-----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, WX2MzL+omrSAqcrqzBAjwyboWaYjK7IEY4iNVaW4uhWFCbZ2ec3nBwIxL1XYAWNY 5GMKxL9tJUu5vp5EBgaN8w== 0000950131-97-006855.txt : 19971117 0000950131-97-006855.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950131-97-006855 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: 97721224 BUSINESS ADDRESS: STREET 1: 4100 EDISON LAKES PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 465453440 BUSINESS PHONE: 2192737000 MAIL ADDRESS: STREET 1: 4100 EDISON LAKE PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 46545-3440 10-Q 1 FORM 10-Q 1997 Third Quarter SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-983 NATIONAL STEEL CORPORATION (Exact name of registrant as specified in its charter) Delaware 25-0687210 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): 219-273-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the Registrant's Common Stock $ .01 par value, as of October 31, 1997, was 43,288,240 shares. NATIONAL STEEL CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE ---- Statements of Consolidated Income - Three Months Ended September 30, 1997 and 1996 3 Statements of Consolidated Income - Nine Months Ended September 30, 1997 and 1996 4 Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 5 Statements of Consolidated Cash Flows - Nine Months Ended September 30, 1997 and 1996 6 Statements of Changes in Consolidated Stockholders' Equity and Redeemable Preferred Stock-Series B - Nine Months Ended September 30, 1997 and Year Ended December 31, 1996 7 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II. OTHER INFORMATION Legal Proceedings 20 Other Information 21 Exhibits and Reports on Form 8-K 21
2 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)
Three Months Ended September 30, 1996 1997 (Restated) --------- ---------- Net Sales $788,663 $735,858 Cost of products sold 654,140 644,960 Selling, general and administrative expense 37,379 40,099 Depreciation and amortization 31,201 36,501 Equity income of affiliates (301) (3,518) -------- -------- Income from Operations 66,244 17,816 Other (Income) Expense: Interest and other financial income (6,245) (1,645) Interest and other financial expense 7,436 11,096 Net gain on disposal of non-core assets (28,804) (3,732) -------- -------- (27,613) 5,719 -------- -------- Income Before Income Taxes and Cumulative Effect of Accounting Change 93,857 12,097 Income tax provision 16,531 3,374 -------- -------- Income Before Cumulative Effect of Accounting Change 77,326 8,723 Cumulative effect of accounting change -- 11,100 -------- -------- Net Income 77,326 19,823 Less preferred stock dividends (2,740) (2,740) -------- -------- Net income applicable to Common Stock $ 74,586 $ 17,083 ======== ======== Per Share Data Applicable to Common Stock: Income Before Cumulative Effect of Accounting Change $1.72 $ 0.13 Cumulative effect of accounting change -- 0.26 -------- -------- Net Income Applicable to Common Stock $1.72 $ 0.39 ======== ======== Weighted average shares outstanding (in thousands) 43,288 43,288
See notes to consolidated financial statements. 3 NATIONAL STEEL CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (In Thousands of Dollars, Except Per Share Amounts) (Unaudited)
Nine Months Ended September 30, 1996 1997 (Restated) ---------- ---------- Net Sales $2,371,150 $2,187,482 Cost of products sold 2,008,245 1,954,507 Selling, general and administrative expense 106,160 104,285 Depreciation and amortization 103,336 109,111 Equity income of affiliates (1,067) (7,181) ---------- ---------- Income from Operations 154,476 26,760 Other (Income) Expense: Interest and other financial income (12,672) (5,338) Interest and other financial expense 26,715 32,909 Net gain on disposal of non-core assets (48,979) (3,732) ---------- ---------- (34,936) 23,839 ---------- ---------- Income Before Income Taxes, Extraordinary Item and Cumulative Effect of Accounting Change 189,412 2,921 Income tax provision (credit) 27,208 (7,723) ---------- ---------- Income Before Extraordinary Item and Cumulative Effect of Accounting Change 162,204 10,644 Extraordinary Item (5,397) -- Cumulative effect of accounting change -- 11,100 ---------- ---------- Net Income 156,807 21,744 Less preferred stock dividends (8,218) (8,222) ---------- ---------- Net income applicable to Common Stock $ 148,589 $ 13,522 ========== ========== Per Share Data Applicable to Common Stock: Income Before Extraordinary Item and Cumulative Effect of Accounting Change $3.55 $0.05 Extraordinary Item (0.12) -- Cumulative effect of accounting change -- 0.26 ---------- ---------- Net Income Applicable to Common Stock $3.43 $0.31 ========== ========== Weighted average shares outstanding (in thousands) 43,288 43,288
See notes to consolidated financial statements. 4 NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars, Except Share Amounts) (Unaudited)
December 31, September 30, 1996 Assets 1997 (Restated) -------------- ----------- Current assets Cash and cash equivalents $ 416,906 $ 109,041 Receivables - net 285,509 281,889 Inventories - net Finished and semi-finished products 275,837 299,333 Raw materials and supplies 117,543 141,234 ---------- ---------- 393,380 440,567 ---------- ---------- Total current assets 1,095,795 831,497 Investments in affiliated companies 15,818 65,399 Property, plant and equipment 3,334,335 3,664,597 Less allowances for depreciation and amortization 2,125,817 2,209,079 ---------- ---------- 1,208,518 1,455,518 Other assets 219,519 201,247 ---------- ---------- Total Assets $2,539,650 $2,553,661 ========== ========== Liabilities, Redeemable Preferred Stock and Stockholders' Equity Current liabilities Accounts payable $ 254,375 $ 234,892 Accrued liabilities 336,525 279,677 Current portion of long term obligations 34,332 37,731 ---------- ---------- Total current liabilities 625,232 552,300 Long term obligations 311,679 323,550 Long term indebtedness to related parties -- 146,744 Other long term liabilities 750,088 825,880 Redeemable Preferred Stock - Series B 62,405 63,530 Stockholders' equity Common Stock - par value $.01: Class A - authorized 30,000,000 shares; issued and outstanding 22,100,000 221 221 Class B - authorized 65,000,000 shares; issued and outstanding 21,188,240 212 212 Preferred Stock - Series A 36,650 36,650 Additional paid-in-capital 465,359 465,359 Retained earnings 287,804 139,215 ---------- ---------- Total stockholders' equity 790,246 641,657 ---------- ---------- Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity $2,539,650 $2,553,661 ========== ==========
See notes to consolidated financial statements. 5 NATIONAL STEEL CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands of Dollars) (Unaudited)
Nine Months Ended September 30, 1996 Cash Flows from Operating Activities: 1997 (Restated) --------- ---------- Net Income $ 156,807 $ 21,744 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 103,336 109,111 Carrying charges related to facility sales and plant closings 15,534 16,788 Net gain on disposal of non-core assets (48,979) (3,732) Extraordinary item (net) 5,397 -- Equity income of affiliates (1,067) (7,181) Dividends from affiliates 6,808 4,375 Postretirement benefits 15,981 20,193 Deferred income taxes (16,200) (16,200) Cash provided (used) by working capital items: Receivables (1,621) 45,696 Inventories 37,187 (26,666) Accounts payable 19,232 19,661 Accrued liabilities 54,464 (10,668) Other (49,930) (42,436) --------- -------- Net Cash Provided by Operating Activities 296,949 130,685 --------- -------- Cash Flows from Investing Activities: Net proceeds from sale of non-core assets 317,612 3,732 Purchases of plant and equipment (101,006) (80,752) Other (362) -- --------- -------- Net Cash Provided (Used) by Investing Activities 216,244 (77,020) --------- -------- Cash Flows from Financing Activities: Prepayment of related party debt (154,328) -- Costs associated with prepayment of related party debt (4,500) -- Other repayments (30,309) (32,944) Borrowings 2,729 -- Payment of released Weirton benefit liabilities (9,878) (11,220) Dividend payments on Preferred Stock-Series A (3,014) (3,020) Dividend payments on Redeemable Preferred Stock-Series B (210) -- Payment of unreleased Weirton liabilities and their release in lieu of cash dividends on Redeemable Preferred Stock-Series B (5,818) (6,042) --------- -------- Net Cash Used by Financing Activities (205,328) (53,226) --------- -------- Net Increase in Cash and Cash Equivalents 307,865 439 Cash and Cash Equivalents, Beginning of the Period 109,041 127,616 --------- -------- Cash and Cash Equivalents, End of the Period $ 416,906 $128,055 ========= ========
See notes to consolidated financial statements. 6 NATIONAL STEEL CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK - SERIES B (In Thousands of Dollars) (Unaudited)
Total Common Common Preferred Additional Retained Stockholders' Redeemable Stock - Stock - Stock - Paid-In Earnings Equity Preferred Stock - Class A Class B Series A Capital (Restated) (Restated) Series B ------- ------- --------- ---------- ---------- ------------- ----------------- BALANCE AT DECEMBER 31, 1995, as previously reported $221 $212 $36,650 $465,359 $ 54,115 $556,557 $65,030 Adjustments made to correct prior period accounting errors -- -- -- -- 43,778 43,778 -- ---- ---- ------- -------- --------- -------- ------- BALANCE AT JANUARY 1, 1996, as restated 221 212 36,650 465,359 97,893 600,335 65,030 Net income, as restated 50,516 50,516 Amortization of excess of book value over redemption value of Redeemable Preferred Stock - Series B 1,500 1,500 (1,500) Cumulative dividends on Preferred Stock - Series A and B (12,459) (12,459) Minimum pension liability 1,765 1,765 ---- ---- ------- -------- --------- -------- ------- BALANCE AT DECEMBER 31, 1996 221 212 36,650 465,359 139,215 641,657 63,530 Net income 156,807 156,807 Amortization of excess of book value over redemption value of Redeemable Preferred Stock - Series B 1,125 1,125 (1,125) Cumulative dividends on Preferred Stock - Series A and B (9,343) (9,343) ---- ---- ------- -------- --------- -------- ------- BALANCE AT SEPTEMBER 30, 1997 $221 $212 $36,650 $465,359 $287,804 $790,246 $62,405 ==== ==== ======= ======== ========= ======== =======
See notes to consolidated financial statements. 7 NATIONAL STEEL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements of National Steel Corporation and its majority owned subsidiaries (the "Company") presented herein are unaudited. However, in the opinion of management, such statements include all adjustments necessary for a fair presentation of the results for the periods indicated. All such adjustments made were of a normal recurring nature, except for the items discussed in Note 2 and Note 3. The financial results presented for the three and nine month periods ended September 30, 1997 are not necessarily indicative of results of operations for the full year. The Annual Report of the Company on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K") contains additional information and should be read in conjunction with this report. The [B1996 Form 10-K will be amended to reflect changes made in accordance with the restatement discussed in Note 2. Certain items in prior years have been reclassified to conform with the current year presentation. NOTE 2 - AUDIT COMMITTEE INQUIRY AND RESTATEMENT OF PRIOR PERIODS The Audit Committee of the Company's Board of Directors in the third quarter of 1997 was informed of allegations about managed earnings, including excess reserves and the accretion of such reserves to income over multiple periods, as well as allegations about deficiencies in the system of internal controls. The Audit Committee engaged legal counsel who, with the assistance of an accounting firm, is inquiring into these matters. The Company, based upon the inquiry to date, has determined the need to restate its financial statements for certain prior periods. In a press release dated October 31, 1997, the Company announced the estimated effect of such restatements. Subsequent to that press release, additional adjustments were identified, the aggregate effect of which was a reduction in retained earnings at September 30, 1997 of $7.3 million. In summary, the Company has made prior period adjustments to correct accounting errors that increase previously reported retained earnings at December 31, 1996 by $49.7 million and at January 1, 1992 by $31.0 million. The Audit Committee inquiry is continuing with respect to the allegations, including those with respect to accounting irregularities and internal control issues. Should additional matters be identified, or additional adjustments arise, as a result of the ongoing Audit Committee inquiry, such matters will be addressed at that time and to the extent appropriate these matters would be reflected in the financial statements for the year ended December 31, 1997. (See also Part II -- Other Information, Item 5) The following tables reflect the effect of the restatement on reported net income (loss) and retained earnings (accumulated deficit) (in millions of dollars):
1997 Restatement: - ---------------- Income Before Extraordinary Item 1st Quarter 2nd Quarter Six Months - -------------------------------- ----------- ----------- ---------- As Reported $25.9 $62.5 $88.4 As Restated $25.3 $59.6 $84.9 Net Income - ---------- As Reported $25.9 $57.1 $83.0 As Restated $25.3 $54.2 $79.5 Earnings Per Share - ------------------ As Reported $0.53 $1.26* $1.79* As Restated $0.52 $1.19* $1.71*
8 * Second Quarter 1997 reported earnings per share before extraordinary items was $1.38; the restated amount was $1.31. Six month 1997 reported earnings per share before extraordinary items was $1.91; the restated amount was $1.83. - ----------------------------- The 1997 results were restated to reflect the reversal of the accretion of the excess reserves to income. The results for the first quarter and second quarter were also restated to reflect the revised timing of an insurance receipt. This receipt was previously reported in the second quarter and now has been recorded in the first quarter. The second quarter results were also adjusted to reflect a gain from the sale of a coal mine property and to reflect the writeoff of fixed assets that were disposed of as part of a capital project.
1996 Restatement: - ---------------- Income (Loss) Before Accounting Change 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year - ----------------- ----------- ----------- ----------- ----------- ------ As Reported $(15.6) $10.4 $24.3 $25.5 $44.6 As Restated $(16.0) $17.9 $ 8.7 $28.8 $39.4 Net Income (Loss) - ----------------- As Reported $(15.6) $10.4 $24.3 $25.5 $44.6 As Restated $(16.0) $17.9 $19.8 $28.8 $50.5 Earnings (Loss) Per Share - ------------------------- As Reported $(0.42) $0.18 $0.50 $0.52 $0.78 As Restated $(0.43) $0.35 $0.39* $0.60 $0.91*
- ----------------------------- * Third Quarter 1996 restated earnings per share before cumulative effect of accounting change was $0.14; full year was $0.66. - ----------------------------- Net income as restated for the second quarter of 1996 increased primarily as the result of a delay in the recognition of reduced pension and postretirement expenses in the second quarter. These reduced pension and postretirement expenses were previously recognized and reported in the third quarter. In addition, the third quarter of 1996 was restated to reflect the change made in the measurement date for the Company's pension and postretirement obligations from December 31st to September 30th. This change has been accounted for as a cumulative effect of an accounting change, increasing third quarter 1996 income by $11.1 million. In the fourth quarter of 1996, the restatement reflects adjustments relating to the Company's postemployment benefit obligations and the allowances for bad debts and obsolete inventory. Additionally, as a result of the previously mentioned restatements, the timing of the utilization of the Company's alternative minimum tax net operating loss carryforwards has changed. As a result of this change in timing, the income tax provision in the third quarter of 1996 increased by $6.5 million. 9
Effect on Other Years: - ---------------------- Income (Loss) Before Extraordinary Item and Accounting Change 1995 1994 1993 1992 - ----------------- ------ ------ -------- ------- As Reported $105.4 $168.5 $(242.4) $(74.7) As Restated $102.2 $185.2 $(243.6) $(74.0) Net Income (Loss) - ----------------- As Reported $110.8 $168.5 $(258.9) $(48.4) As Restated $107.5 $185.2 $(260.1) $(47.8) Earnings (Loss) Per Share - ------------------------- As Reported $ 2.34* $ 4.33 $ (8.04)* $(2.58)* As Restated $ 2.26* $ 4.79 $ (8.07)* $(2.56)*
- ------------------- * Reported earnings per share for 1995 before extraordinary items was $2.21; the restated amount was $2.13. Reported earnings (loss) per share for 1993 before cumulative effect of accounting change was $(7.55); the restated amount was $(7.58). Reported earnings (loss) per share for 1992 before extraordinary items and cumulative effect of accounting change was $(3.61); the restated amount was $(3.59). - ------------------- The major impact of the above restatements occurred in 1994 and 1995. Net income for 1994 increased by $16.7 million, primarily as a result of adjustments to actuarially value certain of the Company's postemployment benefit liabilities and a redetermination of state taxes. The 1995 restatement of $3.2 million related primarily to the deferral of grant income which had previously been recognized as income when received. Effect of Restatements on Retained Earnings (Accumulated Deficit) - ----------------------------------------------------------------- As a result of the restatement, retained earnings (accumulated deficit) as of January 1, 1992 was increased by $30.9 million. A comparison of retained earnings (accumulated deficit) as originally reported and as restated for each of the last five years is as follows:
As Reported As Restated Cumulative Change ----------- ----------- ----------------- January 1, 1992 $ 136.7 $ 167.7 $31.0 December 31, 1992 $ 70.8 $ 102.4 $31.6 December 31, 1993 $(207.4) $(177.0) $30.4 December 31, 1994 $ (44.0) $ 3.1 $47.1 December 31, 1995 $ 54.1 $ 97.9 $43.8 December 31, 1996 $ 89.5 $ 139.2 $49.7
10 NOTE 3- NET GAIN ON DISPOSAL OF NON-CORE ASSETS AND OTHER NONRECURRING ITEMS In 1997 and 1996, the Company disposed or made provisions for disposing of certain non-core assets. The effects of these transactions are presented as a separate component in the Statements of Consolidated Income entitled net gain on disposal of non core assets, except as otherwise indicated. A discussion of these items follows. On April 1, 1997, the Company completed the sale of its 21.73% minority equity interest in the Iron Ore Company of Canada ("IOC") to North Limited, an Australian mining and metals company ("North"). The Company received net proceeds of $75.3 million from North in exchange for its interest in IOC and recorded a $37 million gain. The Company will continue to purchase iron ore at fair market value from IOC pursuant to the terms of long-term supply agreements. On June 12, 1997, the Company completed the sale of a coke oven battery servicing the Great Lakes Division and other related assets, including coal inventories, to a subsidiary of DTE Energy Company. The Company received net proceeds of $234.0 million in connection with the sale and recorded a $16.3 million loss. The Company utilized a portion of the proceeds to prepay the remaining $154.3 million of the related party coke battery debt, which resulted in a net of tax extraordinary loss of $5.4 million. As part of the arrangement, the Company has agreed to operate the battery under an Operation and Maintenance Agreement executed with DTE, and will purchase at fair market value the majority of the coke produced from the battery under a requirements contract. In the second quarter, the Company also recorded a $3.6 million charge related to the decision to cease operations of American Steel Corporation, a wholly- owned subsidiary which pickled and slit steel. The Company also recorded a gain of $3.0 million related to the sale of a coal mine property. In the third quarter of 1997, the Company sold two additional coal properties. The Company received proceeds for the property sales of $7.7 million, $5.3 million after taxes and expenses, and in conjunction with one of the property sales, the purchaser agreed to assume the potential environmental liabilities of approximately $8 million related to the property. Additionally, during the third quarter of 1997, the Company received information concerning other liabilities related to its shutdown coal properties which resulted in a reduction of the related accrued liabilities. As such, the Company recorded an aggregate net gain related to its shutdown coal properties of $28.8 million during the third quarter of 1997. During the third quarter of 1996, the Company settled two disputes that resulted in aggregate gains totaling $11.2 million. On September 12, 1996, following the closing of the settlement agreement between the Company and Bakers Port, Inc., the Company sold 213 acres out of a total of 2,338 acres of land received in connection with the settlement. The sale generated a net gain of $3.7 million. On August 15, 1996, the Company finalized the settlement agreement with the Pension Benefit Guaranty Corporation ("PBGC") relating to the Donner-Hanna Joint Venture pension plans. As a part of the settlement, the Company paid $8.5 million to the PBGC. Since the Company had estimated and accrued approximately $16 million for this liability, a gain of $7.5 million was recorded in connection with the settlement. This gain was recorded as a reduction to cost of products sold during the third quarter of 1996. NOTE 4 - ENVIRONMENTAL AND LEGAL PROCEEDINGS The Company's operations are subject to numerous laws and regulations relating to the protection of human health and the environment. Because these environmental laws and regulations are quite stringent and are generally becoming more stringent, the Company has expended, and can be expected to expend in the future, substantial amounts for compliance with these laws and regulations. Due to the possibility of future changes in circumstances or regulatory requirements, the amount and timing of future environmental expenditures could vary from those currently anticipated. 11 It is the Company's policy to expense or capitalize, as appropriate, environmental expenditures that relate to current operating sites. Environmental expenditures that relate to past operations and which do not contribute to future or current revenue generation are expensed. With respect to costs for environmental assessments or remediation activities, or penalties or fines that may be imposed for noncompliance with such laws and regulations, such costs are accrued when it is probable that liability for such costs will be incurred and the amount of such costs can be reasonably estimated. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and other similar state superfund statutes generally impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated properties, regardless of fault. The Company and certain of its subsidiaries are involved as potentially responsible parties ("PRPs") at a number of off-site CERCLA or state superfund site proceedings. At some of these sites, any remediation costs incurred by the Company would constitute liabilities for which Avatex Corporation ("Avatex"), formerly FoxMeyer Health Corporation, is required to indemnify the Company ("Avatex Environmental Liabilities"). (See Note 5) In addition, at some of these sites, the Company does not have sufficient information regarding the nature and extent of the contamination, the wastes contributed by other PRPs, or the required remediation activity to estimate its potential liability. The Company has also recorded the reclamation and other costs to restore its inactive coal property locations to their original and natural state, as required by various federal and state mining statutes. Since the Company has been conducting steel manufacturing and related operations at numerous locations for over sixty years, the Company potentially may be required to remediate or reclaim any contamination that may be present at these sites. The Company does not have sufficient information to estimate its potential liability in connection with any potential future remediation at such sites. Accordingly, the Company has not accrued for such potential liabilities. As these matters progress or the Company becomes aware of additional matters, the Company may be required to accrue charges in excess of those previously accrued. The outcome of any of the matters described, to the extent they exceed any applicable reserves, could have a material adverse effect on the Company's results of operations and liquidity for the applicable period. The Company has recorded an aggregate environmental liability of $10.0 million and $21.6 million at September 30, 1997 and December 31, 1996, respectively. Approximately $8 million of the decrease in the environmental liability from December 31, 1996 to September 30, 1997 was a result of the sale of certain coal properties which took place in the third quarter of 1997. The balance of the decrease was a result of updated information regarding other environmental proceedings. The Company is involved in various non-environmental legal proceedings, most of which occur in the normal course of its business. The Company does not believe that these proceedings will have a material adverse effect, either individually or in the aggregate, on the Company's financial condition. However, with respect to certain of the proceedings, if reserves prove to be inadequate and the Company incurs a charge to earnings, such charge could have a material adverse effect on the Company's results of operations and liquidity for the applicable period. NOTE 5 - CONTINGENCIES RELATED TO WEIRTON LIABILITIES In 1984, the Company sold its Weirton Steel Division ("Weirton") to the employees of the Weirton Steel Corporation. As a part of this sale, the Company retained certain pension and other postretirement benefit liabilities of Weirton (the "Retained Liabilities") as of the sale date. In a series of transactions occurring after 1984, Avatex sold its interest in the Company to NKK Corporation ("NKK") and the public. As part of those transactions, Avatex agreed to indemnify the Company for the Retained Liabilities and the Avatex Environmental Liabilities. In 1990, under the terms of 12 the Stock Purchase and Recapitalization Agreement between the Company and Avatex (the "Recapitalization Agreement"), the Company received a payment of $146.6 million and released Avatex from indemnification liability for $146.6 million of the Retained Liabilities. In 1993, the Company released Avatex from an additional $67.8 million of pension liabilities in connection with an early redemption of 10,000 shares of the Redeemable Preferred Stock-Series B owned by Avatex. In 1994, Avatex prepaid $10.0 million to the Company with respect to a portion of the Avatex Environmental Liabilities. Avatex remains liable to indemnify the Company for Avatex Environmental Liabilities in excess of this amount. Upon the occurrence of certain events detailed in the Recapitalization Agreement, prior to or coincident with the Series B Preferred Stock final redemption, the released Retained Liabilities would be recalculated by an independent actuary. Any adjustment (the "true-up") to bring the balance of the released Retained Liabilities to such recalculated amount will be dealt with in the Redeemable Preferred Stock-Series B redemption proceeds or otherwise settled. The Company and Avatex have been negotiating a settlement of the Retained Liabilities and the Avatex Environmental Liabilities and, in connection with the negotiations, the Company is considering the final redemption of the Redeemable Preferred Stock-Series B. At this time no agreement has been reached as to the amount of any such settlement and any settlement would be subject to approval by the Board of Directors of the respective companies. If a settlement is reached, adjustments are not expected to have a material effect on net income or stockholders' equity of the Company. Avatex has experienced operating difficulties and has recorded substantial asset writedowns. In its filing with the Securities and Exchange Commission, dated June 30, 1997, it reported a deficit in its consolidated stockholders' equity of $158.7 million. Most of Avatex's operating subsidiaries have filed for bankruptcy protection. Although Avatex, the parent company, has not been included in the bankruptcy filing, the filing has caused the Company to have increased concerns about Avatex's ability to honor its remaining indemnification obligations to the Company. Should Avatex, the parent company, seek bankruptcy protection, the Company's future cash outlays and on-going charges to operations could be significantly increased. Avatex is subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, files reports and other information with the Securities and Exchange Commission. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pursuant to the continuing Audit Committee inquiry, the Company has determined that certain prior period financial statements must be restated. The financial statements for the first two quarters of 1997 and the quarters and year ended 1996 have been restated to correct accounting errors and the restated amounts are reflected in the discussions in Item 2. (See also Note 2 to the Consolidated Financial Statements and Item 5 in Part II - Other Information.) Results of Operations Comparison of the Three-Month Periods Ended September 30, 1997 and 1996 Net Sales Net sales for the third quarter of 1997 totaled $788.7 million, an improvement of $ 52.8 million, or 7.2%, compared to the corresponding period in 1996. Approximately 81% of this increase was attributable to an 85,000 ton increase in shipments, while approximately 13% can be attributed to improvements in product and customer mix. Additionally, improved selling prices accounted for approximately 6% of the increase in net sales. Steel shipments for the third quarter of 1997 were 1,519,000 tons, a 5.9% increase compared to the 1,434,000 tons shipped during the corresponding 1996 period. Cost of Products Sold The Company's cost of products sold of $654.1 million during the third quarter of 1997 represented 82.9% of sales compared to 87.6% of sales for the same period in 1996. The improved cost relationship resulted in a gross margin improvement of approximately $43.6 million. The improvement in gross margin was largely the result of higher production and shipment levels, as well as improved pricing, improved customer and product mix, and the impact of the items discussed below. Certain other events impacted costs in each period. In 1996, an unplanned blast furnace outage at the Company's Granite City Division increased costs by approximately $15 million. Additionally, costs were favorably impacted in 1996 by approximately $8 million in connection with a settlement with the PBGC relating to the Donner-Hanna Joint Venture Pension Plans. As a result of the restatement, cost of goods sold increased by $7.5 million. This increase was primarily due to a pension and postretirement benefit adjustment. Costs were favorably impacted in 1997 by an insurance settlement of approximately $4 million relating to the Granite City Division third quarter 1996 unplanned blast furnace outage, as well as, by the reversal of approximately $4 million relating to the intra-period accrual of costs associated with the expected blast furnace reline at the Great Lakes Division. This planned outage has been postponed until the first quarter of 1998. During the third quarter of 1997, the Company produced 1,658,000 net tons of steel, a 7.5% increase compared to the 1,542,000 net tons produced during the corresponding 1996 period. Selling, General and Administrative Expense Selling, general and administrative expense of $37.4 million during the third quarter of 1997 represents a decrease of $2.7 million compared to the corresponding 1996 period. This decrease is primarily a result of lower benefit related expenses, partially offset by higher information systems contract charges. 14 Depreciation Expense Depreciation expense was lower in the third quarter of 1997 as compared to the corresponding 1996 period primarily as a result of the sale of the Company's coke oven battery at the Great Lakes Division. (See further discussion in Part 1, Item 1, Note 3) Financing Costs Net financing costs of $1.2 million during the third quarter of 1997 represents an $8.3 million decrease compared to the corresponding 1996 period. This improvement is partially attributable to a $4.6 million increase in interest income on short term investments. Additionally, lower interest expense resulted from lower average debt levels, due primarily to the payoff of the related party debt, and slightly higher capitalized interest. Net Gain on Disposal of Non-Core Assets During the third quarter of 1997, the Company sold two additional coal properties. The Company received proceeds for the property sales of $7.7 million. In conjunction with one of the property sales, the purchaser agreed to assume the potential environmental liabilities of approximately $8.0 million related to the property. Additionally, during the third quarter of 1997, the Company received information concerning other liabilities related to its shutdown coal properties which resulted in a reduction of the related accrued liabilities. As such, the Company recorded an aggregate net gain related to its shutdown coal properties of $28.8 million during the third quarter of 1997. During the third quarter of 1996, the Company sold certain land not used in the operations of the Company. The sale generated a net gain of $3.7 million. Income Taxes During the third quarter of 1997, the Company recorded current tax provisions of $21.9 million, offset by a deferred tax benefit of $5.4 million. This deferred tax benefit is a result of the periodic recognition of tax benefits relating to expectations of additional future income. The Company's effective tax rate is lower than the federal statutory rate primarily due to the continued utilization of available net operating loss carryforwards and the recognition of additional deferred tax benefits. 15 Comparison of the Nine-Month Periods Ended September 30, 1997 and 1996 Net Sales Net sales for the first nine months of 1997 totaled $2.37 billion, an increase of $183.7 million, or 8.4%, compared to $2.19 billion during the same 1996 period. Approximately 54% of the increase was the result of the 204,000 ton increase in shipments for the period and approximately 38% was attributable to improvements in product and customer mix. The remaining 8% of the increase was the result of higher selling prices. Steel shipments for the first nine months of 1997 were a record 4,645,000 tons, a 4.6% increase compared to the 4,441,000 tons shipped during the corresponding 1996 period. Cost of Products Sold The Company's cost of products sold of $2.01 billion during the first nine months of 1997 represented 84.7% of sales compared to 89.3% of sales for the same period in 1996. This improved cost relationship resulted in a gross margin improvement of approximately $129.9 million. This improvement was largely the result of increases in selling prices, production and sales levels, as well as stable operations. Certain other events impacted costs in each period. In 1996, a kiln outage at National Steel Pellet Company increased costs by approximately $10 million. An unplanned 1996 blast furnace outage at the Company's Granite City Division increased costs by approximately another $15 million. Costs were favorably impacted in 1996 by approximately $7.5 million in connection with a settlement with the PBGC relating to the Donner-Hanna Joint Venture Pension Plans. In 1997, insurance recoveries aggregating approximately $6.6 million reduced cost of products sold. Raw steel production totaled 4,926,000 tons for the first nine months of 1997, a .6% increase from the 4,895,000 tons produced during the nine month period ended September 30, 1996. Selling, General and Administrative Expense Selling, general and administrative expense of $106.2 million during the first nine months of 1997 represents a $1.9 million increase compared to the corresponding 1996 period. This increase is primarily the result of increased costs associated with expenses due to the conversion of stock options to stock appreciation rights, legal expenses and information systems contract charges, offset by lower benefit related expenses and lower professional service expenses. Depreciation Expense Depreciation expense was lower in the first nine months of 1997 as compared to the corresponding 1996 period primarily as a result of the sale of the Company's coke oven battery at the Great Lakes Division. (See further discussion in Part 1, Item 1, Note 3) Financing Costs Net financing costs of $14.0 million for the nine months ended September 30, 1997 represents a $13.5 million decrease compared to the same 1996 period. This improvement is partially attributable to a $7.3 million increase in interest income on short term investments. Additionally, lower interest expense resulted from lower average debt levels and higher capitalized interest. 16 Net Gain on Disposal of Non-Core Assets In 1997 and 1996, the Company disposed of or made provisions for disposing of certain non-core assets. The effects of these transactions are presented as a separate component in the income statement entitled net gain on disposal of non core assets. A discussion of these items follows. On April 1, 1997, the Company completed the sale of its 21.73% minority equity interest in the Iron Ore Company of Canada ("IOC") to North Limited, an Australian mining and metals company ("North"). The Company received net proceeds of $75.3 million from North in exchange for its interest in IOC and recorded a $37 million gain. The Company will continue to purchase iron ore at fair market value from IOC pursuant to the terms of long-term supply agreements. On June 12, 1997, the Company completed the sale of a coke oven battery servicing the Great Lakes Division and other related assets, including coal inventories, to a subsidiary of DTE Energy Company. The Company received net proceeds of $234.0 million in connection with the sale and recorded a $16.3 million loss. The Company utilized a portion of the proceeds to prepay the remaining $154.3 million of the related party coke battery debt, which resulted in a net of tax extraordinary loss of $5.4 million. As part of the arrangement, the Company has agreed to operate the battery under an operation and maintenance agreement executed with DTE, and will purchase at fair market value the majority of the coke produced from the battery under a requirements contract. In the second quarter, the Company also recorded a $3.6 million charge related to the decision to cease operations of American Steel Corporation, a wholly- owned subsidiary which pickled and slit steel. The Company also recorded a gain of $3.0 million related to the sale of a coal mine property. In the third quarter of 1997, the Company sold two additional coal properties. The Company received proceeds for the property sales of $7.7 million, $5.3 million after taxes and expenses, and in conjunction with one of the property sales, the purchaser agreed to assume the potential environmental liabilities of approximately $8 million related to the property. Additionally, during the third quarter of 1997, the Company received information concerning other liabilities related to its shutdown coal properties which resulted in a reduction of the related accrued liabilities. As such, the Company recorded an aggregate net gain related to its shutdown coal properties of $28.8 million during the third quarter of 1997. On September 12, 1996, following the closing of the settlement agreement between the Company and Bakers Port, Inc., the Company sold 213 acres out of a total of 2,338 acres of land received in connection with the settlement. The sale generated a net gain of $3.7 million. Income Taxes During the first nine months of 1997, the Company recorded current tax provisions of $43.4 million, offset by a deferred tax benefit of $16.2 million. This deferred tax benefit is a result of the periodic recognition of tax benefits related to expectations of additional future taxable income. The Company's effective tax rate is lower than the federal statutory rate primarily due to the continued utilization of available net operating loss carryforwards and the recognition of additional deferred tax benefits. 17 LIQUIDITY AND SOURCES OF CAPITAL The Company's liquidity needs arise primarily from capital investments, working capital requirements, pension funding requirements and principal and interest payments on its indebtedness. The Company has satisfied these liquidity needs with funds provided by long term borrowings and cash provided by operations. Additional sources of liquidity consist of a Receivables Purchase Agreement (the "Receivables Purchase Agreement") with commitments of up to $200.0 million and an expiration date of September, 2002 and both a $100.0 million and a $50.0 million credit facility, which are secured by the Company's inventories (the "Inventory Facilities") and expire in May, 2000 and July, 1998, respectively. The Company is currently in compliance with all material covenants of, and obligations under, the Receivables Purchase Agreement, the Inventory Facilities and other debt instruments. On September 30, 1997, there were no cash borrowings outstanding under the Receivables Purchase Agreement or the Inventory Facilities, and outstanding letters of credit under the Receivables Purchase Agreement totaled $91.0 million. During the first nine months of 1997, the maximum availability under the Receivables Purchase Agreement, after reduction for letters of credit outstanding, varied from $76.7 million to $111.1 million and was $109.0 million as of September 30, 1997. At September 30, 1997, total debt and redeemable preferred stock as a percentage of total capitalization decreased to 34.1% as compared to 47.1% at December 31, 1996. Cash and cash equivalents totaled $416.9 million at September 30, 1997 compared to $109.0 million at December 31, 1996. Cash Flows from Operating Activities For the nine months ended September 30, 1997, cash provided from operating activities totaled $296.9 million, which is primarily attributable to $156.8 million in net income earned during the period, adjusted for the impact of working capital items and non-cash items. Additionally, in the third quarter of 1997, the Company accelerated a contribution of $40.9 million to its pension plans. Cash Flows from Investing Activities Capital investments for the nine months ended September 30, 1997 totaled $101.0 million. The 1997 spending is primarily related to the modernization and upgrading of the Company's 72 inch continuous galvanizing line and the construction of a new 48 inch wide coating line, both of which are located at the Midwest Division. The Company plans to invest approximately $50 million during the remainder of 1997 for capital expenditures, including the aforementioned Midwest Division projects and improvements at its other facilities. During the second quarter of 1997, the Company sold its coke oven battery at the Great Lakes Division, as well as its minority investment in the Iron Ore Company of Canada. The sale of these two non-core assets generated net proceeds of $309.3 million. The Company utilized $162.5 million of these proceeds to prepay the related party debt associated with the coke oven battery, including prepayment costs and accrued interest. Additionally, in the second and third quarters of 1997, certain coal mining properties were sold generating net proceeds of $8.3 million. If the negotiations with Avatex result in a settlement, a cash payment will be required for the settlement of the Retained Liabilities, and the Avatex Environmental Liabilities and the redemption of Redeemable Preferred Stock-Series B (see also Part I, Item I, Note 5). The Company also is continuing to evaluate other possible uses of the remaining proceeds, including additional pension and VEBA funding, retirement of Preferred Stock Series A, additional debt retirements and capital investment opportunities. Cash Flows from Financing Activities During the first nine months of 1997, the Company utilized $205.3 million of cash for financing activities, which includes the $154.3 million prepayment of related party debt associated with the sale of the coke oven battery servicing the Great Lakes Division and $4.5 million of costs associated with the prepayment of the aforementioned debt. Other areas of cash utilization for financing activities included scheduled payments of debt, as well as dividend payments on the Company's preferred stock. 18 OTHER Year 2000 Issues The "Year 2000" problem is caused by software which processes years as only two digits. In earlier periods of computer programming, programmers often developed and maintained date fields with only two digit years in an effort to conserve computer resources and memory. The Company is in the process of working to correct this problem and has formed a committee consisting of executive management to oversee all Year 2000 activities. The Company retained a third party consulting group to assess the Company's mainframe environment and identify the actions which need to be taken to correct any Year 2000 problems. The Company has spent approximately $1.4 million in 1997 and is expected to spend an additional $10 million on its mainframe projects to address the Year 2000 issue. Impact of Recently Issued Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"). "Earnings Per Share," which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the current presentation of primary EPS to a presentation of basic EPS, which excludes any dilutive effect of stock options. The statement also requires presentation of diluted EPS, which is computed similarly to fully diluted EPS under existing accounting rules. Stock options are the Company's only dilutive securities and are not entered into the determination of primary EPS as their dilutive effect is less than 3%. As such, the presentation of basic EPS will be consistent with the current primary EPS. The impact of SFAS 128 on the calculation of fully diluted EPS is not expected to be material. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, which is effective for years beginning after December 15, 1997, and will be adopted by the Company in 1998. The Statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Statement will not have any impact on the results of operations or the financial position of the Company. In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement changes the way public companies are required to report segment information in annual financial statements and in interim financial reports to stockholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Statement is effective for financial statements for fiscal years beginning after December 15, 1997, and the Company anticipates adopting the Statement in 1998. Although the Company is evaluating the impact that this Statement will have on its financial reporting, the Company does not expect any additional significant reporting requirements. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 Statements made by the Company in reports, such as this Form 10-Q, in press releases and in statements made by employees in oral discussions, that are not historical facts constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements, by their nature, involve risk and uncertainty. A variety of factors could cause business conditions and the Company's actual results and experience to differ materially from those expected by the Company or expressed in the Company's forward looking statements. These factors include, but are not limited to, the following: (1) changes in market prices and market demand for the Company's products; (2) changes in the costs or availability of the raw materials and other supplies used by the Company in the manufacture of its products; (3) equipment failures or outages at the Company's steelmaking, mining and processing facilities; (4) losses of customers; (5) changes in the levels of the Company's operating costs and expenses; (6) collective bargaining agreement negotiations, strikes, labor stoppages or other labor difficulties; (7) actions by the Company's competitors, including domestic integrated steel producers, foreign competitors, mini-mills and manufacturers of steel substitutes, such as plastics, aluminum, ceramics, glass, wood and concrete; (8) changes in industry capacity; (9) changes in economic conditions in the United States and other major international economies, including rates of economic growth and inflation; (10) worldwide changes in trade, monetary or fiscal policies, including changes in interest rates; (11) changes in the legal and regulatory requirements applicable to the Company; and (12) the effects of extreme weather conditions. 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings Environmental Matters Great Lakes Division - Wayne County Air Pollution Control Department. With respect to the matter involving alleged exceedances of emission and work practice standards at the Company's Great Lakes Division, previously reported in the Company's 1996 Form 10-K and first quarter 1997 Form 10-Q, the Wayne County Air Pollution Control Department has issued a total of 28 notices of violation concerning alleged noncompliance with applicable permits, regulations and orders in 1997. No demands for penalties have been made, and the Company has responded to the notices. Great Lakes Division - Outfalls Proceedings. With respect to the matter involving alleged exceedances of discharge limitations at an outfall located at the Company's Great Lakes Division hot strip mill facility, previously reported in the Company's 1996 Form 10-K, the Michigan Department of Environmental Quality ("MDEQ") has presented the Company with a draft Administrative Consent Order, which included a demand for payment of a $200,000 civil penalty and MDEQ's costs in the amount of approximately $16,000. Negotiations are continuing. Additionally, with respect to the state court complaint filed by MDEQ on February 5, 1997 alleging approximately 75 violations of two National Pollutant Discharge Elimination System ("NPDES") water discharge permits, previously reported in the Company's 1996 Form 10-K, MDEQ presented the Company with a draft consent decree in which it made a demand for a civil penalty of $45,000 in settlement of this matter. The Company has responded to MDEQ, agreeing to the $45,000 penalty, but proposing to expand the scope of the settlement to include all reported exceedances under the NPDES permits covering the Great Lakes Division's Zug Island and main plant operations through the effective date of the consent decree. Discussions are ongoing. Great Lakes Division - Multimedia Environmental Inspection. With respect to the matter involving a multimedia inspection of the Company's Great Lakes Division by the United States Environmental Protection Agency (the "EPA"), previously reported in the Company's 1996 Form 10-K, on September 24, 1997, the EPA filed a complaint against the Company alleging violations of various environmental requirements. An initial civil penalty of approximately $270,000 was proposed. The Company intends to engage in settlement discussions with the EPA concerning these matters. 20 Item 5. Other Information The Company has appointed Michael D. Gibbons as Acting Chief Financial Officer while it conducts a search to fill the position on 2 permanent basis. In addition to his other responsibilities, Mr. Gibbons will provide oversight and coordinate activities relating to the Company's restatements of its prior period financial statements and SEC filings and its continuing efforts to cooperate with the Audit Committee of the Company's Board of Directors in its ongoing inquiry. The Staff of the SEC has informed the Company that the Commission has authorized an investigation pursuant to a formal order of investigation relating to the matters described in Note 2 of the Consolidated Financial Statements and the Company intends to cooperate with the Staff in this matter. Item 6. Exhibits and Reports on Form 8-K (a) See attached Exhibit Index (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the third quarter of 1997. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL STEEL CORPORATION BY /s/ John A. Maczuzak ------------------------------------- John A. Maczuzak President and Chief Operating Officer BY /s/ Michael D. Gibbons ------------------------------------- Michael D. Gibbons Acting Chief Financial Officer Date: November 14, 1997 22 NATIONAL STEEL CORPORATION QUARTERLY REPORT ON FORM 10-Q EXHIBIT INDEX For the quarterly period ended September 30, 1997 15.1 Independent Accountants' Review Report 15.2 Acknowledgement Letter on unaudited interim financial information 18 Preferability Letter on change in accounting principles 27-A Financial Data Schedule 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 September 30, 1997, and the related statements of consolidated income for the three-month and nine-month periods ended September 30, 1997 and 1996, of consolidated cash flows for the nine-month periods ended September 30, 1997 and 1996, and of changes in consolidated stockholders' equity and redeemable preferred stock--Series B for the nine-month period ended September 30, 1997. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of National Steel Corporation and subsidiaries as of December 31, 1996, and the related statements of consolidated income, cash flows, and changes in stockholders' equity and redeemable preferred stock--Series B for the year then ended (not presented herein), and in our report dated January 23, 1997 (except for Note M, as to which the date is January 31, 1997), we expressed an unqualified opinion on those consolidated financial statements. As discussed in Note 2 to the accompanying interim consolidated financial statements, the Company plans to restate its 1996 consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1996, and in the accompanying statement of changes in consolidated stockholders' equity and redeemable preferred stock--Series B for the year then ended, is fairly stated, in all material respects, in relation to the consolidated financial statements from which they have been derived, after giving effect to the restatement adjustments discussed in Note 2. Ernst & Young LLP Fort Wayne, Indiana November 14, 1997 EX-15.2 3 LETTER ON UNAUDITED INTERIM FINANCIAL INFO Exhibit 15.2 Board of Directors National Steel Corporation We are aware of the incorporation by reference in the following Registration Statements: . Form S-8, No. 33-51991, pertaining to the 1994 and 1995 Stock Grants to Union Employees, . Form S-8, No. 33-51081, pertaining to the 1993 National Steel Corporation Long Term Incentive Plan, . Form S-8, No. 33-51083, pertaining to the 1993 National Steel Corporation Non-Employee Director's Stock Option Plan, and . Form S-8, No. 33-61087, pertaining to the National Steel Retirement Savings Plan and National Steel Represented Employee Retirement Savings Plan, of our report dated November 14, 1997 relating to the unaudited interim consolidated financial statements of National Steel Corporation and subsidiaries that are included in its Form 10-Q for the quarter ended September 30, 1997. Ernst & Young LLP Fort Wayne, Indiana November 14, 1997 EX-18 4 LETTER ON CHANGE IN ACCOUNTING PRINCIPLES Exhibit 18 Board of Directors National Steel Corporation Mishawaka, Indiana As discussed in Note 2 of the Notes to Consolidated Financial Statements of National Steel Corporation and subsidiaries, included in its Form 10-Q for the quarter ended September 30, 1997, the Company changed the measurement date used in accounting for pensions and for postretirement benefits other than pensions from December 31 to September 30. This change, which was made in the third quarter of 1996, was not accounted for as a change in accounting method at that time. The financial statements for the three-month and nine-month periods ended September 30, 1996, included in the September 30, 1997 Form 10-Q, have been restated to reflect this change as a change in accounting method. Management has advised us that it believes the change is to a preferable method in the Company's circumstances because the earlier measurement date results in more accurate year-end disclosures pertaining to the plans and more accurate estimates of expense for interim financial reporting and because the change enhances comparability with other major United States integrated steel companies. There are no authoritative criteria for determining a "preferable" measurement date based on the particular circumstances. However, we conclude that the change in the method of accounting for pensions and for postretirement benefits other than pensions by the use of an earlier measurement date (that is, September 30) is a change to an acceptable alternative method which, based on management's business judgment to make this change for the reasons cited above, is preferable in the Company's circumstances. We have not conducted an audit in accordance with generally accepted auditing standards of any financial statements of the Company as of any date or for any period subsequent to December 31, 1996, and therefore we do not express any opinion on any financial statements the Company subsequent to that date. Ernst & Young LLP Fort Wayne, Indiana November 14, 1997 EX-27.A 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 416,906 0 309,353 23,844 393,380 1,095,795 3,334,335 2,125,817 2,539,650 625,232 311,679 62,405 36,650 433 753,163 2,539,650 788,663 788,663 654,140 654,140 33,230 (578) 7,436 93,857 16,531 77,326 0 0 0 77,326 1.72 1.72
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