-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D9tKilHomsrqGHkJhoAHNOJ0uaNGR/Sad2u5H+8Sojsgs8LHh9I96ESd/lKenFSS vb4fW1v/ZL7ArCv9kBW5vA== 0000950131-98-004816.txt : 19980814 0000950131-98-004816.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950131-98-004816 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL STEEL CORP CENTRAL INDEX KEY: 0000070578 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 250687210 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00983 FILM NUMBER: 98686536 BUSINESS ADDRESS: STREET 1: 4100 EDISON LAKES PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 46545-3440 BUSINESS PHONE: 2192737000 MAIL ADDRESS: STREET 1: 4100 EDISON LAKE PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 46545-3440 10-Q 1 FORM 10-Q 1998 Second Quarter SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 1 0 - Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-983 NATIONAL STEEL CORPORATION (Exact name of registrant as specified in its charter) Delaware 25-0687210 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): 219-273-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the Registrant's Common Stock $.01 par value, as of July 31, 1998, was 43,288,240 shares, consisting of 22,100,000 shares of Class A Common Stock and 21,188,240 shares of Class B Common Stock. NATIONAL STEEL CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE ---- Consolidated Statements of Income - Three Months Ended June 30, 1998 and 1997 3 Consolidated Statements of Income - Six Months Ended June 30, 1998 and 1997 4 Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997 6 Consolidated Statements of Changes in Stockholders' Equity and Redeemable Preferred Stock-Series B - Six Months Ended June 30, 1998 and Year Ended December 31, 1997 7 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Legal Proceedings 16 Submission of Matters to a Vote of Security Holders 16 Other Information 16 Exhibits and Reports on Form 8-K 17
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands of Dollars, Except Per Share Amounts) (Unaudited)
Three Months Ended June 30, 1998 1997 ---- ---- Net Sales $747,846 $824,869 Cost of products sold 655,420 700,051 Selling, general and administrative expense 33,501 36,937 Depreciation 32,444 36,984 Equity income of affiliates (318) (672) -------- -------- Income from Operations 26,799 51,569 Other (Income) Expense Interest and other financial income (4,055) (4,712) Interest and other financial expense 6,974 9,390 Net gain on disposal of non-core assets (2,685) (25,385) -------- -------- 234 (20,707) -------- -------- Income Before Income Taxes and Extraordinary Item 26,565 72,276 Income tax provision 106 7,351 -------- -------- Income Before Extraordinary Item 26,459 64,925 Extraordinary item (net of applicable tax) -- (5,397) -------- -------- Net Income 26,459 59,528 Less preferred stock dividends -- 2,737 -------- -------- Net Income Applicable to Common Stock $ 26,459 $ 56,791 ======== ======== Basic Earnings Per Share: Income before extraordinary item $ 0.61 $ 1.43 Extraordinary item -- (0.12) -------- -------- Net Income Applicable to Common Stock $ 0.61 $ 1.31 ======== ======== Weighted average shares outstanding (in thousands) 43,288 43,288 Diluted Earnings Per Share: Income before extraordinary item $ 0.61 $ 1.42 Extraordinary item -- (0.12) -------- -------- Net Income Applicable to Common Stock $ 0.61 $ 1.30 ======== ======== Weighted average shares outstanding (in thousands) 43,354 43,620 Dividends paid per Common Share $ 0.07 $ -- ======== ========
See notes to consolidated financial statements. 3 NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands of Dollars, Except Per Share Amounts) (Unaudited)
Six Months Ended June 30, 1998 1997 ---------- ---------- Net Sales $1,456,275 $1,582,487 Cost of products sold 1,292,847 1,353,255 Selling, general and administrative expense 71,538 69,381 Depreciation 63,524 72,135 Equity income of affiliates (236) (766) ---------- ---------- Income from Operations 28,602 88,482 Other (Income) Expense Interest and other financial income (9,498) (6,427) Interest and other financial expense 13,200 19,279 Net gain on disposal of non-core assets (2,685) (25,385) ---------- ---------- 1,017 (12,533) ---------- ---------- Income Before Income Taxes and Extraordinary Item 27,589 101,015 Income tax provision (credit) (4,822) 9,425 ---------- ---------- Income Before Extraordinary Item 32,407 91,590 Extraordinary item (net of applicable tax) -- (5,397) ---------- ---------- Net Income 32,407 86,193 Less preferred stock dividends -- 5,478 ---------- ---------- Net Income Applicable to Common Stock $ 32,407 $ 80,715 ========== ========== Basic Earnings Per Share: Income before extraordinary item $ 0.75 $ 1.98 Extraordinary item -- (0.12) ---------- ---------- Net Income Applicable to Common Stock $ 0.75 $ 1.86 ========== ========== Weighted average shares outstanding (in thousands) 43,288 43,288 Diluted Earnings Per Share: Income before extraordinary item $ 0.75 $ 1.97 Extraordinary item -- (0.12) ---------- ---------- Net Income Applicable to Common Stock $ 0.75 $ 1.85 ========== ========== Weighted average shares outstanding (in thousands) 43,340 43,463 Dividends paid per Common Share $ 0.14 $ -- ========== ==========
See notes to consolidated financial statements. 4 NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars, Except Share Amounts) (Unaudited)
June 30, December 31, 1998 1997 ---------- ------------ Assets Current assets Cash and cash equivalents $ 229,202 $ 312,642 Investments 10,000 25,000 Receivables - net 270,405 284,306 Inventories - net: Finished and semi-finished products 304,592 261,648 Raw materials and supplies 129,011 112,554 ---------- ---------- 433,603 374,202 Deferred tax assets 8,597 8,597 ---------- ---------- Total current assets 951,807 1,004,747 Investments in affiliated companies 16,015 15,709 Property, plant and equipment 3,432,056 3,378,131 Less accumulated depreciation 2,204,760 2,149,107 ---------- ---------- 1,227,296 1,229,024 Other assets 216,942 203,979 ---------- ---------- Total Assets $2,412,060 $2,453,459 ========== ========== Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 273,202 $ 246,085 Accrued liabilities 272,688 359,749 Current portion of long term debt 29,919 31,533 ---------- ---------- Total current liabilities 575,809 637,367 Long-term debt 299,973 310,976 Other long-term liabilities 672,953 668,138 Stockholders' equity Common Stock - par value $.01: Class A - authorized 30,000,000 shares, issued and outstanding 22,100,000 221 221 Class B - authorized 65,000,000 shares; issued and outstanding 21,188,240 212 212 Additional paid-in-capital 491,835 491,835 Retained earnings 372,223 345,876 Accumulated other comprehensive income: Minimum pension liability (1,166) (1,166) ---------- ---------- Total stockholders' equity 863,325 836,978 ---------- ---------- Total Liabilities and Stockholders' Equity $2,412,060 $2,453,459 ========== ==========
See notes to consolidated financial statements. 5 NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars) (Unaudited)
Six Months Ended June 30, 1998 1997 -------- --------- Cash Flows from Operating Activities: Net income $ 32,407 $ 86,193 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 63,524 72,135 Carrying charges related to facility sales and plant closings 2,686 10,356 Net gain on disposal of non-core assets (2,685) (25,385) Equity income (236) (766) Dividends from affiliates 1,800 6,808 Postretirement benefits 15,883 7,988 Extraordinary item (net) -- 5,397 Deferred income taxes (10,800) (10,800) Changes in working capital items: Investments 15,000 -- Receivables 13,901 (1,816) Inventories (59,401) 48,257 Accounts payable 27,117 35,607 Accrued liabilities (87,061) 30,619 Other (16,903) 3,068 -------- --------- Net Cash Provided by (Used in) Operating Activities (4,768) 267,661 -------- --------- Cash Flows from Investing Activities: Proceeds from the sale of non-core assets 3,278 312,306 Purchases of plant and equipment (63,273) (71,593) Other -- (362) -------- --------- Net Cash Provided by (Used in) Investing Activities (59,995) 240,351 -------- --------- Cash Flows from Financing Activities: Prepayment of related party debt -- (154,328) Costs associated with prepayment of related party debt -- (4,500) Other debt repayment (19,817) (18,664) Borrowings 7,200 -- Dividend payments on Common Stock (6,060) -- Dividend payments on Preferred Stock-Series A -- (1,998) Dividend payments on Preferred Stock-Series B -- (210) Payment of released Weirton benefit liabilities -- (6,684) Payment of unreleased Weirton liabilities and their release in lieu of cash dividends on Preferred Stock-Series B -- (3,785) -------- --------- Net Cash Used in Financing Activities (18,677) (190,169) -------- --------- Net Increase (Decrease) in Cash and Cash Equivalents (83,440) 317,843 Cash and cash equivalents at beginning of the period 312,642 109,041 -------- --------- Cash and cash equivalents at end of the period $229,202 $ 426,884 ======== =========
See notes to consolidated financial statements.12 6 NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK - SERIES B (In Thousands of Dollars) (Unaudited)
Accumulated Common Common Preferred Additional Other Stock - Stock - Stock - Paid-In Comprehensive Class A Class B Series A Capital Income ------- ------- --------- ---------- ------------- BALANCE AT JANUARY 1, 1997 $221 $212 $36,650 $465,359 $ (505) Comprehensive Income: Net income Other comprehensive income: Minimum pension liability (661) Comprehensive income Amortization of excess of book value over redemption value of Redeemable Preferred Stock - Series B Cumulative dividends on Preferred Stock - Series A and B Redemption of Preferred Stock - Series A (36,650) Redemption of Redeemable Preferred Stock - Series B and related settlement with Avatex 26,476 ---- ---- ------- -------- ------- BALANCE AT DECEMBER 31, 1997 221 212 --- 491,835 (1,166) Net income and comprehensive income Dividends paid ---- ---- ------- -------- ------- BALANCE AT JUNE 30, 1998 $221 $212 $ ---- $491,835 $(1,166) ==== ==== ======= ======== =======
Total Redeemable Retained Stockholders' Preferred Stock - Earnings Equity Series B -------- ------------ ----------------- BALANCE AT JANUARY 1, 1997 $142,625 $644,562 $ 63,530 Comprehensive Income: Net income 213,503 213,503 Other comprehensive income: Minimum pension liability (661) Comprehensive income -------- 212,842 -------- Amortization of excess of book value over redemption value of Redeemable Preferred Stock - Series B 1,354 1,354 (1,354) Cumulative dividends on Preferred Stock - Series A and B (11,606) (11,606) Redemption of Preferred Stock - Series A (36,650) Redemption of Redeemable Preferred Stock - Series B and related settlement with Avatex 26,476 (62,176) -------- -------- ------- BALANCE AT DECEMBER 31, 1997 345,876 836,978 ---- Net income and comprehensive income 32,407 32,407 Dividends paid (6,060) (6,060) -------- -------- ------- BALANCE AT JUNE 30, 1998 $372,223 $863,325 $ ---- ======== ======== =======
See notes to consolidated financial statements. 7 NATIONAL STEEL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements of National Steel Corporation and its majority owned subsidiaries (the "Company") presented herein are unaudited. However, in the opinion of management, such statements include all adjustments necessary for a fair presentation of the results for the periods indicated. All such adjustments made were of a normal recurring nature. The financial results presented for the three and six month periods ended June 30, 1998 are not necessarily indicative of results of operations for the full year. The Annual Report of the Company on Form 10-K, as amended, for the year ended December 31, 1997 (the "1997 Form 10-K") contains additional information and should be read in conjunction with this report. The Company has engaged Ernst & Young LLP to conduct a review of the consolidated financial statements presented herein, in accordance with standards established by the American Institute of Certified Public Accountants. Their review report is included as an exhibit to this Form 10-Q. Certain items in prior years have been reclassified to conform with the current year presentation. NOTE 2 - AUDIT COMMITTEE INQUIRY AND SECURITIES AND EXCHANGE COMMISSION INQUIRY In the third quarter of 1997, the Audit Committee of the Company's Board of Directors was informed of allegations about managed earnings, including excess reserves and the accretion of such reserves to income over multiple periods, as well as allegations about deficiencies in the system of internal controls. The Audit Committee engaged legal counsel who, with the assistance of an accounting firm, inquired into these matters. The Company, based upon the inquiry, restated its financial statements for certain prior periods. On January 29, 1998, the Company filed a Form 10-K/A for 1996 and Forms 10-Q/A for the first, second and third quarters of 1997 reflecting the restatements. See these Forms for information about the restatement, the report of legal counsel to the Audit Committee and the recommendations, approved by the Board of Directors, to improve the Company's system of internal controls contained in the aforementioned report. The Securities and Exchange Commission (the "Commission") has authorized an investigation pursuant to a formal order of investigation relating to the matters described above. The Company has been cooperating with the staff of the Commission and intends to continue to do so. Additionally, a complaint has been filed seeking shareholder class action status and alleging violations of the federal securities laws generally relating to the matters described above. The Company believes that the lawsuit is without merit and intends to defend against it vigorously. NOTE 3 - ENVIRONMENTAL AND LEGAL PROCEEDINGS The Company's operations are subject to numerous laws and regulations relating to the protection of human health and the environment. Because these environmental laws and regulations are quite stringent and are generally becoming more stringent, the Company has expended, and can be expected to expend in the future, substantial amounts for compliance with these laws and regulations. Due to the possibility of future changes in circumstances or regulatory requirements, the amount and timing of future environmental expenditures could vary from those currently anticipated. 8 It is the Company's policy to expense or capitalize, as appropriate, environmental expenditures that relate to current operating sites. Environmental expenditures that relate to past operations and which do not contribute to future or current revenue generation are expensed. Costs for environmental assessments or remediation activities, or penalties or fines that may be imposed for noncompliance with environmental laws and regulations, are accrued when it is probable that liability for such costs will be incurred and the amount of such costs can be reasonably estimated. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and similar state superfund statutes generally impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated properties, regardless of fault. The Company and certain of its subsidiaries are involved as potentially responsible parties ("PRPs") at a number of off-site CERCLA or state superfund site proceedings. At some of these sites, the Company does not have sufficient information regarding the nature and extent of the contamination, the wastes contributed by other PRPs, or the required remediation activity to estimate its potential liability. The Company has also recorded the reclamation and other costs to restore its coal mines at its shutdown locations to their original and natural state, as required by various federal and state mining statutes. Since the Company has been conducting steel manufacturing and related operations at numerous locations for over sixty years, the Company potentially may be required to remediate or reclaim any contamination that may be present at these sites. The Company does not have sufficient information to estimate its potential liability in connection with any potential future remediation at such sites. Accordingly, the Company has not accrued for such potential liabilities. As these matters progress or the Company becomes aware of additional matters, the Company may be required to accrue charges in excess of those previously accrued. The outcome of any of the matters described, to the extent they exceed any applicable reserves, could have a material adverse effect on the Company's results of operations and liquidity for the applicable period. The Company has recorded an aggregate environmental liability of approximately $18.3 million and $18.7 million at June 30, 1998 and December 31, 1997, respectively. The Company is involved in various non-environmental legal proceedings, most of which occur in the normal course of its business. The Company does not believe that these proceedings will have a material adverse effect, either individually or in the aggregate, on the Company's financial condition. However, with respect to certain of the proceedings, if reserves prove to be inadequate and the Company incurs a charge to earnings, such charge could have a material adverse effect on the Company's results of operations and liquidity for the applicable period. NOTE 4 - EARNINGS PER SHARE Basic earnings per share ("EPS") is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of common stock shares outstanding during the period plus dilutive stock options which are determined through the application of the treasury stock method. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Comparative operating results for the six and three month periods ending June 30, 1998 and 1997 are as follows:
Six Months ended June 30, Three Months ended June 30, 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in millions) (Dollars in millions) Net Sales $1,456.3 $1,582.5 $747.8 $824.9 Gross margin 99.9 157.1 60.0 87.8 Gross margin as a percentage of net sales 6.9% 9.9% 8.0% 10.6% Tons shipped (in thousands) 2,869 3,125 1,450 1,605
Net Sales Net sales for the first six months of 1998 totaled $1,456.3 million, an 8.0% decrease compared to the net sales of $1,582.5 million during the corresponding 1997 period. Tons shipped in the first six months of 1998 and 1997 were 2,869,000 and 3,125,000, respectively. The decrease in tons shipped is the primary reason for the $126.2 million decrease in sales for the first half of the year and was mainly caused by the Great Lakes Division "A" blast furnace reline during much of the first quarter as well as part of the second quarter and adverse weather conditions affecting shipments to the construction and container markets in the second quarter. Net sales for the second quarter of 1998 totaled $747.8 million, a 9.3% decrease compared to net sales of $824.9 million during the corresponding 1997 period. Tons shipped in the second quarter of 1998 and 1997 were 1,450,000 and 1,605,000, respectively. The 155,000 ton decrease in shipments in the second quarter of 1998 was primarily a result of adverse weather conditions affecting shipments to the construction and container markets as well as the blast furnace reline. This resulted in a decrease in sales of approximately $79.0 million when compared to the second quarter of 1997. Also contributing to the sales decrease was a $9 per ton decrease in average selling price, which reduced sales by approximately $14.0 million. Product, market and customer mix improvements amounting to approximately $16.0 million, or $11 per ton, partially offset the decreases described above. Gross Margin (net sales less cost of products sold and depreciation) Gross margin in the first six months of 1998 was $99.9 million, or 6.9% of net sales, compared to gross margin of $157.1 million, or 9.9% of net sales, during the corresponding 1997 period. The decrease in gross margin in the first half of 1998 is primarily the result of lower net sales due to a lower number of tons shipped and lower sales realizations amounting to approximately $61.0 million. The Great Lakes Division "A" blast furnace outage along with higher maintenance costs and other manufacturing costs lowered margins by approximately $39.0 million when compared to the corresponding 1997 period. The other costs referred to above include the effects of a late winter storm that affected the Company's Midwest Division and an unplanned outage at the National Steel Pellet Company, both of which occurred in the first quarter of 1998. This was partially offset by improved operating unit yield performances, lower depreciation expense as a result of the second quarter 1997 sale of the Great Lakes Division No. 5 coke battery and lower costs due to the results of the fourth quarter 1997 settlement with Avatex Corporation. These offsetting items amounted to approximately a $32.0 million increase in gross margin. In addition, outside steel purchases were lower by $10.0 million compared to the corresponding 1997 period. 10 Gross Margin - (Continued) Gross margin in the second quarter of 1998 was $60.0 million, or 8.0% of net sales, compared to gross margin of $87.8 million, or 10.6% of net sales, during the corresponding 1997 period. The decrease in gross margin in the second quarter of 1998 when compared to the second quarter of 1997 is primarily the result of lower net sales due to lower shipments and lower selling prices, as described in the net sales discussion above, impacting gross margins by approximately $36.0 million. In addition, the Company's Great Lakes Division "A" blast furnace outage which extended into the second quarter of 1998, as well as higher maintenance, raw material and energy costs, reduced gross margins by an additional $20.0 million. The above mentioned second quarter events were partially offset by improved product and customer mix, improved operating unit yield performances, lower depreciation expense as a result of the second quarter 1997 sale of the Great Lakes Division No. 5 coke battery and lower costs due to the results of the 1997 settlement with Avatex Corporation. These offsetting items amounted to approximately $23.0 million. In addition, outside steel purchases were lower by $6.0 million compared to the same period in 1997. Selling, General and Administrative Expense Selling, general and administrative expense in the first half of 1998 was $71.5 million, or 4.9% of net sales, compared to $69.4 million, or 4.4% of net sales, in the corresponding 1997 period. This $2.1 million increase is primarily a result of higher expenses associated with stock appreciation rights and higher professional and legal service costs, partially offset by lower information systems costs. Selling, general and administrative expense in the second quarter of 1998 was $33.5 million, or 4.5% of net sales, compared to $36.9 million, or 4.5% of net sales, in the corresponding 1997 period. This $3.4 million decrease is primarily a result of lower expenses associated with stock appreciation rights and lower information systems costs partially offset by higher legal expenses when compared to the second quarter of 1997. Net Financing Costs In the six months ended June 30, 1998, net financing costs represented a $9.2 million decrease compared to the same 1997 period. Lower interest expense of $6.1 million resulted from lower average debt levels while income on short-term investments increased by $3.1 million due to higher average cash balances when compared to the same 1997 period. Net financing costs of $2.9 million for the three months ended June 30, 1998 represented a $1.8 million decrease compared to the same 1997 period. This improvement is primarily attributable to a $2.4 million decrease in interest expense which resulted from lower average debt levels and was partially offset by lower income on short term investments of $0.6 million. Net Gain On Disposal of Non-Core Assets and Other Related Activities During the second quarter of 1998, the Company sold certain non-core land and property at its Midwest Division and recorded a net gain of $2.7 million related to the sale. During the second quarter of 1997, the Company disposed of certain non-core business assets that resulted in a net gain of $25.3 million. The assets included the sale of the Company's 21.73% minority equity interest in the Iron Ore Company of Canada which netted a gain of $37.0 million, the sale of its Great Lakes Division No. 5 coke oven battery and related coal inventories which netted a loss of $11.1 million and the sale of a coal mine property which netted a gain of $3.0 million. Additionally, the Company recorded a $3.6 million charge related to the decision to cease operations of American Steel Corporation, a wholly-owned subsidiary which pickled and slit steel. 11 Income Taxes The Company recorded current taxes payable of $6.0 million and $20.2 million in the six month period ending June 30, 1998 and 1997, respectively. The Company also recorded a deferred tax benefit of $10.8 million in the first six months of both 1998 and 1997. The Company recorded current taxes payable of $5.5 million and $12.8 million in the second quarter of 1998 and 1997, respectively. The Company also recorded a deferred tax benefit of $5.4 million in the second quarters of both 1998 and 1997. The Company's effective tax rate is lower than the combined federal and state statutory rates primarily because of continued utilization of available federal and state net operating loss carryforwards and the recognition of additional deferred tax benefits. Other The Company anticipates the resumption of regular shipments to General Motors following the settlement of its strike. The Company is closely monitoring increased imports from Asia and Eastern Europe as well as the continued impact of adverse weather on the food container market. 12 LIQUIDITY AND SOURCES OF CAPITAL The Company's liquidity needs arise primarily from capital investments, working capital requirements, pension funding requirements, principal and interest payments on its indebtedness and common stock dividend payments. The Company has satisfied these liquidity needs with funds provided by long term borrowings and cash provided by operations. Additional sources of liquidity consist of a Receivables Purchase Agreement (the "Receivables Purchase Agreement") with commitments of up to $200.0 million and an expiration date of September 2002 and a $100.0 million and a $50.0 million credit facility, both of which are secured by the Company's inventories (the "Inventory Facilities") and expire in May 2000 and July 1999, respectively. The Company is currently in compliance with all material covenants of, and obligations under, the Receivables Purchase Agreement, the Inventory Facilities and other debt instruments. On June 30, 1998, there were no cash borrowings outstanding under the Receivables Purchase Agreement or the Inventory Facilities, and outstanding letters of credit under the Receivables Purchase Agreement totaled $86.2 million. During the first six months of 1998, the maximum availability under the Receivables Purchase Agreement, after reduction of letters of credit outstanding, varied from $76.3 million to $113.8 million and was $113.8 million as of June 30, 1998. At June 30, 1998, total debt as a percentage of total capitalization decreased to 27.7% as compared to 29.0% at December 31, 1997. Cash and cash equivalents totaled $229.2 million at June 30, 1998 compared to $312.6 million at December 31, 1997. The Company continues to evaluate possible uses of any excess cash reserves, including additional pension funding, additional debt retirement, a common stock repurchase program and additional strategic investment opportunities. Cash Flows from Operating Activities For the six months ended June 30, 1998, cash used in operating activities amounted to $4.8 million, which is primarily attributable to the impact of working capital items. These items include decreases in accrued liabilities mainly due to the timing of pension and bonus payments and increases in inventories partially offset by noncash charges for depreciation and postretirement benefits along with net income of $32.4 million. Cash Flows from Investing Activities Capital investments for the six months ended June 30, 1998 amounted to $63.3 million. The 1998 spending is mainly attributable to the construction of the new coating line at the Midwest Division and the reline of the Great Lakes Division "A" blast furnace. Cash Flows from Financing Activities During the first six months of 1998, the Company utilized $18.7 million of cash for financing activities which included scheduled payments of debt, as well as dividend payments on the Company's common stock. 13 OTHER Year 2000 Issues The "Year 2000" computer software problem is caused by programming practices that were originally intended to conserve computer memory, thus allowing only two "digits" in the date field with the assumption being that the first two date digits would be "19." If not corrected, this error could cause computers to fail or give erroneous results as the computer processes data before or during the year 2000. The Company has been active in trying to correct this problem under the oversight of an executive steering committee. Thus far during 1998, the Company has spent approximately $1.3 million on Year 2000 projects. Additionally, the Company spent $1.8 million in 1997. The Company expects to spend up to an additional $8.7 million in 1998 and 1999 to complete its Year 2000 projects, and anticipates the final completion of these projects to occur in the second quarter of 1999. These projects include business software and other information technology items, as well as non-information technology items, such as process control software and embedded software in hardware devices. The Company is also reviewing with its major vendors and suppliers their efforts in becoming Year 2000 compliant. The Company continues to assess its various systems, electronic commerce and business associates, and intends to make whatever modifications are necessary to prevent business interruption. The cost and time for completion of the Year 2000 projects are management's best estimates and were derived utilizing certain industry standards, as well as actual analysis of software programs. Assumptions have been made relative to the timing of future events and availability of resources. Various factors could cause expected cost and completion times to differ from those anticipated. However, the Company does not currently believe that Year 2000 issues will have a material adverse impact on the Company's financial condition or results of operations. Great Lakes Division Property Tax Appeal In 1991, the Company filed a lawsuit in the Michigan Tax Tribunal against the cities of River Rouge and Ecorse seeking a reduction in the assessed value of the real estate and personal property at the Company's Great Lakes Division. The lawsuit was amended year by year to cover the tax years 1991 through 1994. Following a decision by the Michigan Tax Tribunal in August 1996 reducing the assessed values, all parties appealed this decision. In January 1998, the Court of Appeals issued a written opinion in which it affirmed in part, vacated in part and remanded the case to the Michigan Tax Tribunal. A second case involving tax years 1995 through 1997 is also pending in the Michigan Tax Tribunal. A proposed settlement of both cases is currently under review by, and is subject to the approval of, the Michigan Tax Tribunal. Any settlement is not expected to have a material impact on the financial position of the Company. Impact of Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement changes the way public companies are required to report operating segment information in annual financial statements and in interim financial reports to stockholders. Operating segments are determined consistent with the way management organizes and evaluates financial information internally for making decisions and assessing performance. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Statement is effective for financial statements for fiscal years beginning after December 15, 1997, and the Company will adopt the Statement, as required, effective December 31, 1998. Although the Company continues to evaluate the impact that this Statement will have on its financial reporting, the Company does not expect significant additional reporting requirements. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which is effective for fiscal years beginning after December 15, 1997, and will be adopted by the Company, as required, effective December 31, 1998. The statement will standardize disclosures about pensions and other postretirement benefits in an effort to make the information more understandable. Implementation of this disclosure standard will not affect the financial position or results of operations of the Company. 14 Dividend on Common Stock On July 20, 1998, the Company's board of directors declared a regular quarterly common stock dividend of $0.07 per share, payable on September 9, 1998, to shareholders of record on August 21, 1998. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 Statements made by the Company in reports, such as this Form 10-Q, in press releases and in statements made by employees in oral discussions, that are not historical facts constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements, by their nature, involve risk and uncertainty. A variety of factors could cause business conditions and the Company's actual results and experience to differ materially from those expected by the Company or expressed in the Company's forward looking statements. These factors include, but are not limited to, the following: (1) changes in market prices and market demand for the Company's products; (2) changes in the costs or availability of the raw materials and other supplies used by the Company in the manufacture of its products; (3) equipment failures or outages at the Company's steelmaking and processing facilities; (4) losses of customers; (5) changes in the levels of the Company's operating costs and expenses; (6) collective bargaining agreement negotiations, strikes, labor stoppages or other labor difficulties; (7) actions by the Company's competitors, including domestic integrated steel producers, foreign competitors, mini-mills and manufacturers of steel substitutes, such as plastics, aluminum, ceramics, glass, wood and concrete; (8) changes in industry capacity; (9) changes in economic conditions in the United States and other major international economies, including rates of economic growth and inflation; (10) worldwide changes in trade, monetary or fiscal policies including changes in interest rates; (11) changes in the legal and regulatory requirements applicable to the Company; and (12) the effects of extreme weather conditions. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings Steinmetz v. National Steel Corporation, et. al. A complaint was filed on May 13, 1998 in the United States District Court for the Northern District of Indiana by named plaintiff Hyman Steinmetz seeking shareholder class action status and alleging violations of the federal securities laws against the Company; its majority shareholder, NKK U.S.A. Corporation; Osamu Sawaragi, the Company's chairman and chief executive officer; and a former officer of the Company. The complaint generally relates to the Company's restatement of its financial statements for certain prior periods which was announced in October 1997. The complaint seeks unspecified money damages, interest, costs and fees. The Company believes that the lawsuit is without merit and intends to defend against it vigorously. Item 4. Submission of Matters to a Vote of Security Holders Set forth below are the results of the vote on the matters which were submitted to a vote of the Company's stockholders at the annual meeting of stockholders which was held on April 27, 1998: (1) Election of Directors. The following individuals were elected to serve as directors of the Company, for a term expiring on the date of the 1999 annual meeting of stockholders, by the following vote:
Name Number of Votes For Number of Votes Withheld ---- ------------------- ------------------------ Charles A. Bowsher 63,555,842 113,675 Edsel D. Dunford 63,555,992 113,525 Frank J. Lucchino 63,566,192 103,325 Bruce K. MacLaury 63,555,842 113,675 Keiichiro Sakata 63,556,342 113,175 Osamu Sawaragi 63,556,342 113,175 Mineo Shimura 63,555,342 114,175 Hisashi Tanaka 63,556,342 113,175 Yutaka Tanaka 63,556,342 113,175
(2) Ratification of Independent Auditors. The appointment of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending December 31, 1998 was ratified by the following vote:
Number of Votes For Number of Votes For Number of Abstentions ------------------- ------------------- --------------------- 63,654,569 5,436 9,512
Item 5. Other Information In accordance with the recent amendments to Rule 14a-4 and 14a-5 under the Securities Exchange Act of 1934, written notice of shareholder proposals submitted outside the processes of Rule 14a-8 for consideration at the 1999 Annual Meeting of Shareholders must be received by the Company on or before February 10, 1999, in order to be considered timely for purposes of Rule 14a-4. The persons designated in the Company's proxy statement shall be granted discretionary authority to vote with respect to any shareholder proposal of which the Company does not receive timely notice. 16 Item 6. Exhibits and Reports on Form 8-K (a) See attached Exhibit Index (b) Reports on Form 8-K The Company filed a report on Form 8-K dated April 28, 1998 reporting on Item 5, Other Events. The Company filed a report on Form 8-K dated April 29, 1998 reporting on Item 5, Other Events. The Company filed a report on Form 8-K dated June 3, 1998 reporting on Item 5, Other Events. The Company filed a report on Form 8-K dated June 18, 1998 reporting on Item 5, Other Events. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL STEEL CORPORATION BY /s/ John A. Maczuzak ---------------------------------------------- John A. Maczuzak President and Chief Operating Officer BY /s/ Glenn H. Gage ---------------------------------------------- Glenn H. Gage Senior Vice President and Chief Financial Officer Date: August 13, 1998 18 NATIONAL STEEL CORPORATION QUARTERLY REPORT ON FORM 10-Q EXHIBIT INDEX For the quarterly period ended June 30, 1998 15.1 Independent Accountants' Review Report 15.2 Acknowledgment Letter on Unaudited Interim Financial Information 27-A Financial Data Schedule 19 EX-15.1 2 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Exhibit 15.1 Independent Accountants' Review Report Board of Directors National Steel Corporation We have reviewed the accompanying consolidated balance sheet of National Steel Corporation and subsidiaries (the Company) as of June 30, 1998, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 1998 and 1997, of cash flows for the six-month period ended June 30, 1998 and 1997, and of changes in stockholders' equity and redeemable preferred stock--Series B for the six-month period ended June 30, 1998. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of National Steel Corporation and subsidiaries as of December 31, 1997, and the related consolidated statements of income, cash flows, and stockholders' equity and redeemable preferred stock-- Series B for the year then ended (not presented here), and in our report dated January 28, 1998 (except for Notes C, I, and K, as to which the date is February 26, 1998), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Ernst & Young LLP Fort Wayne, Indiana August 13, 1998 EX-15.2 3 ACKNOWLEDGEMENT LETTER Exhibit 15.2 Board of Directors National Steel Corporation We are aware of the incorporation by reference in the following Registration Statements: Form S-8, No. 33-51991, pertaining to the 1994 and 1995 Stock Grants to Union Employees, Form S-8, No. 33-51081, pertaining to the 1993 National Steel Corporation Long-Term Incentive Plan, Form S-8, No. 33-51083, pertaining to the 1993 National Steel Corporation Non-Employee Director's Stock Option Plan, and Form S-8, No. 33-61087, pertaining to the National Steel Retirement Savings Plan and National Steel Represented Employee Retirement Savings Plan, of our report dated August 13, 1998 relating to the unaudited interim consolidated financial statements of National Steel Corporation and subsidiaries that are included in its Form 10-Q for the quarter ended June 30, 1998. Ernst & Young LLP Fort Wayne, Indiana August 13, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 229,202 10,000 288,901 18,496 433,606 951,807 3,432,056 2,204,760 2,412,060 575,809 299,973 0 0 433 862,892 2,412,060 1,456,275 1,456,275 1,292,847 1,292,847 132,141 852 3,702 27,589 (4,822) 32,407 0 0 0 32,407 0.75 0.75
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