-----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, Kh30eAlQdAvfstQ0u7fL8K6bCSoMAdniWOxwJR7DBMCTxb9Mqhc1dsYwVl//fRBk c/pm7FkXjqEv5nHbrgwhYw== 0000950131-98-000445.txt : 19980130 0000950131-98-000445.hdr.sgml : 19980130 ACCESSION NUMBER: 0000950131-98-000445 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19980129 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/A SEC ACT: SEC FILE NUMBER: 001-00983 FILM NUMBER: 98516430 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/A 1 FORM 10-Q/A 1997 First Quarter SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 1 0 - Q/A (Amendment No. 1 to Form 10-Q originally filed May 14, 1997) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-983 NATIONAL STEEL CORPORATION (Exact name of registrant as specified in its charter) Delaware 25-0687210 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440 (Address of principal executive offices) (Zip Code) 219-273-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of April 30, 1997, there were 22,100,000 shares of Registrant's Class A Common Stock, $.01 par value, and 21,188,240 shares of Registrant's Class B Common Stock, $.01 par value, outstanding. NATIONAL STEEL CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS THIS AMENDMENT REFLECTS RESTATED FINANCIAL INFORMATION. (SEE NOTE 2 TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.)
PART I. FINANCIAL INFORMATION PAGE ---- Statements of Consolidated Income - Three Months Ended March 31, 1997 and 1996 3 Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 4 Statements of Consolidated Cash Flows - Three Months Ended March 31, 1997 and 1996 5 Statements of Changes in Consolidated Stockholders' Equity and Redeemable Preferred Stock-Series B - Three Months Ended March 31, 1997 and Year Ended December 31, 1996 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II. OTHER INFORMATION Legal Proceedings 18 Exhibits and Reports on Form 8-K 19
2 PART I. - FINANCIAL INFORMATION NATIONAL STEEL CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (In Thousands of Dollars, Except Per Share Amounts) (Unaudited)
Three Months Ended March 31, 1997 1996 (Restated) (Restated) ----------- ---------- Net Sales $757,618 $682,143 Cost of products sold 653,204 629,002 Selling, general and administrative 32,444 30,113 Depreciation, depletion and amortization 35,151 36,288 Equity income of affiliates (94) (2,287) --------- --------- Income (Loss) from Operations 36,913 (10,973) Financing Costs: Interest and other financial income (1,715) (1,896) Interest and other financial expense 9,889 10,667 --------- --------- 8,174 8,771 --------- --------- Income (Loss) before Income Taxes 28,739 (19,744) Income tax provision (credit) 2,074 (5,548) --------- --------- Net Income (Loss) 26,665 (14,196) Less preferred stock dividends 2,741 2,742 --------- --------- Net income (loss) applicable to Common Stock $ 23,924 $(16,938) ========= ========= Per Share Data Applicable to Common Stock: Net Income (Loss) Applicable to Common Stock $ .55 $ (.39) ========= ========= Weighted average shares outstanding (in thousands) 43,288 43,288
See notes to consolidated financial statements. 3 NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars, Except Share Amounts) (Unaudited)
March 31, December 31, 1997 1996 (Restated) (Restated) ---------- ------------ Assets Current assets Cash and cash equivalents $ 135,003 $ 109,041 Receivables - net 292,767 281,889 Inventories - net: Finished and semi-finished products 304,562 299,333 Raw materials and supplies 111,600 141,234 ---------- ---------- 416,162 440,567 ---------- ---------- Total current assets 843,932 831,497 Investments in affiliated companies 59,648 65,399 Property, plant and equipment 3,709,305 3,664,597 Less allowances for depreciation, depletion and amortization 2,245,443 2,209,079 ---------- ---------- 1,463,862 1,455,518 Other assets 207,657 203,878 ---------- ---------- Total Assets $2,575,099 $2,556,292 ========== ========== Liabilities, Redeemable Preferred Stock and Stockholders' Equity Current liabilities Accounts payable $ 222,830 $ 234,892 Accrued liabilities 289,639 278,147 Current portion of long term obligations 38,538 37,731 ---------- ---------- Total current liabilities 551,007 550,770 Long term obligations 314,714 323,550 Long term indebtedness to related parties 139,160 146,744 Other long term liabilities 838,577 827,136 Redeemable Preferred Stock - Series B 63,155 63,530 Stockholders' equity Common Stock - par value $.01: Class A - authorized 30,000,000 shares, issued and outstanding 22,100,000 221 221 Class B - authorized 65,000,000 shares; issued and outstanding 21,188,240 212 212 Preferred Stock - Series A 36,650 36,650 Additional paid-in-capital 465,359 465,359 Retained earnings 166,044 142,120 ---------- ---------- Total stockholders' equity 668,486 644,562 ---------- ---------- Total Liabilities, Redeemable Preferred Stock and Stockholders' Equity $2,575,099 $2,556,292 ========== ==========
See notes to consolidated financial statements. 4 NATIONAL STEEL CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (In Thousands of Dollars) (Unaudited)
Three Months Ended March 31, 1997 1996 (Restated) (Restated) ---------- ---------- Cash Flows from Operating Activities Net Income (loss) $ 26,665 $(14,196) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 35,151 36,288 Carrying charges related to facility sales and plant closings 5,179 5,596 Equity income of affiliates (94) (2,287) Dividends from affiliates 6,808 4,375 Postretirement benefits 10,039 14,332 Deferred income taxes (5,400) (5,400) Cash provided (used) by working capital items: Receivables (10,878) 45,604 Inventories 24,405 (46) Accounts Payable (12,062) (14,489) Accrued Liabilities 11,419 (6,139) Other (833) (2,620) -------- -------- Net Cash Provided by Operating Activities 90,399 61,018 Cash Flows from Investing Activities Purchases of plant and equipment (net) (42,975) (31,236) -------- -------- Net Cash Used in Investing Activities (42,975) (31,236) Cash Flows from Financing Activities Debt Repayment (15,613) (14,981) Payment of released Weirton benefit liabilities (2,806) (3,763) Dividend payments on Preferred Stock-Series A (1,014) (1,015) Dividend payments on Preferred Stock-Series B (210) ----- Payment of unreleased Weirton liabilities and their release in lieu of cash dividends on Preferred Stock-Series B (1,819) (2,031) -------- -------- Net Cash Used in Financing Activities (21,462) (21,790) -------- -------- Net Increase in Cash and Cash Equivalents 25,962 7,992 Cash and cash equivalents at the beginning of the period 109,041 127,616 -------- -------- Cash and cash equivalents at the end of the period $135,003 $135,608 ======== ========
See notes to consolidated financial statements. 5 NATIONAL STEEL CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK - SERIES B (In Thousands of Dollars) (Unaudited)
Common Common Preferred Additional Total Redeemable Stock - Stock - Stock - Paid-In Retained Stockholders' Preferred Stock - Class A Class B Series A Capital Earnings Equity Series B ------- ------- --------- ---------- -------- ------------- ----------------- BALANCE AT DECEMBER 31, 1995 as previously reported $221 $212 $36,650 $465,359 $54,115 $556,557 $65,030 Adjustment to correct prior period Accounting errors 43,778 43,778 ---- ---- ------- -------- -------- -------- ------- BALANCE AT JANUARY 1, 1996 (Restated) $221 $212 $36,650 $465,359 $ 97,893 $600,335 $65,030 Net income (Restated) 53,924 53,924 Amortization of excess of book value over redemption value of Redeemable Preferred Stock - Series B 1,500 1,500 (1,500) Cumulative dividends on Preferred Stock - Series A and B (12,459) (12,459) Minimum pension liability (Restated) 1,262 1,262 ---- ---- ------- -------- -------- -------- ------- BALANCE AT DECEMBER 31, 1996 (Restated) 221 212 36,650 465,359 142,120 644,562 63,530 Net income (Restated) 26,665 26,665 Amortization of excess of book value over redemption value of Redeemable Preferred Stock - Series B 375 375 (375) Cumulative dividends on Preferred Stock - Series A and B (3,116) (3,116) ---- ---- ------- -------- -------- -------- ------- BALANCE AT MARCH 31, 1997 (Restated) $221 $212 $36,650 $465,359 $166,044 $668,486 $63,155 ==== ==== ======= ======== ======== ======== =======
See notes to consolidated financial statements. 6 NATIONAL STEEL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements of National Steel Corporation and its majority owned subsidiaries (the "Company") presented herein are unaudited. However, in the opinion of management, such statements include all adjustments necessary for a fair presentation of the results for the periods indicated. All such adjustments made were of a normal recurring nature, except for the items discussed in Note 2. The financial results presented for the three month period ended March 31, 1997 is not necessarily indicative of results of operations for the full year. The Annual Report of the Company on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K") contains additional information and should be read in conjunction with this report. The 1996 Form 10-K has been amended to reflect changes made in accordance with the restatement discussed in Note 2. Certain items in prior years have been reclassified to conform with the current year presentation. NOTE 2 - AUDIT COMMITTEE INQUIRY AND RESTATEMENT OF PRIOR PERIODS The Audit Committee of the Company's Board of Directors in the third quarter of 1997 was informed of allegations about managed earnings, including excess reserves and the accretion of such reserves to income over multiple periods, as well as allegations about deficiencies in the system of internal controls. The Audit Committee engaged legal counsel who, with the assistance of an accounting firm, has inquired into these matters. The Company, based upon the inquiry, has determined the need to restate its financial statements for certain prior periods. In the Form 10-Q filed on November 14, 1997, the Company included the effects of the restatement that increased previously reported retained earnings at December 31, 1996 by $49.7 million and January 1, 1992 by $31.0 million. That Form 10-Q also indicated that the Audit Committee inquiry was continuing. Subsequent to that filing, as a result of further review initiated due to that inquiry, and as part of its 1997 year-end closing process, the Company has become aware of certain additional accounting errors which require restatement. These additional adjustments affect the reported results for 1997 and 1996, and result in reporting net earnings increases of $3.4 million in 1996 and $1.4 million, $5.3 million and $1.2 million in the first, second and third quarters of 1997, respectively. On December 15, 1997, the Board of Directors approved the termination of the Company's Vice President-Finance in connection with the Audit Committee inquiry. During January 1998, legal counsel to the Audit Committee issued its report to the Audit Committee and the Audit Committee approved the report and concluded its inquiry. On January 21, 1998, the Board of Directors accepted the report and approved the recommendations, except for the recommendation to revise the Audit Committee Charter which will be considered at the next Board of Directors meeting. The report found certain misapplications of generally accepted accounting principles and accounting errors, including excess reserves, which have been corrected by the restatements as discussed below. The report found that the accretion of excess reserves to income during the first, second and third quarters of 1997 as described below may have had the effect of management of earnings as the result of errors in judgment and misapplications of generally accepted accounting principles. However, these errors do not appear to have involved the intentional misstatement of the Company's accounts. The report also found weaknesses in internal controls and recommended various improvements in the Company's system of internal controls, a comprehensive review of such controls, a restructuring of its finance and accounting department, and expansion of the role of the internal audit function, as well as corrective measures to be taken related to the specific causes of the accounting errors. The Company has begun to implement these recommendations. The Securities and Exchange Commission (the "Commission") has authorized an investigation pursuant to a formal order of investigation relating to the matters described above. The Company has been cooperating with the Staff of the Commission and intends to continue to do so. 7 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: - ----------------- 1st Quarter 2nd Quarter 3rd Quarter Nine Months Income Before Income Taxes and - ------------------------------ Extraordinary Item: - ------------------- As Originally Reported $ 28.5 $ 71.9 $ 93.9 $194.3 As Restated $ 28.7 $ 72.3 $ 93.7 $194.7 Income Before Extraordinary Item: - --------------------------------- As Originally Reported $ 25.9 $ 62.5 $ 77.3 $165.7 As Restated $ 26.7 $ 64.9 $ 78.6 $170.2 Net Income: - ----------- As Originally Reported $ 25.9 $ 57.1 $ 77.3 $160.3 As Restated $ 26.7 $ 59.5 $ 78.6 $164.8 Earnings Per Share: - ------------------- As Originally Reported $ .53 $ 1.26* $ 1.72 $ 3.52 As Restated $ .55 $ 1.31* $ 1.76 $ 3.62
* Second quarter 1997 reported earnings per share before extraordinary items was $1.38; the restated amount was $1.43. Six month reported earnings per share before extraordinary items was $1.91; the restated amount was $1.98. Nine month reported earnings per share before extraordinary items was $3.55; the restated amount was $3.74. - ----------------------------- The first quarter of 1997 was increased on a net pre-tax income basis by $.3 million. The reversal of the accretion of excess reserves reduced pre-tax income by approximately $3.0 million (net of $.3 million of tax related accretion). Revised timing of the recognition of an insurance recovery from the second to the first quarter of 1997 increased pre-tax income by approximately $3.0 million. Other adjustments increased pre-tax income by approximately $.2 million. The tax provision decreased by $.6 million primarily as a result of a revision in the state tax provision to appropriately reflect the benefit of net operating loss carryforwards. The second quarter of 1997 was increased on a net pre-tax income basis by $.3 million. The reversal of the accretion of excess reserves decreased pre-tax income by approximately $3.6 million (net of $.3 million of tax related accretion). The aforementioned revised timing of the recognition of an insurance recovery decreased pre-tax income by approximately $3.0 million. The revised timing of a write-off of the net book value of fixed assets to the period in which they were disposed of or demolished in connection with a 1997 construction project reduced pre-tax income by approximately $1.5 million. The revised timing on the recognition of a gain on the 1997 sale of a coal mine property increased pre-tax income by $3.0 million. Pretax income was also restated to reflect the reversal of a $5.2 million accrual of property taxes relating to the No. 5 coke oven battery, which were assumed by the buyer as part of the sale of that coke oven battery in the second quarter. Other adjustments increased pre-tax income by approximately $.3 million. The adjustment to the income tax provision of approximately $2.0 million related to a correction of the effective tax rate used in calculating the previously reported income tax provision. Pre-tax income in the third quarter of 1997 was reduced by $.2 million. This reduction was due to the reversal of the impact of the accretion of an excess reserve to income which reduced the restated income by $.6 million, offset by other adjustments of $.4 million. The tax provision was reduced in the restatement by approximately $1.4 million to appropriately reflect the benefit of net operating loss carryforwards for state tax purposes. 8
1996 Restatement: - ----------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year ----------- ----------- ----------- ----------- ------- Income (Loss) Before Income Taxes and Accounting Change - --------------------------------- As Originally Reported $ (21.0) $ 5.0 $ 21.2 $ 23.6 $ 28.8 As Restated $ (19.8) $ 12.4 $ 12.1 $ 27.3 $ 32.0 Income (Loss) Before Accounting Change: - -------------------- As Originally Reported $ (15.6) $ 10.4 $ 24.3 $ 25.5 $ 44.6 As Restated $ (14.2) $ 17.9 $ 11.5 $ 27.6 $ 42.8 Net Income (Loss): - ------------------ As Originally Reported $ (15.6) $ 10.4 $ 24.3 $ 25.5 $ 44.6 As Restated $ (14.2) $ 17.9 $ 22.6 $ 27.6 $ 53.9 Earnings (Loss) Per Share: - -------------------------- As Originally Reported $ ( .42) $ .18 $ .50* $ .52 $ .78 As Restated $ ( .39) $ .35 $ .46* $ .57 $ .99
- ------------------- * Third quarter 1996 reported earnings per share before cumulative effect of accounting change was $ .50, the restated amount was $ .20; full year as reported was $ .78 and the restated amount was $.74. - ------------------- Pre-tax loss in the first quarter decreased by $1.2 million as a result of the restatement adjustments. The decrease was the result of an approximately $1.8 million adjustment to correct the accruals for certain employee incentive costs, offset by other adjustments which decreased pre-tax income by approximately $.6 million. Pre-tax income in the second quarter increased by $7.4 million as a result of the restatement adjustments. The correction of a delay in recognition of reduced pension and postretirement benefits increased pre-tax income by $8.7 million. These reduced pension and postretirement expenses, which became known to the Company when the January 1 actuarial valuation information was being completed late in the second quarter, were previously recognized and reported in the third quarter. These expenses were reduced from the original estimates as a result of revised interest rate assumptions and as a result of the use of actual claim information with respect to postretirement benefit obligation computations. In addition, the second quarter included a reduction of pre-tax income of approximately $1.0 million to amortize grant income over the useful lives of the productive assets purchased with the grant rather than to recognize such grant income as received. Other adjustments decreased pre-tax income by $.3 million. Pre-tax income in the third quarter decreased by $9.1 million as a result of the restatement adjustments. The decrease was caused by the aforementioned $8.7 million pension and postretirement benefit adjustment and other adjustments, which decreased pre-tax income by $.4 million. In addition to the effect of the above adjustments on net income, the restated net income in the third quarter was increased by $11.1 million to reflect the change made in the measurement date for the Company's pension and postretirement obligations from December 31st to September 30th. This change is accounted for as a cumulative effect of an accounting change. The 3.7 million increase in the tax provision related to the correction of the effective tax rate used in calculating the previously reported income tax provisions. As result of these adjustments, net income for the quarter decreased by $1.7 million. Fourth quarter pre-tax income increased by an aggregate of $3.7 million as a result of the restatement adjustments. This resulted from reflecting the reversal of a reserve for slow moving inventory of $3.5 million previously recorded in the fourth quarter and reflecting a reduction of the allowance for bad debts by $2.0 million from amounts previously reported. This increase in pre-tax income was partially offset by an increase in postemployment benefits obligations based on corrections to actuarial valuations, which 9 decreased pre-tax income by approximately $2.4 million. Other adjustments increased pre-tax income by approximately $.6 million. The tax provision in the fourth quarter was increased in the restated financial statements by approximately $1.6 million as a result of a correction of the effective tax rate used in calculating the previously reported income tax provision.
Effect on Other Years: - ---------------------- 1995 1994 1993 1992 -------- -------- -------- --------- Income (Loss) Before Income Taxes, Extraordinary Item And Accounting Change - ------------------------------ As Originally Reported $ 91.8 $ 151.8 $ (279.9) $ (74.5) As Restated $ 90.0 $ 168.7 $ (281.1) $ (73.9) Income (Loss) Before Extraordinary Item And Accounting Change - ------------------------ As Originally Reported $ 105.4 $ 168.5 $ (242.4) $ (74.7) As Restated $ 102.2 $ 185.2 $ (243.6) $ (74.0) Net Income (Loss) - ----------------- As Originally Reported $ 110.8 $ 168.5 $ (258.9) $ (48.4) As Restated $ 107.5 $ 185.2 $ (260.1) $ (47.8) Earnings (Loss) Per Share - ------------------------- As Originally Reported $ 2.34* $ 4.33 $ (8.04)* $ (2.58)* As Restated $ 2.26* $ 4.79 $ (8.07)* $ (2.56)*
- -------------------- * Reported earnings per share for 1995 before extraordinary items was $2.21, the restated amount was $2.13. Reported earnings (loss) per share for 1993 before cumulative effect of accounting change was $(7.55); the restated amount was $(7.58). Reported earnings (loss) per share for 1992 before extraordinary items and cumulative effect of accounting change was $(3.61); the restated amount was $(3.59). - -------------------- The most significant of the restatement adjustments displayed in the table above occurred in 1994 and 1995. Restated pre-tax income for 1994 increased by $16.9 million. Approximately $13.1 million of the increase in 1994 pre-tax income related to adjustments to actuarially value certain of the Company's postemployment and postretirement benefit liabilities related to workers compensation and benefits for surviving spouses of certain former employees of the Company or joint ventures in which the Company was involved. The remaining adjustments relate to a reduction of the Company's Michigan Single Business Tax accruals and other items, which increased pre-tax income by approximately $3.7 million and $.1 million, respectively, in 1994. The 1995 restated pre-tax income includes an adjustment of approximately $3.8 million to amortize the recognition of grant income over the useful lives of the productive assets purchased with the grant, offset by other adjustments related primary to postretirement and postemployment benefits, which increased pre-tax income by $2.0 million. Grant income had previously been recognized as income when received. 10 Effect of Restatements on Retained Earnings (Accumulated Deficit) - ----------------------------------------------------------------- As a result of the restatement, Retained Earnings (Accumulated Deficit) as of January 1, 1992 increased by $31.0 million. A comparison of Retained Earnings (Accumulated Deficit) as originally reported and as restated for each of the last five years is as follows:
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 89.5 142.1 52.6
Adjustments made to reserves at January 1, 1992 consist of the following: - Franchise tax and state tax reserves $14.9 - General office reserve 7.0 - Reserves for shutdown properties 8.9 - Other reserves .2 ----- Total $31.0 ===== The adjustments made to reserves at January 1, 1992 included excess state tax reserves related to franchise taxes of approximately $12.4 million and state income taxes of approximately $2.5 million. The general office reserve was a reserve established to record potential out-of-period items and was determined to be unnecessary at, and subsequent to, December 31, 1991. The excess shutdown reserves related to former operating or mining properties and joint ventures and included retiree medical insurance and other benefit arrangements and property costs. Amendments to the 1996 Form 10-K and amendments to the other 1997 quarterly reports on Form 10-Q have been filed reflecting the above restatements. This report should be read in conjunction with those amended filings. 11 NOTE 3 - SUBSEQUENT EVENTS On April 1, 1997, the Company closed the sale of its 21.73% minority equity interest in Iron Ore Company of Canada ("IOC") to North Limited, an Australian mining and metals company ("North"). The Company received approximately $85 million from North in exchange for its interest in IOC and will report an after- tax gain of approximately $25 million, or $0.58 per share, during the second quarter of 1997. The Company will continue to purchase iron ore from IOC pursuant to the terms of long-term supply agreements. On April 18, 1997, the Company announced that it has reached an agreement in principle to sell its coke oven battery servicing its Great Lakes Division and other related assets, including coal inventories, to a subsidiary of DTE Energy Company. As part of the arrangement, the Company has agreed to operate the battery and will purchase the majority of the coke produced from the battery for a twelve year period under a requirements contract. The Company expects to receive proceeds of approximately $225 million from this transaction, plus the value of the coal inventory. Although this transaction will result in an after-tax loss of approximately $25 million, the impact on future earnings is expected to be positive. The sale is subject to the parties reaching a definitive agreement on all aspects of the transaction, as well as customary regulatory review and approval of both companies' Boards of Directors. Proceeds from the coke battery transaction will be used to repay the outstanding related party indebtedness on the coke battery, which approximates $154 million, plus prepayment and transaction costs which will be incurred in the payoff of the debt and accrued interest. The Company is evaluating the use of the remaining proceeds relating to these transactions. Possible uses of the remaining proceeds may include additional funding of employee benefit plans, additional debt reduction and funding of strategic initiatives. NOTE 4 - ENVIRONMENTAL AND LEGAL PROCEEDINGS The Company's operations are subject to numerous laws and regulations relating to the protection of human health and the environment. Because these environmental laws and regulations are quite stringent and are generally becoming more stringent, the Company has expended, and can be expected to expend in the future, substantial amounts for compliance with these laws and regulations. Due to the possibility of future changes in circumstances or regulatory requirements, the amount and timing of future environmental expenditures could vary from those currently anticipated. It is the Company's policy to expense or capitalize, as appropriate, environmental expenditures that relate to current operating sites. Environmental expenditures that relate to past operations and which do not contribute to future or current revenue generation are expensed. With respect to costs for environmental assessments or remediation activities, or penalties or fines that may be imposed for noncompliance with such laws and regulations, such costs are accrued when it is probable that liability for such costs will be incurred and the amount of such costs can be reasonably estimated. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and similar state superfund statutes generally impose joint and several liability on present and former owners and operators, transporters and generators for remediation of contaminated properties, regardless of fault. The Company and certain of its subsidiaries are involved as potentially responsible parties ("PRPs") at a number of off-site CERCLA or state superfund site proceedings. At some of these sites, any remediation costs incurred by the Company would constitute liabilities for which Avatex Corporation ("Avatex"), formerly FoxMeyer Health Corporation, is required to indemnify the Company ("Avatex Environmental Liabilities"). In addition, at some of these sites, the Company does not have sufficient information regarding the nature and extent of the contamination, the wastes contributed by other PRPs, or the required remediation activity to estimate its potential liability. 12 The Company has also recorded the reclamation and other costs to restore its coal and iron ore mines at its shutdown locations to their original and natural state, as required by various federal and state mining statutes. Since the Company has been conducting steel manufacturing and related operations at numerous locations for over sixty years, the Company potentially may be required to remediate or reclaim any contamination that may be present at these sites. The Company does not have sufficient information to estimate its potential liability in connection with any potential future remediation at such sites. Accordingly, the Company has not accrued for such potential liabilities. As these matters progress or the Company becomes aware of additional matters, the Company may be required to accrue charges in excess of those previously accrued. The outcome of any of the matters described, to the extent they exceed any applicable reserves, could have a material adverse effect on the Company's results of operations and liquidity for the applicable period. The Company has recorded an aggregate environmental liability of approximately $21.4 million and $21.6 million at March 31, 1997 and December 31, 1996, respectively. The Company is involved in various non-environmental legal proceedings, most of which occur in the normal course of its business. The Company does not believe that these proceedings will have a material adverse effect, either individually or in the aggregate, on the Company's financial condition. However, with respect to certain of the proceedings, if reserves prove to be inadequate and the Company incurs a charge to earnings, such charge could have a material adverse effect on the Company's results of operations and liquidity for the applicable period. NOTE 5 - CONTINGENCIES RELATED TO WEIRTON LIABILITIES In 1984, the Company sold its Weirton Steel Division ("Weirton") to the employees of the Weirton Steel Corporation. As a part of this sale, the Company retained certain pension and other postretirement benefit liabilities of Weirton (the "Retained Liabilities") as of the sale date. In a series of transactions occurring after 1984, Avatex sold its interest in the Company to NKK Corporation ("NKK") and the public. As a part of those transactions, Avatex agreed to indemnify the Company for the Retained Liabilities and certain environmental liabilities. In 1990, as a part of one of these transactions, the Company received a payment of $146.6 million and released Avatex from indemnification of $146.6 million of the Retained Liabilities. In 1993, the Company released Avatex from an additional $67.8 million of pension liabilities in connection with an early redemption of 10,000 shares of the Series B Redeemable Preferred Stock owned by Avatex. In 1994, Avatex deposited $10 million with the Company to cover indemnified environmental liabilities. As part of the indemnification agreements, Avatex and the Company have agreed that a "true-up" of the pension and other postretirement liabilities will take place no later than the year 2000. The "true-up" may take place sooner if the parties agree to do so. Based on current information, it is expected that a "true-up" would result in a payment to Avatex. Any adjustment resulting from this "true-up" is expected to be made to the capital accounts of the Company since such an adjustment results from finalization of amounts related to the recapitalization arrangements. Avatex has experienced operating difficulties and has recorded substantial asset writedowns. In its latest filing with the Securities and Exchange Commission, dated December 31, 1996, it reported a deficit in its consolidated stockholders' equity of $83 million. Most of Avatex's operating subsidiaries have filed for bankruptcy protection. Although Avatex, the parent company, has not been included in the bankruptcy filing, the filing has caused the Company to have increased concerns about Avatex's ability to honor its remaining indemnification obligations to the Company. Should Avatex, the parent company, seek bankruptcy protection, the Company's future cash outlays and on-going charges to operations relating to the Retained Liabilities could be significantly increased. Avatex is subject to the informational requirements of the Securities and Exchange Act of 1934 and, in accordance therewith, files reports and other information with the Securities and Exchange Commission. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pursuant to an Audit Committee inquiry, the Company has determined that certain prior period financial statements must be restated. The financial statements for the first three quarters of 1997, and each of the quarters of and the year ended 1996 have been restated to correct the accounting errors. The effect of the restatement on items previously presented in the Management's Discussion and Analysis of Financial Condition and Results of Operations is as follows:
Three months ended Three months ended March 31, 1997 March 31, 1996 As reported As Restated As Reported As Restated ----------- ----------- ----------- ----------- Net sales $ 757,618 $ 757,618 $ 682,143 $ 682,143 Cost of products sold 654,293 653,204 628,920 629,002 Equity income of affiliates (94) (94) (2,287) (2,287) Income tax provision (credit) 2,639 2,074 (5,387) (5,548) Net income (loss) 25,886 26,665 (15,575) (14,196) % Net income (loss) change 3.0% 8.9%
The following Management's Discussion and Analysis has been revised to reflect the restated financial statements as discussed in Note 2 to the unaudited Consolidated Financial Statements. Results of Operations Comparison of the Restated Three Month Periods ended March 31, 1997 and 1996 Net Sales Net sales for the first quarter of 1997 totaled $757.6 million, an 11.1% increase compared to net sales of $682.1 million during the corresponding 1996 period. This $75.5 million increase was attributable to an 85,000 ton increase in volume, an improvement in selling prices and a favorable shift in product mix. Steel shipments were a first quarter record 1,521,000 tons, a 5.9% increase compared to the 1,436,000 tons shipped during the same 1996 period. Cost of Products Sold The Company's cost of products sold of $653.2 million during the first quarter of 1997 represents an increase of $24.2 million compared to the same period in 1996. This increase was primarily attributable to the higher level of shipments, as well as a product mix shift towards higher-cost coated items. Cost of products sold, as a percent of sales, declined from 92.2% during the first quarter of 1996 to 86.2% during the corresponding 1997 period. This 6.0% improvement is attributable to several nonrecurring items that occurred during the first quarter of 1996, including a kiln outage and fire at the Company's iron ore mining facility. Raw steel production was 1,634,000 tons during the first quarter of 1997, which represents a 1.9% decrease compared to the 1,666,000 tons produced during the same 1996 period. Equity Income of Affiliates During the first quarter of 1997, equity income of affiliates of $.1 million represents a decline of $2.2 million compared to the corresponding 1996 period. This decline is primarily the result of lower income from Iron Ore Company of Canada ("IOC") and Double G Coatings, L.P. Income Taxes During the first quarter of 1997, the Company recorded current tax provisions of $7.5 million, offset by a deferred tax benefit of $5.4 million related to retiree postemployment benefits ("OPEB"). The Company's effective tax rate is lower than the combined federal and state statutory rates primarily because of continued utilization of available federal and state net operating loss carryforwards and the recognition of additional deferred tax benefits. As such, the Company anticipates paying alternative minimum tax at a rate of 20%. As a result of the operating loss sustained during the first quarter of 1996, the Company's tax provision was comprised primarily of a deferred tax credit of $5.4 million related to OPEB. Subsequent Events See Liquidity and Sources of Capital regarding the sale of the Company's minority equity interest in IOC, as well as an agreement in principle to sell the coke oven battery serving its Great Lakes Division. Contingencies See Part 1 - Financial Information - Note 5, regarding contingencies related to the Weirton Liabilities. 14 Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share", which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the current presentation of primary EPS to a presentation of basic EPS, which excludes any dilutive effect of stock options. The statement also requires presentation of diluted EPS, which is computed similarly to fully diluted EPS under existing accounting rules. Stock options are the Company's only dilutive securities and are not entered into the determination of primary EPS as their dilutive effect is less than 3%. As such, the presentation of basic EPS will be consistent with the current primary EPS. The impact of SFAS 128 on the calculation of fully diluted EPS is not expected to be material. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1 ("SOP 96-1"), "Environmental Remediation Liabilities". SOP-96-1 provides authoritative guidance on the recognition, measurement, display and disclosures of environmental remediation liabilities. It is the Company's belief that it is in compliance with the accounting and reporting guidance described therein and its issuance did not have a material impact on the Company. 15 LIQUIDITY AND SOURCES OF CAPITAL The Company's liquidity needs arise primarily from capital investments, working capital requirements, pension funding requirements and principal and interest payments on its indebtedness. The Company has satisfied these liquidity needs with funds provided by long term borrowings and cash provided by operations. Additional sources of liquidity consist of a Receivables Purchase Agreement (the "Receivables Purchase Agreement") with commitments of up to $200.0 million and an expiration date of May 2001 and both a $100.0 million and a $50.0 million credit facility, which are secured by the Company's inventories (the "Inventory Facilities") and expire in May 2000 and July 1998, respectively. On April 1, 1997, the Company closed the sale of its 21.73% minority equity interest in IOC to North . The Company received approximately $85 million from North in exchange for its interest in IOC and will report an after-tax gain of approximately $25 million during the second quarter of 1997. On April 18, 1997, the Company announced that it has reached an agreement in principle to sell its coke oven battery servicing its Great Lakes Division and other related assets, including coal inventories, to a subsidiary of DTE Energy Company. As part of the arrangement, the Company has agreed to operate the battery and will purchase the majority of the coke produced from the battery for a twelve year period under a requirements contract. The Company expects to receive proceeds of $225 million from this transaction, plus the value of the coal inventory. Although this transaction is expected to result in an after-tax loss of approximately $25 million, the impact on future earnings is expected to be positive. Proceeds will be used to repay the outstanding related party indebtedness on the coke battery, which approximates $154 million, plus prepayment and transaction costs which will be incurred in the payoff of the debt and accrued interest. The Company is evaluating the use of the remaining proceeds relating to these transactions. Possible uses of the remaining proceeds may include additional funding of employee benefit plans, additional debt reduction and funding of strategic initiatives. The Company is currently in compliance with all material covenants of, and obligations under, the Receivables Purchase Agreement, the Inventory Facilities and other debt instruments. On March 31, 1997, there were no cash borrowings outstanding under the Receivables Purchase Agreement or the Inventory Facilities, and outstanding letters of credit under the Receivables Purchase Agreement totaled $91.7 million. During the first quarter of 1997, the maximum availability under the Receivables Purchase Agreement, after reduction of letters of credit outstanding, varied from $76.7 million to $111.1 million and was $97.3 million as of March 31, 1997. At March 31, 1997, total debt and redeemable preferred stock as a percentage of total capitalization decreased to 45.4% as compared to 47.0% at December 31, 1996. Cash and cash equivalents totaled $135.0 million at March 31, 1997 as compared to $109.0 million at December 31, 1996. Cash Flows from Operating Activities For the quarter ended March 31, 1997, cash provided from operating activities amounted to $90.4 million, which is primarily attributable to $26.7 million in net income earned during the quarter, adjusted for the impact of working capital items and non-cash charges for depreciation and postretirement benefits. Cash Flows from Investing Activities Capital investments for the quarters ended March 31, 1997 and 1996 amounted to $43.0 million and $31.2 million, respectively. The 1997 spending increase is primarily due to the 72 inch continuous galvanizing line upgrade and the construction of a new coating line, both at the Midwest Division. The Company plans to invest approximately $114.0 million during the remainder of 1997 for capital 16 expenditures, including the aforementioned Midwest Division projects, scheduled repairs to the Great Lakes Division "A" blast furnace and improvements at its other facilities. Cash Flows from Financing Activities During the first quarter of 1997, the Company utilized $21.5 million of cash for financing activities which included scheduled payments of debt, as well as dividend payments on the Company's preferred stock. OTHER Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 Statements made by the Company in reports, such as this Form 10-Q, in press releases and in statements made by employees in oral discussions, that are not historical facts constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements, by their nature, involve risk and uncertainty. A variety of factors could cause business conditions and the Company's actual results and experience to differ materially from those expected by the Company or expressed in the Company's forward looking statements. These factors include, but are not limited to, the following: (1) changes in market prices and market demand for the Company's products; (2) changes in the costs or availability of the raw materials and other supplies used by the Company in the manufacture of its products; (3) equipment failures or outages at the Company's steelmaking and processing facilities; (4) losses of customers; (5) changes in the levels of the Company's operating costs and expenses; (6) collective bargaining agreement negotiations, strikes, labor stoppages or other labor difficulties; (7) actions by the Company's competitors, including domestic integrated steel producers, foreign competitors, mini-mills and manufacturers of steel substitutes, such as plastics, aluminum, ceramics, glass, wood and concrete; (8) changes in industry capacity; (9) changes in economic conditions in the United States and other major international economies, including rates of economic growth and inflation; (10) worldwide changes in trade, monetary or fiscal policies; (11) changes in the legal and regulatory requirements applicable to the Company; and (12) the effects of extreme weather conditions. 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings Environmental Matters Great Lakes Division - Wayne Country Air Pollution Control Department. With respect to the matter involving alleged exceedances of emissions and work practice standards at the Company's Great Lakes Division, previously reported in the 1996 Form 10-K, the Wayne Country Air Pollution Control Department has issued nine new notices of violation during the first quarter of 1997. These notices of violation relate to alleged exceedances of particulate emission standards and equipment operating and maintenance requirements. There has been no demand for penalties or sanctions, and the Company has addressed all of the issues raised with respect to these new notices of violation. Granite City - Alleged Air Violations. With respect to the matter involving alleged violations of various air emission requirements at the Granite City Division's basic oxygen furnace shop, coke oven batteries and by-products plant, previously reported in the 1996 Form 10-K, the U.S. Department of Justice notified the Company on May 5, 1997 that it would recommend a settlement of this matter prior to filing suit for a civil penalty of $3.1 million and appropriate injunctive relief. The Company intends to meet with the Department of Justice to discuss its settlement demand. 18 Item 6. Exhibits and Reports on Form 8-K (a) See attached Exhibit Index (b) Reports on Form 8-K The Company filed a report on Form 8-K dated February 23, 1997 reporting on Item 5, Other Events. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL STEEL CORPORATION BY /s/ John A. Maczuzak ----------------------- John A. Maczuzak President and Chief Operating Officer BY /s/ Michael D. Gibbons ------------------------- Michael D. Gibbons Acting Chief Financial Officer Date: January 28, 1998 20 NATIONAL STEEL CORPORATION QUARTERLY REPORT ON FORM 10-Q/A EXHIBIT INDEX For the quarterly period ended March 31, 1997 27-A Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 135,003 0 313,018 20,251 416,162 843,932 3,709,305 2,245,443 2,575,099 551,007 453,874 433 63,155 36,650 631,403 2,575,099 757,618 757,618 653,204 653,204 66,570 931 8,174 28,739 2,074 26,665 0 0 0 26,665 0.55 0.55
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