<PAGE>
1997
Third 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 November 14, 1997)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-983
NATIONAL STEEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-0687210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): 219-273-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock $.01 par
value, as of October 31, 1997, was 43,288,240 shares.
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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 September 30, 1997 and 1996 3
Statements of Consolidated Income -
Nine Months Ended September 30, 1997 and 1996 4
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 5
Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 1997 and 1996 6
Statements of Changes in Consolidated
Stockholders' Equity and Redeemable
Preferred Stock-Series B -
Nine Months Ended September 30, 1997 and
Year Ended December 31, 1996 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II. OTHER INFORMATION
Legal Proceedings 22
Other Information 23
Exhibits and Reports on Form 8-K 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended September 30,
1997 1996
(Restated) (Restated)
---------- ----------
<S> <C> <C>
Net Sales $788,663 $735,858
Cost of products sold 653,715 644,960
Selling, general and administrative expense 37,979 40,099
Depreciation and amortization 31,201 36,501
Equity income of affiliates (301) (3,518)
-------- --------
Income from Operations 66,069 17,816
Other (Income) Expense:
Interest and other financial income (6,245) (1,645)
Interest and other financial expense 7,436 11,096
Net gain on disposal of non-core assets (28,804) (3,732)
-------- --------
(27,613) 5,719
-------- --------
Income Before Income Taxes and Cumulative Effect
of Accounting Change 93,682 12,097
Income tax provision 15,121 570
-------- --------
Income Before Cumulative Effect of Accounting
Change 78,561 11,527
Cumulative effect of accounting change -- 11,100
-------- --------
Net Income 78,561 22,627
Less preferred stock dividends (2,740) (2,740)
-------- --------
Net income applicable to Common Stock $75,821 $19,887
======== ========
Per Share Data Applicable to Common Stock:
Income Before Cumulative Effect of Accounting
Change $ 1.76 $ .21
Cumulative effect of accounting change -- .25
-------- --------
Net Income Applicable to Common Stock $ 1.76 $ .46
======== ========
Weighted average shares outstanding
(in thousands) 43,288 43,288
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
(Restated) (Restated)
---------- ----------
<S> <C> <C>
Net Sales $2,371,150 $2,187,482
Cost of products sold 2,006,970 1,954,507
Selling, general and administrative expense 107,360 102,485
Depreciation and amortization 103,336 109,111
Equity income of affiliates (1,067) (7,181)
---------- ----------
Income from Operations 154,551 28,560
Other (Income) Expense:
Interest and other financial income (12,672) (5,338)
Interest and other financial expense 26,715 32,909
Net gain on disposal of non-core assets (54,189) (3,732)
---------- ----------
(40,146) 23,839
---------- ----------
Income Before Income Taxes, Extraordinary Item
and Cumulative Effect of Accounting Change 194,697 4,721
Income tax provision (credit) 24,546 (10,527)
---------- ----------
Income Before Extraordinary Item and Cumulative
Effect of Accounting Change 170,151 15,248
Extraordinary Item (5,397) --
Cumulative effect of accounting change -- 11,100
---------- ----------
Net Income 164,754 26,348
Less preferred stock dividends (8,218) (8,222)
---------- ----------
Net income applicable to Common Stock $ 156,536 $ 18,126
========== ==========
Per Share Data Applicable to Common Stock:
Income Before Extraordinary Item and Cumulative
Effect of Accounting Change $ 3.74 $ .17
Extraordinary Item (.12) --
Cumulative effect of accounting change -- .25
---------- ----------
Net Income Applicable to Common Stock $ 3.62 $ .42
========== ==========
Weighted average shares outstanding (in thousands) 43,288 43,288
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
Assets (Restated) (Restated)
------------- ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 416,906 $ 109,041
Receivables - net 285,509 281,889
Inventories - net
Finished and semi-finished products 275,837 299,333
Raw materials and supplies 117,543 141,234
---------- ----------
393,380 440,567
---------- ----------
Total current assets 1,095,795 831,497
Investments in affiliated companies 15,818 65,399
Property, plant and equipment 3,334,335 3,664,597
Less allowances for depreciation and amortization 2,125,817 2,209,079
---------- ----------
1,208,518 1,455,518
Other assets 222,150 203,878
---------- ----------
Total Assets $2,542,281 $2,556,292
========== ==========
Liabilities, Redeemable Preferred Stock and
Stockholders' Equity
Current liabilities
Accounts payable $ 254,375 $ 234,892
Accrued liabilities 327,048 278,147
Current portion of long term obligations 34,332 37,731
---------- ----------
Total current liabilities 615,755 550,770
Long term obligations 311,679 323,550
Long term indebtedness to related parties -- 146,744
Other long term liabilities 751,344 827,136
Redeemable Preferred Stock - Series B 62,405 63,530
Stockholders' equity
Common Stock - par value $.01:
Class A - authorized 30,000,000 shares; issued
and outstanding 22,100,000 221 221
Class B - authorized 65,000,000 shares; issued
and outstanding 21,188,240 212 212
Preferred Stock - Series A 36,650 36,650
Additional paid-in-capital 465,359 465,359
Retained earnings 298,656 142,120
---------- ----------
Total stockholders' equity 801,098 644,562
---------- ----------
Total Liabilities, Redeemable Preferred Stock
and Stockholders' Equity $2,542,281 $2,556,292
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
Cash Flows from Operating Activities: (Restated) (Restated)
---------- ----------
<S> <C> <C>
Net Income $ 164,754 $ 26,348
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 103,336 109,111
Carrying charges related to facility sales
and plant closings 15,534 16,788
Net gain on disposal of non-core assets (54,189) (3,732)
Extraordinary item (net) 5,397 --
Cumulative effect of accounting change -- (11,100)
Equity income of affiliates (1,067) (7,181)
Dividends from affiliates 6,808 4,375
Postretirement benefits 15,981 22,993
Deferred income taxes (16,200) (16,200)
Cash provided (used) by working capital items:
Receivables (1,621) 45,696
Inventories 37,187 (26,666)
Accounts payable 19,232 19,661
Accrued liabilities 46,517 (15,272)
Other (44,720) (34,136)
--------- ---------
Net Cash Provided by Operating Activities 296,949 130,685
--------- ---------
Cash Flows from Investing Activities:
Net proceeds from sale of non-core assets 317,612 3,732
Purchases of plant and equipment (101,006) (80,752)
Other (362) --
--------- ---------
Net Cash Provided (Used) by Investing Activities 216,244 (77,020)
--------- ---------
Cash Flows from Financing Activities:
Prepayment of related party debt (154,328) --
Costs associated with prepayment of related party debt (4,500) --
Other repayments (30,309) (32,944)
Borrowings 2,729 --
Payment of released Weirton benefit liabilities (9,878) (11,220)
Dividend payments on Preferred Stock-Series A (3,014) (3,020)
Dividend payments on Redeemable Preferred Stock-Series B (210) --
Payment of unreleased Weirton liabilities and
their release in lieu of cash dividends on
Redeemable Preferred Stock-Series B (5,818) (6,042)
--------- ---------
Net Cash Used by Financing Activities (205,328) (53,226)
--------- ---------
Net Increase in Cash and Cash Equivalents 307,865 439
Cash and Cash Equivalents, Beginning of the Period 109,041 127,616
--------- ---------
Cash and Cash Equivalents, End of the Period $ 416,906 $128,055
========= =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK - SERIES B
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
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>
BALANCE AT DECEMBER 31, 1995,
as previously reported $221 $212 $36,650 $465,359 $54,115 $556,557 $65,030
Adjustments to correct prior periods
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) 164,754 164,754
Amortization of excess of book value
over redemption value of Redeemable
Preferred Stock - Series B 1,125 1,125 (1,125)
Cumulative dividends on Preferred
Stock - Series A and B (9,343) (9,343)
---- ---- -------- -------- --------- --------- --------
BALANCE AT SEPTEMBER 30, 1997 (Restated) $221 $212 $36,650 $465,359 $298,656 $801,098 $62,405
==== ==== ======== ======== ========= ========= ========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of National Steel Corporation and its
majority owned subsidiaries (the "Company") presented herein are unaudited.
However, in the opinion of management, such statements include all adjustments
necessary for a fair presentation of the results for the periods indicated. All
such adjustments made were of a normal recurring nature, except for the items
discussed in Notes 2 and 3. The financial results presented for the three
and nine month periods ended September 30, 1997 are not necessarily indicative
of results of operations for the full year. The Annual Report of the Company on
Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K") contains
additional information and should be read in conjunction with this report. The
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, as the result of errors
in judgment and misapplications of generally accepted accounting principles, the
effect of management of earnings. 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.
8
<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 $.2
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. Pre-tax income was also restated to reflect the
revision 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.
9
<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 provision. As a 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
10
<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 primarily to postretirement and
postemployment benefits, which increased pre-tax income by $2.0 million. Grant
income had previously been recognized as income when received.
11
<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.
12
<PAGE>
NOTE 3- NET GAIN ON DISPOSAL OF NON-CORE ASSETS AND OTHER NONRECURRING ITEMS
In 1997 and 1996, the Company disposed of or made provisions for disposing of
certain non-core assets. The effects of these transactions are presented as a
separate component in the Statements of Consolidated Income entitled net gain on
disposal of non core assets, except as otherwise indicated. A discussion of
these items follows.
On April 1, 1997, the Company completed the sale of its 21.73% minority equity
interest in the Iron Ore Company of Canada ("IOC") to North Limited, an
Australian mining and metals company ("North"). The Company received net
proceeds of $75.3 million from North in exchange for its interest in IOC and
recorded a $37 million gain. The Company will continue to purchase iron ore at
fair market value from IOC pursuant to the terms of long-term supply agreements.
On June 12, 1997, the Company completed the sale of a coke oven battery
servicing the Great Lakes Division and other related assets, including coal
inventories, to a subsidiary of DTE Energy Company. The Company received net
proceeds of $234.0 million in connection with the sale and recorded an $11.1
million loss (The Company originally recorded a loss of $16.3 million on the
sale, which was decreased in the restatement by $5.2 million as a result of the
incorrect accounting for property taxes related to the sold property. See Note 2
to the unaudited Consolidated Financial Statements). The Company utilized a
portion of the proceeds to prepay the remaining $154.3 million of the related
party coke oven battery debt, which resulted in a net of tax extraordinary loss
of $5.4 million. As part of the arrangement, the Company has agreed to operate
the battery under an Operation and Maintenance Agreement executed with DTE, and
will purchase at fair market value the majority of the coke produced from the
battery under a requirements contract.
In the second quarter, the Company also recorded a $3.6 million charge related
to the decision to cease operations of American Steel Corporation, a wholly-
owned subsidiary which pickled and slit steel. The Company also recorded a gain
of $3.0 million related to the sale of a coal mine property.
In the third quarter of 1997, the Company sold two additional coal properties.
The Company received proceeds for the property sales of $7.7 million, $5.3
million after taxes and expenses, and in conjunction with one of the property
sales, the purchaser agreed to assume the potential environmental liabilities of
approximately $8 million related to the property. Additionally, during the third
quarter of 1997, the Company received information concerning other liabilities
related to its shutdown coal properties which resulted in a reduction of the
related accrued liabilities. As such, the Company recorded an aggregate net gain
related to its shutdown coal properties of $28.8 million during the third
quarter of 1997.
During the third quarter of 1996, the Company settled two disputes that resulted
in aggregate gains totaling $11.2 million. On September 12, 1996, following the
closing of the settlement agreement between the Company and Bakers Port, Inc.,
the Company sold 213 acres out of a total of 2,338 acres of land received in
connection with the settlement. The sale generated a net gain of $3.7 million.
On August 15, 1996, the Company finalized the settlement agreement with the
Pension Benefit Guaranty Corporation ("PBGC") relating to the Donner-Hanna Joint
Venture pension plans. As a part of the settlement, the Company paid $8.5
million to the PBGC. Since the Company had estimated and accrued approximately
$16 million for this liability, a gain of $7.5 million was recorded in
connection with the settlement. This gain was recorded as a reduction to cost of
products sold during the third quarter of 1996.
The Company retroactively reflected in its 1996 third quarter results the
cumulative effect of an accounting change which resulted from a change in the
valuation date used to measure liabilities related to pension and other
postretirement benefits ("OPEB"). The cumulative impact of this change was $11.1
million. The valuation date to measure the liabilities was changed from December
31 to September 30 and was made in order to provide more timely information with
respect to pension and OPEB provisions. This restatement adjustment was done in
conjunction with certain restatements of prior periods. (See Note 2 to the
unaudited Consolidated Financial Statements.)
13
<PAGE>
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 other similar state superfund statutes
generally impose joint and several liability on present and former owners and
operators, transporters and generators for remediation of contaminated
properties, regardless of fault. The Company and certain of its subsidiaries are
involved as potentially responsible parties ("PRPs") at a number of off-site
CERCLA or state superfund site proceedings. At some of these sites, any
remediation costs incurred by the Company would constitute liabilities for which
Avatex Corporation ("Avatex"), formerly FoxMeyer Health Corporation, is required
to indemnify the Company ("Avatex Environmental Liabilities"). (See Note 5) In
addition, at some of these sites, the Company does not have sufficient
information regarding the nature and extent of the contamination, the wastes
contributed by other PRPs, or the required remediation activity to estimate its
potential liability.
The Company has also recorded the reclamation and other costs to restore its
inactive coal property locations to their original and natural state, as
required by various federal and state mining statutes.
Since the Company has been conducting steel manufacturing and related operations
at numerous locations for over sixty years, the Company potentially may be
required to remediate or reclaim any contamination that may be present at these
sites. The Company does not have sufficient information to estimate its
potential liability in connection with any potential future remediation at such
sites. Accordingly, the Company has not accrued for such potential liabilities.
As these matters progress or the Company becomes aware of additional matters,
the Company may be required to accrue charges in excess of those previously
accrued. The outcome of any of the matters described, to the extent they exceed
any applicable reserves, could have a material adverse effect on the Company's
results of operations and liquidity for the applicable period. The Company has
recorded an aggregate environmental liability of $10.0 million and $21.6 million
at September 30, 1997 and December 31, 1996, respectively. Approximately $8
million of the decrease in the environmental liability from December 31, 1996 to
September 30, 1997 was a result of the sale of certain coal properties which
took place in the third quarter of 1997. The balance of the decrease was a
result of updated information regarding other environmental proceedings.
The Company is involved in various non-environmental legal proceedings, most of
which occur in the normal course of its business. The Company does not believe
that these proceedings will have a material adverse effect, either individually
or in the aggregate, on the Company's financial condition. However, with respect
to certain of the proceedings, if reserves prove to be inadequate and the
Company incurs a charge to earnings, such charge could have a material adverse
effect on the Company's results of operations and liquidity for the applicable
period.
14
<PAGE>
NOTE 5 - CONTINGENCIES RELATED TO WEIRTON LIABILITIES
In 1984, the Company sold its Weirton Steel Division ("Weirton") to the
employees of the Weirton Steel Corporation. As a part of this sale, the Company
retained certain pension and other postretirement benefit liabilities of Weirton
(the "Retained Liabilities") as of the sale date.
In a series of transactions occurring after 1984, Avatex sold its interest in
the Company to NKK Corporation ("NKK") and the public. As part of those
transactions, Avatex agreed to indemnify the Company for the Retained
Liabilities and the Avatex Environmental Liabilities. In 1990, under the terms
of the Stock Purchase and Recapitalization Agreement between the Company and
Avatex (the "Recapitalization Agreement"), the Company received a payment of
$146.6 million and released Avatex from indemnification liability for $146.6
million of the Retained Liabilities. In 1993, the Company released Avatex from
an additional $67.8 million of pension liabilities in connection with an early
redemption of 10,000 shares of the Redeemable Preferred Stock - Series B owned
by Avatex. In 1994, Avatex prepaid $10.0 million to the Company with respect to
a portion of the Avatex Environmental Liabilities. Avatex remains liable to
indemnify the Company for Avatex Environmental Liabilities in excess of this
amount.
Upon the occurrence of certain events detailed in the Recapitalization
Agreement, prior to or coincident with the Series B Preferred Stock final
redemption, the released Retained Liabilities would be recalculated by an
independent actuary. Any adjustment (the "true-up") to bring the balance of the
released Retained Liabilities to such recalculated amount will be dealt with in
the Redeemable Preferred Stock - Series B redemption proceeds or otherwise
settled.
The Company and Avatex have been negotiating a settlement of the Retained
Liabilities and the Avatex Environmental Liabilities and, in connection with the
negotiations, the Company is considering the final redemption of the Redeemable
Preferred Stock Series B. At this time no agreement has been reached as to the
amount of any such settlement and any settlement would be subject to approval by
the Board of Directors of the respective companies. If a settlement is reached,
adjustments are not expected to have a material effect on net income or
stockholders' equity of the Company.
Avatex has experienced operating difficulties and has recorded substantial asset
writedowns. In its filing with the Securities and Exchange Commission, dated
June 30, 1997, it reported a deficit in its consolidated stockholders' equity of
$158.7 million. Most of Avatex's operating subsidiaries have filed for
bankruptcy protection. Although Avatex, the parent company, has not been
included in the bankruptcy filing, the filing has caused the Company to have
increased concerns about Avatex's ability to honor its remaining indemnification
obligations to the Company. Should Avatex, the parent company, seek bankruptcy
protection, the Company's future cash outlays and on-going charges to operations
could be significantly increased.
Avatex is subject to the informational requirements of the Securities Exchange
Act of 1934 and, in accordance therewith, files reports and other information
with the Securities and Exchange Commission.
15
<PAGE>
ITEM 2. 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 accounting errors. (See Item 5 in Part II -
Other Information.)
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
September 30, 1997 September 30, 1996
-------------------------- --------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 788,663 $ 788,663 $ 735,858 $ 735,858
Cost of products sold 654,140 653,715 637,006 644,960
Selling, general and administrative 37,379 37,979 38,943 40,099
Depreciation expense 31,201 31,201 36,501 36,501
Financing costs (net) 1,191 1,191 9,451 9,451
Net gain on disposal of non-core assets 28,804 28,804 3,732 3,732
Income tax provision (credit) 16,531 15,121 (3,082) 570
Cumulative effect of accounting change -- -- -- 11,100
Net income 77,326 78,561 24,289 22,627
% Net income increase (decrease) 1.6% (6.8%)
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1997 September 30, 1996
-------------------------- --------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,371,150 $ 2,371,150 $ 2,187,482 $ 2,187,482
Cost of products sold 2,008,245 2,006,970 1,953,643 1,954,507
Selling, general and administrative 106,160 107,360 102,822 102,485
Depreciation expense 103,336 103,336 109,111 109,111
Financing costs (net) 14,043 14,043 27,571 27,571
Net gain on disposal of non-core assets 48,979 54,189 3,732 3,732
Income tax provision (credit) 27,208 24,546 (13,857) (10,527)
Cumulative effect of accounting change -- -- -- 11,100
Net income 156,807 164,754 19,105 26,348
% Net income increase (decrease) 5.1% 37.9%
</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 September 30, 1997 and 1996
Net Sales
- ---------
Net sales for the third quarter of 1997 totaled $788.7 million, an improvement
of $ 52.8 million, or 7.2%, compared to the corresponding period in 1996.
Approximately 81% of this increase was attributable to an 85,000 ton increase in
shipments, while approximately 13% can be attributed to improvements in product
and customer mix. Additionally, improved selling prices accounted for
approximately 6% of the increase in net sales.
Steel shipments for the third quarter of 1997 were 1,519,000 tons, a 5.9%
increase compared to the 1,434,000 tons shipped during the corresponding 1996
period.
Cost of Products Sold
- ---------------------
The Company's cost of products sold of $653.7 million during the third quarter
of 1997 represented 82.9% of sales compared to 87.6% of sales for the same
period in 1996. The improved cost relationship resulted in a gross margin
improvement of approximately $44.1 million. The improvement in gross margin was
largely the result of higher production and shipment levels, as well as improved
pricing, improved customer and product mix, and the impact of the items
discussed below.
Certain other events impacted costs in each period. In 1996, an unplanned blast
furnace outage at the Company's Granite City Division increased costs by
approximately $15 million. Additionally, costs were favorably impacted in 1996
by approximately $7.5 million in connection with a settlement with the PBGC
relating to the Donner-Hanna Joint Venture Pension Plans. Costs were favorably
impacted in 1997 by an insurance settlement of approximately $4 million relating
to the Granite City Division third quarter 1996 unplanned blast furnace outage,
as well as by the reversal of approximately $4 million relating to the intra-
period accrual of costs associated with the expected blast furnace reline at the
Great Lakes Division. This planned outage has been postponed until the first
quarter of 1998.
During the third quarter of 1997, the Company produced 1,658,000 net tons of
steel, a 7.5% increase compared to the 1,542,000 net tons produced during the
corresponding 1996 period.
16
<PAGE>
Selling, General and Administrative Expense
- -------------------------------------------
Selling, general and administrative expense of $38.0 million during the third
quarter of 1997 represents a decrease of $2.1 million compared to the
corresponding 1996 period. This decrease is primarily a result of lower benefit
related expenses, partially offset by higher information systems contract
charges.
Depreciation Expense
- --------------------
Depreciation expense was lower in the third quarter of 1997 as compared to the
corresponding 1996 period primarily as a result of the sale of the Company's
coke oven battery at the Great Lakes Division. (See further discussion in Part
1, Item 1, Note 3)
Financing Costs
- ---------------
Net financing costs of $1.2 million during the third quarter of 1997 represents
an $8.3 million decrease compared to the corresponding 1996 period. This
improvement is partially attributable to a $4.6 million increase in interest
income on short term investments. Additionally, lower interest expense resulted
from lower average debt levels, due primarily to the payoff of the related party
debt, and slightly higher capitalized interest.
Net Gain on Disposal of Non-Core Assets
- ---------------------------------------
During the third quarter of 1997, the Company sold two additional coal
properties. The Company received proceeds for the property sales of $7.7
million. In conjunction with one of the property sales, the purchaser agreed to
assume the potential environmental liabilities of approximately $8.0 million
related to the property. Additionally, during the third quarter of 1997, the
Company received information concerning other liabilities related to its
shutdown coal properties which resulted in a reduction of the related accrued
liabilities. As such, the Company recorded an aggregate net gain related to its
shutdown coal properties of $28.8 million during the third quarter of 1997.
During the third quarter of 1996, the Company sold certain land not used in the
operations of the Company. The sale generated a net gain of $3.7 million.
Income Taxes
- ------------
During the third quarter of 1997, the Company recorded current tax provisions of
$20.5 million, offset by a deferred tax benefit of $5.4 million. This deferred
tax benefit is a result of the periodic recognition of tax benefits relating to
expectations of additional future income. The Company's effective tax rate is
lower than the combined federal and state statutory rates primarily due to the
continued utilization of available federal and state net operating loss
carryforwards and the recognition of additional deferred tax benefits.
Cumulative Effect of Accounting Change
- --------------------------------------
The Company retroactively reflected in its 1996 third quarter results the
cumulative effect of an accounting change which resulted from a change in the
valuation date used to measure liabilities related to pension and other
postretirement benefits ("OPEB"). The cumulative impact of this change was $11.1
million. The valuation date to measure the liabilities was changed from December
31 to September 30 and was made in order to provide more timely information with
respect to pension and OPEB provisions. This restatement adjustment was done in
conjunction with certain restatements of prior periods. (See Note 2 to the
unaudited Consolidated Financial Statements.)
17
<PAGE>
Comparison of the Restated Nine-Month Periods Ended September 30, 1997 and 1996
Net Sales
- ---------
Net sales for the first nine months of 1997 totaled $2.37 billion, an increase
of $183.7 million, or 8.4%, compared to $2.19 billion during the same 1996
period. Approximately 54% of the increase was the result of the 204,000 ton
increase in shipments for the period and approximately 38% was attributable to
improvements in product and customer mix. The remaining 8% of the increase was
the result of higher selling prices.
Steel shipments for the first nine months of 1997 were a record 4,645,000 tons,
a 4.6% increase compared to the 4,441,000 tons shipped during the corresponding
1996 period.
Cost of Products Sold
- ---------------------
The Company's cost of products sold of $2.01 billion during the first nine
months of 1997 represented 84.6% of sales compared to 89.3% of sales for the
same period in 1996. This improved cost relationship resulted in a gross margin
improvement of approximately $131.2 million. This improvement was largely the
result of increases in selling prices, production and sales levels, as well as
stable operations.
Certain other events impacted costs in each period. In 1996, a kiln outage at
National Steel Pellet Company increased costs by approximately $10 million. An
unplanned 1996 blast furnace outage at the Company's Granite City Division
increased costs by approximately another $15 million. Costs were favorably
impacted in 1996 by approximately $7.5 million in connection with a settlement
with the PBGC relating to the Donner-Hanna Joint Venture Pension Plans. In 1997,
insurance recoveries relating to unplanned outages aggregating approximately
$6.6 million reduced cost of products sold.
Raw steel production totaled 4,926,000 tons for the first nine months of 1997, a
.6% increase from the 4,895,000 tons produced during the nine month period ended
September 30, 1996.
Selling, General and Administrative Expense
- -------------------------------------------
Selling, general and administrative expense of $107.4 million during the first
nine months of 1997 represents a $4.9 million increase compared to the
corresponding 1996 period. This increase is primarily the result of increased
costs associated with expenses due to the conversion of stock options to stock
appreciation rights, legal expenses and information systems contract charges and
lower professional service expenses.
Depreciation Expense
- --------------------
Depreciation expense was lower in the first nine months of 1997 as compared to
the corresponding 1996 period primarily as a result of the sale of the Company's
coke oven battery at the Great Lakes Division. (See further discussion in Part
1, Item 1, Note 3)
18
<PAGE>
Financing Costs
- ---------------
Net financing costs of $14.0 million for the nine months ended September 30,
1997 represents a $13.5 million decrease compared to the same 1996 period. This
improvement is partially attributable to a $7.3 million increase in interest
income on short term investments. Additionally, lower interest expense resulted
from lower average debt levels and higher capitalized interest.
Net Gain on Disposal of Non-Core Assets
- ---------------------------------------
In 1997 and 1996, the Company disposed of or made provisions for disposing of
certain non-core assets. The effects of these transactions are presented as a
separate component in the income statement entitled net gain on disposal of non
core assets. A discussion of these items follows.
On April 1, 1997, the Company completed the sale of its 21.73% minority equity
interest in the Iron Ore Company of Canada ("IOC") to North Limited, an
Australian mining and metals company ("North"). The Company received net
proceeds of $75.3 million from North in exchange for its interest in IOC and
recorded a $37.0 million gain. The Company will continue to purchase iron ore at
fair market value from IOC pursuant to the terms of long-term supply agreements.
On June 12, 1997, the Company completed the sale of a coke oven battery
servicing the Great Lakes Division and other related assets, including coal
inventories, to a subsidiary of DTE Energy Company. The Company received net
proceeds of $234.0 million in connection with the sale and recorded an $11.1
million loss. The Company utilized a portion of the proceeds to prepay the
remaining $154.3 million of the related party coke oven battery debt, which
resulted in a net of tax extraordinary loss of $5.4 million. As part of the
arrangement, the Company has agreed to operate the battery under an Operation
and Maintenance Agreement executed with DTE, and will purchase at fair market
value the majority of the coke produced from the battery under a requirements
contract.
In the second quarter, the Company also recorded a $3.6 million charge related
to the decision to cease operations of American Steel Corporation, a wholly-
owned subsidiary which pickled and slit steel. The Company also recorded a gain
of $3.0 million related to the sale of a coal mine property.
In the third quarter of 1997, the Company sold two additional coal properties.
The Company received proceeds for the property sales of $7.7 million, $5.3
million after taxes and expenses, and in conjunction with one of the property
sales, the purchaser agreed to assume the potential environmental liabilities of
approximately $8.0 million related to the property. Additionally, during the
third quarter of 1997, the Company received information concerning other
liabilities related to its shutdown coal properties which resulted in a
reduction of the related accrued liabilities. As such, the Company recorded an
aggregate net gain related to its shutdown coal properties of $28.8 million
during the third quarter of 1997.
On September 12, 1996, following the closing of the settlement agreement between
the Company and Bakers Port, Inc., the Company sold 213 acres out of a total of
2,338 acres of land received in connection with the settlement. The sale
generated a net gain of $3.7 million.
Income Taxes
- ------------
During the first nine months of 1997, the Company recorded current tax
provisions of $40.7 million, offset by a deferred tax benefit of $16.2 million.
This deferred tax benefit is a result of the periodic recognition of tax
benefits related to expectations of additional future taxable income. The
Company's effective tax rate is lower than the combined federal and state
statutory rates primarily due to the continued utilization of available federal
and state net operating loss carryforwards and the recognition of additional
deferred tax benefits.
19
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
- --------------------------------
The Company's liquidity needs arise primarily from capital investments, working
capital requirements, pension funding requirements and principal and interest
payments on its indebtedness. The Company has satisfied these liquidity needs
with funds provided by long term borrowings and cash provided by operations.
Additional sources of liquidity consist of a Receivables Purchase Agreement (the
"Receivables Purchase Agreement") with commitments of up to $200.0 million and
an expiration date of September, 2002 and both a $100.0 million and a $50.0
million credit facility, which are secured by the Company's inventories (the
"Inventory Facilities") and expire in May, 2000 and July, 1998, respectively.
The Company is currently in compliance with all material covenants of, and
obligations under, the Receivables Purchase Agreement, the Inventory Facilities
and other debt instruments. On September 30, 1997, there were no cash borrowings
outstanding under the Receivables Purchase Agreement or the Inventory
Facilities, and outstanding letters of credit under the Receivables Purchase
Agreement totaled $91.0 million. During the first nine months of 1997, the
maximum availability under the Receivables Purchase Agreement, after reduction
for letters of credit outstanding, varied from $76.7 million to $111.1 million
and was $109.0 million as of September 30, 1997.
At September 30, 1997, total debt and redeemable preferred stock as a percentage
of total capitalization decreased to 33.8% as compared to 47.0% at December 31,
1996. Cash and cash equivalents totaled $416.9 million at September 30, 1997
compared to $109.0 million at December 31, 1996.
Cash Flows from Operating Activities
- ------------------------------------
For the nine months ended September 30, 1997, cash provided from operating
activities totaled $296.9 million, which is primarily attributable to $164.8
million in net income earned during this period, adjusted for the impact of
working capital items and non-cash items. Additionally, in the third quarter of
1997, the Company accelerated a contribution of $40.9 million to its pension
plans.
Cash Flows from Investing Activities
- ------------------------------------
Capital investments for the nine months ended September 30, 1997 totaled $101.0
million. The 1997 spending is primarily related to the modernization and
upgrading of the Company's 72 inch continuous galvanizing line and the
construction of a new 48 inch wide coating line, both of which are located at
the Midwest Division. The Company plans to invest approximately $50 million
during the remainder of 1997 for capital expenditures, including the
aforementioned Midwest Division projects and improvements at its other
facilities.
During the second quarter of 1997, the Company sold its coke oven battery at the
Great Lakes Division, as well as its minority investment in the Iron Ore Company
of Canada. The sale of these two non-core assets generated net proceeds of
$309.3 million. The Company utilized $162.5 million of these proceeds to prepay
the related party debt associated with the coke oven battery, including
prepayment costs and accrued interest. Additionally, in the second and third
quarters of 1997, certain coal mining properties were sold generating net
proceeds of $8.3 million. If the negotiations with Avatex result in a
settlement, a cash payment will be required for the settlement of the Retained
Liabilities, and the Avatex Environmental Liabilities and the redemption of
Redeemable Preferred Stock - Series B (see also Part I, Item 1, Note 5 and Part
II, Item 6(b)). The Company also is continuing to evaluate other possible uses
of the remaining proceeds, including additional pension and VEBA funding,
retirement of Preferred Stock Series A, additional debt retirements and capital
investment opportunities.
Cash Flows from Financing Activities
- ------------------------------------
During the first nine months of 1997, the Company utilized $205.3 million of
cash for financing activities, which includes the $154.3 million prepayment of
related party debt associated with the sale of the coke oven battery servicing
the Great Lakes Division and $4.5 million of costs associated with the
prepayment of the aforementioned debt. Other areas of cash utilization for
financing activities included scheduled payments of debt, as well as dividend
payments on the Company's preferred stock.
20
<PAGE>
OTHER
- -----
Impact of Recommendations from Audit Committee Inquiry
- ------------------------------------------------------
On January 21, 1998 the Board of Directors accepted the report and approved the
recommendations of the legal counsel to the Audit Committee for improvements in
the Company's system of internal 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
accounting errors. The Company has begun the process of implementing these
recommendations, the cost of which is currently unknown, but at present is not
expected to be material to the ongoing results of operations, financial
condition or liquidity of the Company.
Year 2000 Issues
- ----------------
The "Year 2000" problem is caused by software which processes years as only two
digits. In earlier periods of computer programming, programmers often developed
and maintained date fields with only two digit years in an effort to conserve
computer resources and memory. The Company is in the process of working to
correct this problem and has formed a committee consisting of executive
management to oversee all Year 2000 activities. The Company retained a third
party consulting group to assess the Company's mainframe environment and
identify the actions which need to be taken to correct any Year 2000 problems.
The Company has spent approximately $1.4 million in 1997 and is expected to
spend an additional $10 million on its mainframe projects to address the Year
2000 issue.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share", which
is required to be adopted on December 31, 1997. At that time, the Company will
be required to change the current presentation of primary EPS to a presentation
of basic EPS, which excludes any dilutive effect of stock options. The statement
also requires presentation of diluted EPS, which is computed similarly to fully
diluted EPS under existing accounting rules. Stock options are the Company's
only dilutive securities and are not entered into the determination of primary
EPS as their dilutive effect is less than 3%. As such, the presentation of basic
EPS will be consistent with the current primary EPS. The impact of SFAS 128 on
the calculation of fully diluted EPS is not expected to be material.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income,
which is effective for years beginning after December 15, 1997, and will be
adopted by the Company in 1998. The Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Statement will not have any impact
on the results of operations or the financial position of the Company.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Statement changes the way public
companies are required to report segment information in annual financial
statements and in interim financial reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Statement is effective for financial statements for
fiscal years beginning after December 15, 1997, and the Company anticipates
adopting the Statement in 1998. Although the Company is evaluating the impact
that this Statement will have on its financial reporting, the Company does not
expect any additional significant reporting requirements.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Statements made by the Company in reports, such as this Form 10-Q, in press
releases and in statements made by employees in oral discussions, that are not
historical facts constitute "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995.
Forward looking statements, by their nature, involve risk and uncertainty. A
variety of factors could cause business conditions and the Company's actual
results and experience to differ materially from those expected by the Company
or expressed in the Company's forward looking statements. These factors include,
but are not limited to, the following: (1) changes in market prices and market
demand for the Company's products; (2) changes in the costs or availability of
the raw materials and other supplies used by the Company in the manufacture of
its products; (3) equipment failures or outages at the Company's steelmaking,
mining and processing facilities; (4) losses of customers; (5) changes in the
levels of the Company's operating costs and expenses; (6) collective bargaining
agreement negotiations, strikes, labor stoppages or other labor difficulties;
(7) actions by the Company's competitors, including domestic integrated steel
producers, foreign competitors, mini-mills and manufacturers of steel
substitutes, such as plastics, aluminum, ceramics, glass, wood and concrete; (8)
changes in industry capacity; (9) changes in economic conditions in the United
States and other major international economies, including rates of economic
growth and inflation; (10) worldwide changes in trade, monetary or fiscal
policies, including changes in interest rates; (11) changes in the legal and
regulatory requirements applicable to the Company; and (12) the effects of
extreme weather conditions.
21
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Environmental Matters
Great Lakes Division - Wayne County Air Pollution Control Department. With
respect to the matter involving alleged exceedances of emission and work
practice standards at the Company's Great Lakes Division, previously reported in
the Company's 1996 Form 10-K and first quarter 1997 Form 10-Q, the Wayne County
Air Pollution Control Department has issued a total of 28 notices of violation
concerning alleged noncompliance with applicable permits, regulations and orders
in 1997. No demands for penalties have been made, and the Company has responded
to the notices.
Great Lakes Division - Outfalls Proceedings. With respect to the matter
involving alleged exceedances of discharge limitations at an outfall located at
the Company's Great Lakes Division hot strip mill facility, previously reported
in the Company's 1996 Form 10-K, the Michigan Department of Environmental
Quality ("MDEQ") has presented the Company with a draft Administrative Consent
Order, which included a demand for payment of a $200,000 civil penalty and
MDEQ's costs in the amount of approximately $16,000. Negotiations are
continuing.
Additionally, with respect to the state court complaint filed by MDEQ on
February 5, 1997 alleging approximately 75 violations of two National Pollutant
Discharge Elimination System ("NPDES") water discharge permits, previously
reported in the Company's 1996 Form 10-K, MDEQ presented the Company with a
draft consent decree in which it made a demand for a civil penalty of $45,000 in
settlement of this matter. The Company has responded to MDEQ, agreeing to the
$45,000 penalty, but proposing to expand the scope of the settlement to include
all reported exceedances under the NPDES permits covering the Great Lakes
Division's Zug Island and main plant operations through the effective date of
the consent decree. Discussions are ongoing.
Great Lakes Division - Multimedia Environmental Inspection. With respect to the
matter involving a multimedia inspection of the Company's Great Lakes Division
by the United States Environmental Protection Agency (the "EPA"), previously
reported in the Company's 1996 Form 10-K, on September 24, 1997, the EPA filed a
complaint against the Company alleging violations of various environmental
requirements. An initial civil penalty of approximately $270,000 was proposed.
The Company intends to engage in settlement discussions with the EPA concerning
these matters.
22
<PAGE>
Item 5. Other Information
The Company has appointed Michael D. Gibbons as Acting Chief Financial Officer
while it conducts a search to fill the position on a permanent basis. In
addition to his other responsibilities, Mr. Gibbons will provide oversight and
coordinate activities relating to the Company's restatements of its prior period
financial statements and SEC filings and its continuing efforts to cooperate
with the Audit Committee of the Company's Board of Directors in its inquiry.
(See Note 2 to the unaudited Consolidated Financial Statements.)
The Securities and Exchange Commission has authorized an investigation pursuant
to a formal order of investigation relating to the matters described in Note 2
to the unaudited Consolidated Financial Statements. The Company has been
cooperating with the Staff of the Commission and intends to continue to do so.
Item 6. Exhibits and Reports on Form 8-K
(a) See attached Exhibit Index
(b) Reports on Form 8-K
The Company filed a Form 8-K on December 1, 1997 which disclosed that
National Steel Corporation issued a press release on November 25, 1997
announcing that it redeemed all of its Series B Preferred Stock held
by Avatex Corporation, formerly known as National Intergroup, Inc.,
and finalized a settlement with Avatex regarding certain employee
benefit liabilities associated with the Company's former Weirton Steel
Division, as well as certain environmental liabilities.
23
<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
----------------
24
<PAGE>
NATIONAL STEEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q/A
EXHIBIT INDEX
For the quarterly period ended September 30, 1997
15.1 Independent Accountants' Review Report
15.2 Acknowledgment Letter on unaudited interim financial information
27-A Financial Data Schedule
<PAGE>
Exhibit 15.1
Independent Accountants' Review Report
Board of Directors
National Steel Corporation
We have reviewed the accompanying consolidated balance sheet of National Steel
Corporation and subsidiaries (the Company) as of September 30, 1997, and the
related statements of consolidated income for the three-month and nine-month
periods ended September 30, 1997 and 1996, of consolidated cash flows for the
nine-month periods ended September 30, 1997 and 1996, and of changes in
consolidated stockholders' equity and redeemable preferred stock--Series B for
the nine-month period ended September 30, 1997. These financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company has
restated its previously issued consolidated financial statements for the
three-month and nine-month periods ended September 30, 1997 and 1996.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of National Steel Corporation and
subsidiaries as of December 31, 1996, and the related statements of consolidated
income, cash flows, and changes in stockholders' equity and redeemable preferred
stock--Series B for the year then ended (not presented herein), and in our
report dated January 23, 1997 (except for Notes N and B, as to which the dates
are January 31, 1997 and January 28, 1998, respectively), we expressed an
unqualified opinion on those consolidated financial statements. As discussed in
Note 2 to the accompanying interim consolidated financial statements, the
Company has restated its 1996 consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1996, and in the accompanying statement of changes in consolidated
stockholders' equity and redeemable preferred stock--Series B for the year then
ended, is fairly stated, in all material respects, in relation to the
consolidated financial statements from which they have been derived, after
giving effect to the restatement adjustments discussed in Note 2.
Ernst & Young LLP
Fort Wayne, Indiana
November 14, 1997 except for Note 2,
as to which the date is January 28, 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 November 14, 1997, except for Note 2, as to which the date
is January 28, 1998 relating to the unaudited interim consolidated financial
statements of National Steel Corporation and subsidiaries that are included in
its Form 10-Q/A for the quarter ended September 30, 1997.
Ernst & Young LLP
Fort Wayne, Indiana
January 28, 1998
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