<PAGE>
1997
First Quarter
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 - Q/A
(Amendment No. 1 to Form 10-Q originally filed May 14, 1997)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
219-273-7000
(Registrant's telephone number, including area code)
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
----- -----
As of April 30, 1997, there were 22,100,000 shares of Registrant's Class A
Common Stock, $.01 par value, and 21,188,240 shares of Registrant's Class B
Common Stock, $.01 par value, outstanding.
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
THIS AMENDMENT REFLECTS RESTATED FINANCIAL INFORMATION. (SEE NOTE 2 TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.)
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Statements of Consolidated Income -
Three Months Ended March 31, 1997 and 1996 3
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 4
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1997 and 1996 5
Statements of Changes in Consolidated
Stockholders' Equity and Redeemable
Preferred Stock-Series B -
Three Months Ended March 31, 1997 and
Year Ended December 31, 1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. OTHER INFORMATION
Legal Proceedings 18
Exhibits and Reports on Form 8-K 19
</TABLE>
2
<PAGE>
PART I. - FINANCIAL INFORMATION
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1996
(Restated) (Restated)
----------- ----------
<S> <C> <C>
Net Sales $757,618 $682,143
Cost of products sold 653,204 629,002
Selling, general and administrative 32,444 30,113
Depreciation, depletion and amortization 35,151 36,288
Equity income of affiliates (94) (2,287)
--------- ---------
Income (Loss) from Operations 36,913 (10,973)
Financing Costs:
Interest and other financial income (1,715) (1,896)
Interest and other financial expense 9,889 10,667
--------- ---------
8,174 8,771
--------- ---------
Income (Loss) before Income Taxes 28,739 (19,744)
Income tax provision (credit) 2,074 (5,548)
--------- ---------
Net Income (Loss) 26,665 (14,196)
Less preferred stock dividends 2,741 2,742
--------- ---------
Net income (loss) applicable to Common Stock $ 23,924 $(16,938)
========= =========
Per Share Data Applicable to Common Stock:
Net Income (Loss) Applicable to Common Stock $ .55 $ (.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
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Restated) (Restated)
---------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 135,003 $ 109,041
Receivables - net 292,767 281,889
Inventories - net:
Finished and semi-finished products 304,562 299,333
Raw materials and supplies 111,600 141,234
---------- ----------
416,162 440,567
---------- ----------
Total current assets 843,932 831,497
Investments in affiliated companies 59,648 65,399
Property, plant and equipment 3,709,305 3,664,597
Less allowances for depreciation, depletion
and amortization 2,245,443 2,209,079
---------- ----------
1,463,862 1,455,518
Other assets 207,657 203,878
---------- ----------
Total Assets $2,575,099 $2,556,292
========== ==========
Liabilities, Redeemable Preferred Stock and
Stockholders' Equity
Current liabilities
Accounts payable $ 222,830 $ 234,892
Accrued liabilities 289,639 278,147
Current portion of long term obligations 38,538 37,731
---------- ----------
Total current liabilities 551,007 550,770
Long term obligations 314,714 323,550
Long term indebtedness to related parties 139,160 146,744
Other long term liabilities 838,577 827,136
Redeemable Preferred Stock - Series B 63,155 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 166,044 142,120
---------- ----------
Total stockholders' equity 668,486 644,562
---------- ----------
Total Liabilities, Redeemable Preferred Stock
and Stockholders' Equity $2,575,099 $2,556,292
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1996
(Restated) (Restated)
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (loss) $ 26,665 $(14,196)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 35,151 36,288
Carrying charges related to facility sales
and plant closings 5,179 5,596
Equity income of affiliates (94) (2,287)
Dividends from affiliates 6,808 4,375
Postretirement benefits 10,039 14,332
Deferred income taxes (5,400) (5,400)
Cash provided (used) by working capital items:
Receivables (10,878) 45,604
Inventories 24,405 (46)
Accounts Payable (12,062) (14,489)
Accrued Liabilities 11,419 (6,139)
Other (833) (2,620)
-------- --------
Net Cash Provided by Operating Activities 90,399 61,018
Cash Flows from Investing Activities
Purchases of plant and equipment (net) (42,975) (31,236)
-------- --------
Net Cash Used in Investing Activities (42,975) (31,236)
Cash Flows from Financing Activities
Debt Repayment (15,613) (14,981)
Payment of released Weirton benefit liabilities (2,806) (3,763)
Dividend payments on Preferred Stock-Series A (1,014) (1,015)
Dividend payments on Preferred Stock-Series B (210) -----
Payment of unreleased Weirton liabilities and
their release in lieu of cash dividends on
Preferred Stock-Series B (1,819) (2,031)
-------- --------
Net Cash Used in Financing Activities (21,462) (21,790)
-------- --------
Net Increase in Cash and Cash Equivalents 25,962 7,992
Cash and cash equivalents at the beginning of the period 109,041 127,616
-------- --------
Cash and cash equivalents at the end of the period $135,003 $135,608
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK - SERIES B
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Common Common Preferred Additional Total Redeemable
Stock - Stock - Stock - Paid-In Retained Stockholders' Preferred Stock -
Class A Class B Series A Capital Earnings Equity 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
Adjustment to correct prior period
Accounting errors 43,778 43,778
---- ---- ------- -------- -------- -------- -------
BALANCE AT JANUARY 1, 1996 (Restated) $221 $212 $36,650 $465,359 $ 97,893 $600,335 $65,030
Net income (Restated) 53,924 53,924
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 (Restated) 1,262 1,262
---- ---- ------- -------- -------- -------- -------
BALANCE AT DECEMBER 31, 1996 (Restated) 221 212 36,650 465,359 142,120 644,562 63,530
Net income (Restated) 26,665 26,665
Amortization of excess of book value
over redemption value of Redeemable
Preferred Stock - Series B 375 375 (375)
Cumulative dividends on Preferred
Stock - Series A and B (3,116) (3,116)
---- ---- ------- -------- -------- -------- -------
BALANCE AT MARCH 31, 1997 (Restated) $221 $212 $36,650 $465,359 $166,044 $668,486 $63,155
==== ==== ======= ======== ======== ======== =======
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. The financial results presented for the three month period
ended March 31, 1997 is 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 1996 Form 10-K has been
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, has inquired into these matters. The Company, based upon the inquiry, has
determined the need to restate its financial statements for certain prior
periods. In the Form 10-Q filed on November 14, 1997, the Company included the
effects of the restatement that increased previously reported retained earnings
at December 31, 1996 by $49.7 million and January 1, 1992 by $31.0 million. That
Form 10-Q also indicated that the Audit Committee inquiry was continuing.
Subsequent to that filing, as a result of further review initiated due to that
inquiry, and as part of its 1997 year-end closing process, the Company has
become aware of certain additional accounting errors which require restatement.
These additional adjustments affect the reported results for 1997 and 1996, and
result in reporting net earnings increases of $3.4 million in 1996 and $1.4
million, $5.3 million and $1.2 million in the first, second and third quarters
of 1997, respectively.
On December 15, 1997, the Board of Directors approved the termination of the
Company's Vice President-Finance in connection with the Audit Committee inquiry.
During January 1998, legal counsel to the Audit Committee issued its report to
the Audit Committee and the Audit Committee approved the report and concluded
its inquiry. On January 21, 1998, the Board of Directors accepted the report and
approved the recommendations, except for the recommendation to revise the Audit
Committee Charter which will be considered at the next Board of Directors
meeting. The report found certain misapplications of generally accepted
accounting principles and accounting errors, including excess reserves, which
have been corrected by the restatements as discussed below. The report found
that the accretion of excess reserves to income during the first, second and
third quarters of 1997 as described below may have had the effect of management
of earnings as the result of errors in judgment and misapplications of generally
accepted accounting principles. However, these errors do not appear to have
involved the intentional misstatement of the Company's accounts. The report also
found weaknesses in internal controls and recommended various improvements in
the Company's system of internal controls, a comprehensive review of such
controls, a restructuring of its finance and accounting department, and
expansion of the role of the internal audit function, as well as corrective
measures to be taken related to the specific causes of the accounting errors.
The Company has begun to implement these recommendations.
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.
7
<PAGE>
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:
- -----------------
1st Quarter 2nd Quarter 3rd Quarter Nine Months
<S> <C> <C> <C> <C>
Income Before Income Taxes and
- ------------------------------
Extraordinary Item:
- -------------------
As Originally Reported $ 28.5 $ 71.9 $ 93.9 $194.3
As Restated $ 28.7 $ 72.3 $ 93.7 $194.7
Income Before Extraordinary Item:
- ---------------------------------
As Originally Reported $ 25.9 $ 62.5 $ 77.3 $165.7
As Restated $ 26.7 $ 64.9 $ 78.6 $170.2
Net Income:
- -----------
As Originally Reported $ 25.9 $ 57.1 $ 77.3 $160.3
As Restated $ 26.7 $ 59.5 $ 78.6 $164.8
Earnings Per Share:
- -------------------
As Originally Reported $ .53 $ 1.26* $ 1.72 $ 3.52
As Restated $ .55 $ 1.31* $ 1.76 $ 3.62
</TABLE>
* Second quarter 1997 reported earnings per share before extraordinary items was
$1.38; the restated amount was $1.43. Six month reported earnings per share
before extraordinary items was $1.91; the restated amount was $1.98. Nine month
reported earnings per share before extraordinary items was $3.55; the restated
amount was $3.74.
- -----------------------------
The first quarter of 1997 was increased on a net pre-tax income basis by $.3
million. The reversal of the accretion of excess reserves reduced pre-tax income
by approximately $3.0 million (net of $.3 million of tax related accretion).
Revised timing of the recognition of an insurance recovery from the second to
the first quarter of 1997 increased pre-tax income by approximately $3.0
million. Other adjustments increased pre-tax income by approximately $.2
million. The tax provision decreased by $.6 million primarily as a result of a
revision in the state tax provision to appropriately reflect the benefit of net
operating loss carryforwards.
The second quarter of 1997 was increased on a net pre-tax income basis by $.3
million. The reversal of the accretion of excess reserves decreased pre-tax
income by approximately $3.6 million (net of $.3 million of tax related
accretion). The aforementioned revised timing of the recognition of an
insurance recovery decreased pre-tax income by approximately $3.0 million. The
revised timing of a write-off of the net book value of fixed assets to the
period in which they were disposed of or demolished in connection with a 1997
construction project reduced pre-tax income by approximately $1.5 million. The
revised timing on the recognition of a gain on the 1997 sale of a coal mine
property increased pre-tax income by $3.0 million. Pretax income was also
restated to reflect the reversal of a $5.2 million accrual of property taxes
relating to the No. 5 coke oven battery, which were assumed by the buyer as part
of the sale of that coke oven battery in the second quarter. Other adjustments
increased pre-tax income by approximately $.3 million. The adjustment to the
income tax provision of approximately $2.0 million related to a correction of
the effective tax rate used in calculating the previously reported income tax
provision.
Pre-tax income in the third quarter of 1997 was reduced by $.2 million. This
reduction was due to the reversal of the impact of the accretion of an excess
reserve to income which reduced the restated income by $.6 million, offset by
other adjustments of $.4 million. The tax provision was reduced in the
restatement by approximately $1.4 million to appropriately reflect the benefit
of net operating loss carryforwards for state tax purposes.
8
<PAGE>
<TABLE>
<CAPTION>
1996 Restatement:
- -----------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
----------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Income (Loss) Before Income Taxes
and Accounting Change
- ---------------------------------
As Originally Reported $ (21.0) $ 5.0 $ 21.2 $ 23.6 $ 28.8
As Restated $ (19.8) $ 12.4 $ 12.1 $ 27.3 $ 32.0
Income (Loss) Before
Accounting Change:
- --------------------
As Originally Reported $ (15.6) $ 10.4 $ 24.3 $ 25.5 $ 44.6
As Restated $ (14.2) $ 17.9 $ 11.5 $ 27.6 $ 42.8
Net Income (Loss):
- ------------------
As Originally Reported $ (15.6) $ 10.4 $ 24.3 $ 25.5 $ 44.6
As Restated $ (14.2) $ 17.9 $ 22.6 $ 27.6 $ 53.9
Earnings (Loss) Per Share:
- --------------------------
As Originally Reported $ ( .42) $ .18 $ .50* $ .52 $ .78
As Restated $ ( .39) $ .35 $ .46* $ .57 $ .99
</TABLE>
- -------------------
* Third quarter 1996 reported earnings per share before cumulative effect of
accounting change was $ .50, the restated amount was $ .20; full year as
reported was $ .78 and the restated amount was $.74.
- -------------------
Pre-tax loss in the first quarter decreased by $1.2 million as a result of the
restatement adjustments. The decrease was the result of an approximately $1.8
million adjustment to correct the accruals for certain employee incentive costs,
offset by other adjustments which decreased pre-tax income by approximately $.6
million.
Pre-tax income in the second quarter increased by $7.4 million as a
result of the restatement adjustments. The correction of a delay in recognition
of reduced pension and postretirement benefits increased pre-tax income by $8.7
million. These reduced pension and postretirement expenses, which became known
to the Company when the January 1 actuarial valuation information was being
completed late in the second quarter, were previously recognized and reported in
the third quarter. These expenses were reduced from the original estimates as a
result of revised interest rate assumptions and as a result of the use of actual
claim information with respect to postretirement benefit obligation
computations. In addition, the second quarter included a reduction of pre-tax
income of approximately $1.0 million to amortize grant income over the useful
lives of the productive assets purchased with the grant rather than to recognize
such grant income as received. Other adjustments decreased pre-tax income by $.3
million.
Pre-tax income in the third quarter decreased by $9.1 million as a result of the
restatement adjustments. The decrease was caused by the aforementioned $8.7
million pension and postretirement benefit adjustment and other adjustments,
which decreased pre-tax income by $.4 million. In addition to the effect of the
above adjustments on net income, the restated net income in the third quarter
was increased by $11.1 million 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 is accounted for as a cumulative effect of an
accounting change. The 3.7 million increase in the tax provision related to the
correction of the effective tax rate used in calculating the previously reported
income tax provisions. As result of these adjustments, net income for the
quarter decreased by $1.7 million.
Fourth quarter pre-tax income increased by an aggregate of $3.7 million as a
result of the restatement adjustments. This resulted from reflecting the
reversal of a reserve for slow moving inventory of $3.5 million previously
recorded in the fourth quarter and reflecting a reduction of the allowance for
bad debts by $2.0 million from amounts previously reported. This increase in
pre-tax income was partially offset by an increase in postemployment benefits
obligations based on corrections to actuarial valuations, which
9
<PAGE>
decreased pre-tax income by approximately $2.4 million. Other adjustments
increased pre-tax income by approximately $.6 million. The tax provision in the
fourth quarter was increased in the restated financial statements by
approximately $1.6 million as a result of a correction of the effective tax rate
used in calculating the previously reported income tax provision.
<TABLE>
<CAPTION>
Effect on Other Years:
- ----------------------
1995 1994 1993 1992
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Income (Loss) Before Income
Taxes, Extraordinary Item And
Accounting Change
- ------------------------------
As Originally Reported $ 91.8 $ 151.8 $ (279.9) $ (74.5)
As Restated $ 90.0 $ 168.7 $ (281.1) $ (73.9)
Income (Loss) Before
Extraordinary Item And
Accounting Change
- ------------------------
As Originally Reported $ 105.4 $ 168.5 $ (242.4) $ (74.7)
As Restated $ 102.2 $ 185.2 $ (243.6) $ (74.0)
Net Income (Loss)
- -----------------
As Originally Reported $ 110.8 $ 168.5 $ (258.9) $ (48.4)
As Restated $ 107.5 $ 185.2 $ (260.1) $ (47.8)
Earnings (Loss) Per Share
- -------------------------
As Originally 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 most significant of the restatement adjustments displayed in the table
above occurred in 1994 and 1995. Restated pre-tax income for 1994 increased by
$16.9 million. Approximately $13.1 million of the increase in 1994 pre-tax
income related to adjustments to actuarially value certain of the Company's
postemployment and postretirement benefit liabilities related to workers
compensation and benefits for surviving spouses of certain former employees of
the Company or joint ventures in which the Company was involved. The remaining
adjustments relate to a reduction of the Company's Michigan Single Business Tax
accruals and other items, which increased pre-tax income by approximately $3.7
million and $.1 million, respectively, in 1994. The 1995 restated pre-tax income
includes an adjustment of approximately $3.8 million to amortize the recognition
of grant income over the useful lives of the productive assets purchased with
the grant, offset by other adjustments related primary to postretirement and
postemployment benefits, which increased pre-tax income by $2.0 million. Grant
income had previously been recognized as income when received.
10
<PAGE>
Effect of Restatements on Retained Earnings (Accumulated Deficit)
- -----------------------------------------------------------------
As a result of the restatement, Retained Earnings (Accumulated Deficit) as of
January 1, 1992 increased by $31.0 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 89.5 142.1 52.6
</TABLE>
Adjustments made to reserves at January 1, 1992 consist of the following:
- Franchise tax and state tax reserves $14.9
- General office reserve 7.0
- Reserves for shutdown properties 8.9
- Other reserves .2
-----
Total $31.0
=====
The adjustments made to reserves at January 1, 1992 included excess state tax
reserves related to franchise taxes of approximately $12.4 million and state
income taxes of approximately $2.5 million. The general office reserve was a
reserve established to record potential out-of-period items and was determined
to be unnecessary at, and subsequent to, December 31, 1991. The excess shutdown
reserves related to former operating or mining properties and joint ventures and
included retiree medical insurance and other benefit arrangements and property
costs.
Amendments to the 1996 Form 10-K and amendments to the other 1997 quarterly
reports on Form 10-Q have been filed reflecting the above restatements. This
report should be read in conjunction with those amended filings.
11
<PAGE>
NOTE 3 - SUBSEQUENT EVENTS
On April 1, 1997, the Company closed the sale of its 21.73% minority equity
interest in Iron Ore Company of Canada ("IOC") to North Limited, an Australian
mining and metals company ("North"). The Company received approximately $85
million from North in exchange for its interest in IOC and will report an after-
tax gain of approximately $25 million, or $0.58 per share, during the second
quarter of 1997. The Company will continue to purchase iron ore from IOC
pursuant to the terms of long-term supply agreements.
On April 18, 1997, the Company announced that it has reached an agreement in
principle to sell its coke oven battery servicing its Great Lakes Division and
other related assets, including coal inventories, to a subsidiary of DTE Energy
Company. As part of the arrangement, the Company has agreed to operate the
battery and will purchase the majority of the coke produced from the battery for
a twelve year period under a requirements contract.
The Company expects to receive proceeds of approximately $225 million from this
transaction, plus the value of the coal inventory. Although this transaction
will result in an after-tax loss of approximately $25 million, the impact on
future earnings is expected to be positive. The sale is subject to the parties
reaching a definitive agreement on all aspects of the transaction, as well as
customary regulatory review and approval of both companies' Boards of Directors.
Proceeds from the coke battery transaction will be used to repay the outstanding
related party indebtedness on the coke battery, which approximates $154 million,
plus prepayment and transaction costs which will be incurred in the payoff of
the debt and accrued interest.
The Company is evaluating the use of the remaining proceeds relating to these
transactions. Possible uses of the remaining proceeds may include additional
funding of employee benefit plans, additional debt reduction and funding of
strategic initiatives.
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.
It is the Company's policy to expense or capitalize, as appropriate,
environmental expenditures that relate to current operating sites. Environmental
expenditures that relate to past operations and which do not contribute to
future or current revenue generation are expensed. With respect to costs for
environmental assessments or remediation activities, or penalties or fines that
may be imposed for noncompliance with such laws and regulations, such costs are
accrued when it is probable that liability for such costs will be incurred and
the amount of such costs can be reasonably estimated.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state superfund statutes generally
impose joint and several liability on present and former owners and operators,
transporters and generators for remediation of contaminated properties,
regardless of fault. The Company and certain of its subsidiaries are involved as
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"). 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.
12
<PAGE>
The Company has also recorded the reclamation and other costs to restore its
coal and iron ore mines at its shutdown locations to their original and natural
state, as required by various federal and state mining statutes.
Since the Company has been conducting steel manufacturing and related operations
at numerous locations for over sixty years, the Company potentially may be
required to remediate or reclaim any contamination that may be present at these
sites. The Company does not have sufficient information to estimate its
potential liability in connection with any potential future remediation at such
sites. Accordingly, the Company has not accrued for such potential liabilities.
As 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 $21.4 million and
$21.6 million at March 31, 1997 and December 31, 1996, 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 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 a part of those
transactions, Avatex agreed to indemnify the Company for the Retained
Liabilities and certain environmental liabilities. In 1990, as a part of one of
these transactions, the Company received a payment of $146.6 million and
released Avatex from indemnification of $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 Series B Redeemable Preferred Stock owned by Avatex. In 1994,
Avatex deposited $10 million with the Company to cover indemnified environmental
liabilities.
As part of the indemnification agreements, Avatex and the Company have agreed
that a "true-up" of the pension and other postretirement liabilities will take
place no later than the year 2000. The "true-up" may take place sooner if the
parties agree to do so. Based on current information, it is expected that a
"true-up" would result in a payment to Avatex. Any adjustment resulting from
this "true-up" is expected to be made to the capital accounts of the Company
since such an adjustment results from finalization of amounts related to the
recapitalization arrangements.
Avatex has experienced operating difficulties and has recorded substantial asset
writedowns. In its latest filing with the Securities and Exchange Commission,
dated December 31, 1996, it reported a deficit in its consolidated stockholders'
equity of $83 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
relating to the Retained Liabilities could be significantly increased.
Avatex is subject to the informational requirements of the Securities and
Exchange Act of 1934 and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pursuant to an Audit Committee inquiry, the Company has determined that certain
prior period financial statements must be restated. The financial statements for
the first three quarters of 1997, and each of the quarters of and the year
ended 1996 have been restated to correct the accounting errors.
The effect of the restatement on items previously presented in the Management's
Discussion and Analysis of Financial Condition and Results of Operations is as
follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1997 March 31, 1996
As reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 757,618 $ 757,618 $ 682,143 $ 682,143
Cost of products sold 654,293 653,204 628,920 629,002
Equity income of affiliates (94) (94) (2,287) (2,287)
Income tax provision (credit) 2,639 2,074 (5,387) (5,548)
Net income (loss) 25,886 26,665 (15,575) (14,196)
% Net income (loss) change 3.0% 8.9%
</TABLE>
The following Management's Discussion and Analysis has been revised to reflect
the restated financial statements as discussed in Note 2 to the unaudited
Consolidated Financial Statements.
Results of Operations
Comparison of the Restated Three Month Periods ended March 31, 1997 and 1996
Net Sales
Net sales for the first quarter of 1997 totaled $757.6 million, an 11.1%
increase compared to net sales of $682.1 million during the corresponding 1996
period. This $75.5 million increase was attributable to an 85,000 ton increase
in volume, an improvement in selling prices and a favorable shift in product
mix. Steel shipments were a first quarter record 1,521,000 tons, a 5.9% increase
compared to the 1,436,000 tons shipped during the same 1996 period.
Cost of Products Sold
The Company's cost of products sold of $653.2 million during the first quarter
of 1997 represents an increase of $24.2 million compared to the same period in
1996. This increase was primarily attributable to the higher level of shipments,
as well as a product mix shift towards higher-cost coated items. Cost of
products sold, as a percent of sales, declined from 92.2% during the first
quarter of 1996 to 86.2% during the corresponding 1997 period. This 6.0%
improvement is attributable to several nonrecurring items that occurred during
the first quarter of 1996, including a kiln outage and fire at the Company's
iron ore mining facility.
Raw steel production was 1,634,000 tons during the first quarter of 1997, which
represents a 1.9% decrease compared to the 1,666,000 tons produced during the
same 1996 period.
Equity Income of Affiliates
During the first quarter of 1997, equity income of affiliates of $.1 million
represents a decline of $2.2 million compared to the corresponding 1996 period.
This decline is primarily the result of lower income from Iron Ore Company of
Canada ("IOC") and Double G Coatings, L.P.
Income Taxes
During the first quarter of 1997, the Company recorded current tax provisions of
$7.5 million, offset by a deferred tax benefit of $5.4 million related to
retiree postemployment benefits ("OPEB"). 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. As such,
the Company anticipates paying alternative minimum tax at a rate of 20%.
As a result of the operating loss sustained during the first quarter of 1996,
the Company's tax provision was comprised primarily of a deferred tax credit of
$5.4 million related to OPEB.
Subsequent Events
See Liquidity and Sources of Capital regarding the sale of the Company's
minority equity interest in IOC, as well as an agreement in principle to sell
the coke oven battery serving its Great Lakes Division.
Contingencies
See Part 1 - Financial Information - Note 5, regarding contingencies related to
the Weirton Liabilities.
14
<PAGE>
Accounting Pronouncements
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 October 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1 ("SOP 96-1"), "Environmental Remediation
Liabilities". SOP-96-1 provides authoritative guidance on the recognition,
measurement, display and disclosures of environmental remediation liabilities.
It is the Company's belief that it is in compliance with the accounting and
reporting guidance described therein and its issuance did not have a material
impact on the Company.
15
<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 May 2001 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.
On April 1, 1997, the Company closed the sale of its 21.73% minority equity
interest in IOC to North . The Company received approximately $85 million from
North in exchange for its interest in IOC and will report an after-tax gain of
approximately $25 million during the second quarter of 1997.
On April 18, 1997, the Company announced that it has reached an agreement in
principle to sell its coke oven battery servicing its Great Lakes Division and
other related assets, including coal inventories, to a subsidiary of DTE Energy
Company. As part of the arrangement, the Company has agreed to operate the
battery and will purchase the majority of the coke produced from the battery for
a twelve year period under a requirements contract.
The Company expects to receive proceeds of $225 million from this transaction,
plus the value of the coal inventory. Although this transaction is expected to
result in an after-tax loss of approximately $25 million, the impact on future
earnings is expected to be positive. Proceeds will be used to repay the
outstanding related party indebtedness on the coke battery, which approximates
$154 million, plus prepayment and transaction costs which will be incurred in
the payoff of the debt and accrued interest.
The Company is evaluating the use of the remaining proceeds relating to these
transactions. Possible uses of the remaining proceeds may include additional
funding of employee benefit plans, additional debt reduction and funding of
strategic initiatives.
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 March 31, 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 $91.7 million. During the first quarter of 1997, the maximum
availability under the Receivables Purchase Agreement, after reduction of
letters of credit outstanding, varied from $76.7 million to $111.1 million and
was $97.3 million as of March 31, 1997.
At March 31, 1997, total debt and redeemable preferred stock as a percentage of
total capitalization decreased to 45.4% as compared to 47.0% at December 31,
1996. Cash and cash equivalents totaled $135.0 million at March 31, 1997 as
compared to $109.0 million at December 31, 1996.
Cash Flows from Operating Activities
For the quarter ended March 31, 1997, cash provided from operating activities
amounted to $90.4 million, which is primarily attributable to $26.7 million in
net income earned during the quarter, adjusted for the impact of working capital
items and non-cash charges for depreciation and postretirement benefits.
Cash Flows from Investing Activities
Capital investments for the quarters ended March 31, 1997 and 1996 amounted to
$43.0 million and $31.2 million, respectively. The 1997 spending increase is
primarily due to the 72 inch continuous galvanizing line upgrade and the
construction of a new coating line, both at the Midwest Division. The Company
plans to invest approximately $114.0 million during the remainder of 1997 for
capital
16
<PAGE>
expenditures, including the aforementioned Midwest Division projects, scheduled
repairs to the Great Lakes Division "A" blast furnace and improvements at its
other facilities.
Cash Flows from Financing Activities
During the first quarter of 1997, the Company utilized $21.5 million of cash for
financing activities which included scheduled payments of debt, as well as
dividend payments on the Company's preferred stock.
OTHER
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Statements made by the Company in reports, such as this Form 10-Q, in press
releases and in statements made by employees in oral discussions, that are not
historical facts constitute "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995.
Forward looking statements, by their nature, involve risk and uncertainty. A
variety of factors could cause business conditions and the Company's actual
results and experience to differ materially from those expected by the Company
or expressed in the Company's forward looking statements. These factors include,
but are not limited to, the following: (1) changes in market prices and market
demand for the Company's products; (2) changes in the costs or availability of
the raw materials and other supplies used by the Company in the manufacture of
its products; (3) equipment failures or outages at the Company's steelmaking and
processing facilities; (4) losses of customers; (5) changes in the levels of the
Company's operating costs and expenses; (6) collective bargaining agreement
negotiations, strikes, labor stoppages or other labor difficulties; (7) actions
by the Company's competitors, including domestic integrated steel producers,
foreign competitors, mini-mills and manufacturers of steel substitutes, such as
plastics, aluminum, ceramics, glass, wood and concrete; (8) changes in industry
capacity; (9) changes in economic conditions in the United States and other
major international economies, including rates of economic growth and inflation;
(10) worldwide changes in trade, monetary or fiscal policies; (11) changes in
the legal and regulatory requirements applicable to the Company; and (12) the
effects of extreme weather conditions.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Environmental Matters
Great Lakes Division - Wayne Country Air Pollution Control Department. With
respect to the matter involving alleged exceedances of emissions and work
practice standards at the Company's Great Lakes Division, previously reported in
the 1996 Form 10-K, the Wayne Country Air Pollution Control Department has
issued nine new notices of violation during the first quarter of 1997. These
notices of violation relate to alleged exceedances of particulate emission
standards and equipment operating and maintenance requirements. There has been
no demand for penalties or sanctions, and the Company has addressed all of the
issues raised with respect to these new notices of violation.
Granite City - Alleged Air Violations. With respect to the matter involving
alleged violations of various air emission requirements at the Granite City
Division's basic oxygen furnace shop, coke oven batteries and by-products plant,
previously reported in the 1996 Form 10-K, the U.S. Department of Justice
notified the Company on May 5, 1997 that it would recommend a settlement of this
matter prior to filing suit for a civil penalty of $3.1 million and appropriate
injunctive relief. The Company intends to meet with the Department of Justice to
discuss its settlement demand.
18
<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 February 23, 1997
reporting on Item 5, Other Events.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL STEEL CORPORATION
BY /s/ John A. Maczuzak
-----------------------
John A. Maczuzak
President and Chief Operating Officer
BY /s/ Michael D. Gibbons
-------------------------
Michael D. Gibbons
Acting Chief Financial Officer
Date: January 28, 1998
20
<PAGE>
NATIONAL STEEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q/A
EXHIBIT INDEX
For the quarterly period ended March 31, 1997
27-A Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 135,003
<SECURITIES> 0
<RECEIVABLES> 313,018
<ALLOWANCES> 20,251
<INVENTORY> 416,162
<CURRENT-ASSETS> 843,932
<PP&E> 3,709,305
<DEPRECIATION> 2,245,443
<TOTAL-ASSETS> 2,575,099
<CURRENT-LIABILITIES> 551,007
<BONDS> 453,874
<COMMON> 433
63,155
36,650
<OTHER-SE> 631,403
<TOTAL-LIABILITY-AND-EQUITY> 2,575,099
<SALES> 757,618
<TOTAL-REVENUES> 757,618
<CGS> 653,204
<TOTAL-COSTS> 653,204
<OTHER-EXPENSES> 66,570
<LOSS-PROVISION> 931
<INTEREST-EXPENSE> 8,174
<INCOME-PRETAX> 28,739
<INCOME-TAX> 2,074
<INCOME-CONTINUING> 26,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,665
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
</TABLE>
