint generally relates to the
Company's restatement of its financial statements for certain prior periods
which was announced in October 1997. The complaint seeks unspecified money
damages, interest, costs and fees. The Company believes that the lawsuit is
without merit and intends to defend against it vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
Set forth below are the results of the vote on the matters which were submitted
to a vote of the Company's stockholders at the annual meeting of stockholders
which was held on April 27, 1998:
(1) Election of Directors. The following individuals were elected to serve
as directors of the Company, for a term expiring on the date of the 1999 annual
meeting of stockholders, by the following vote:
<TABLE>
<CAPTION>
Name Number of Votes For Number of Votes Withheld
---- ------------------- ------------------------
<S> <C> <C>
Charles A. Bowsher 63,555,842 113,675
Edsel D. Dunford 63,555,992 113,525
Frank J. Lucchino 63,566,192 103,325
Bruce K. MacLaury 63,555,842 113,675
Keiichiro Sakata 63,556,342 113,175
Osamu Sawaragi 63,556,342 113,175
Mineo Shimura 63,555,342 114,175
Hisashi Tanaka 63,556,342 113,175
Yutaka Tanaka 63,556,342 113,175
</TABLE>
(2) Ratification of Independent Auditors. The appointment of Ernst &
Young LLP as the Company's independent auditors for the fiscal year ending
December 31, 1998 was ratified by the following vote:
<TABLE>
<CAPTION>
Number of Votes For Number of Votes For Number of Abstentions
------------------- ------------------- ---------------------
<S> <C> <C>
63,654,569 5,436 9,512
</TABLE>
Item 5. Other Information
In accordance with the recent amendments to Rule 14a-4 and 14a-5 under the
Securities Exchange Act of 1934, written notice of shareholder proposals
submitted outside the processes of Rule 14a-8 for consideration at the 1999
Annual Meeting of Shareholders must be received by the Company on or before
February 10, 1999, in order to be considered timely for purposes of Rule 14a-4.
The persons designated in the Company's proxy statement shall be granted
discretionary authority to vote with respect to any shareholder proposal of
which the Company does not receive timely notice.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) See attached Exhibit Index
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 28, 1998 reporting on
Item 5, Other Events.
The Company filed a report on Form 8-K dated April 29, 1998 reporting on
Item 5, Other Events.
The Company filed a report on Form 8-K dated June 3, 1998 reporting on Item
5, Other Events.
The Company filed a report on Form 8-K dated June 18, 1998 reporting on
Item 5, Other Events.
17
<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/ Glenn H. Gage
----------------------------------------------
Glenn H. Gage
Senior Vice President and Chief Financial Officer
Date: August 13, 1998
18
<PAGE>
NATIONAL STEEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
For the quarterly period ended June 30, 1998
15.1 Independent Accountants' Review Report
15.2 Acknowledgment Letter on Unaudited Interim Financial Information
27-A Financial Data Schedule
19
<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 June 30, 1998, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 1998 and 1997, of cash flows for the six-month period ended June
30, 1998 and 1997, and of changes in stockholders' equity and redeemable
preferred stock--Series B for the six-month period ended June 30, 1998. 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, 1997, and the related consolidated statements of
income, cash flows, and stockholders' equity and redeemable preferred stock--
Series B for the year then ended (not presented here), and in our report dated
January 28, 1998 (except for Notes C, I, and K, as to which the date is February
26, 1998), we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Ernst & Young LLP
Fort Wayne, Indiana
August 13, 1998
<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 August 13, 1998 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 June 30, 1998.
Ernst & Young LLP
Fort Wayne, Indiana
August 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 229,202
<SECURITIES> 10,000
<RECEIVABLES> 288,901
<ALLOWANCES> 18,496
<INVENTORY> 433,606
<CURRENT-ASSETS> 951,807
<PP&E> 3,432,056
<DEPRECIATION> 2,204,760
<TOTAL-ASSETS> 2,412,060
<CURRENT-LIABILITIES> 575,809
<BONDS> 299,973
0
0
<COMMON> 433
<OTHER-SE> 862,892
<TOTAL-LIABILITY-AND-EQUITY> 2,412,060
<SALES> 1,456,275
<TOTAL-REVENUES> 1,456,275
<CGS> 1,292,847
<TOTAL-COSTS> 1,292,847
<OTHER-EXPENSES> 132,141
<LOSS-PROVISION> 852
<INTEREST-EXPENSE> 3,702
<INCOME-PRETAX> 27,589
<INCOME-TAX> (4,822)
<INCOME-CONTINUING> 32,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,407
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
