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Table of Contents
    
2002
    
Second Quarter
 
UNITED STATES
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 June 30, 2002
 
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):
  
574-273-7000
 
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 August 1, 2002, was 41,288,240 shares, consisting of 22,100,000 shares of Class A Common Stock and 19,188,240 shares of Class B Common Stock.
 

Table of Contents
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
 
TABLE OF CONTENTS
 
         
PAGE
PART I
   
FINANCIAL INFORMATION
     
Item 1.
   
Financial Statements (unaudited)
     
       
3
       
4
       
5
       
6
       
7
     
12
     
19
PART II.
   
OTHER INFORMATION
     
     
19
     
21
     
21
 

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Table of Contents
PART 1. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions of Dollars, Except Per Share Amounts)
(Unaudited)
 
    
Three Months
Ended June 30
     
Six Months
Ended June 30
  
    
2002
     
2001
     
2002
     
2001
  
Net Sales
   
$
658.1
 
   
$
673.2
 
   
$
1,262.1
 
   
$
1,262.6
 
Cost of products sold
   
 
613.0
 
   
 
682.3
 
   
 
1,224.5
 
   
 
1,306.5
 
Selling, general and administrative expense
   
 
30.1
 
   
 
32.6
 
   
 
66.9
 
   
 
68.0
 
Depreciation
   
 
39.8
 
   
 
42.0
 
   
 
80.5
 
   
 
83.9
 
Equity income of affiliates
   
 
(1.3
)
   
 
(0.7
)
   
 
(1.9
)
   
 
(1.3
)
Unusual items (credit)
   
 
—  
 
   
 
(2.0
)
   
 
—  
 
   
 
(28.0
)
    
  
  
  
Loss from Operations before Reorganization Items
   
 
(23.5
)
   
 
(81.0
)
   
 
(107.9
)
   
 
(166.5
)
Reorganization items
   
 
6.4
 
   
 
—  
 
   
 
13.6
 
   
 
—  
 
Other (income) expense:
                                    
Interest and other financial income
   
 
—  
 
   
 
(0.5
)
   
 
(0.3
)
   
 
(0.7
)
Interest and other financial expense
   
 
3.9
 
   
 
16.9
 
   
 
18.8
 
   
 
32.4
 
Net gain on disposal of non-core assets and other related activities
   
 
—  
 
   
 
(1.5
)
   
 
—  
 
   
 
(1.5
)
    
  
  
  
    
 
3.9
 
   
 
14.9
 
   
 
18.5
 
   
 
30.2
 
    
  
  
  
Loss before Income Taxes and Cumulative Effect of Change in Accounting Principle
   
 
(33.8
)
   
 
(95.9
)
   
 
(140.0
)
   
 
(196.7
)
Income tax expense (credit)
   
 
0.2
 
   
 
14.4
 
   
 
(52.8
)
   
 
39.5
 
    
  
  
  
Loss Before Cumulative Effect of Change in Accounting Principle
   
 
(34.0
)
   
 
(110.3
)
   
 
(87.2
)
   
 
(236.2
)
Cumulative effect of change in accounting principle
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
17.2
 
    
  
  
  
Net Loss
   
$
(34.0
)
   
$
(110.3
)
   
$
(87.2
)
   
$
(219.0
)
    
  
  
  
Basic and Diluted Earnings Per Share:
                                    
Loss before cumulative effect of change in accounting principle
   
$
(0.82
)
   
$
(2.67
)
   
$
(2.11
)
   
$
(5.72
)
Cumulative effect of change in accounting principle
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
0.42
 
    
  
  
  
Net loss
   
$
(0.82
)
   
$
(2.67
)
   
$
(2.11
)
   
$
(5.30
)
    
  
  
  
Weighted average shares outstanding (in thousands)
   
 
41,288
 
   
 
41,288
 
   
 
41,288
 
   
 
41,288
 
 
See notes to consolidated financial statements.

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Table of Contents
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
 
CONSOLIDATED BALANCE SHEETS
(In Millions of Dollars, Except Share Amounts)
 
    
June 30,
2002
     
December 31,
2001
  
    
(Unaudited)
     
(Note 2)
  
ASSETS
              
Current assets
                  
Cash and cash equivalents
   
$
1.1
 
   
$
1.4
 
Restricted cash
   
 
—  
 
   
 
2.4
 
Receivables—net
   
 
251.0
 
   
 
224.2
 
Inventories
   
 
301.6
 
   
 
390.4
 
Deferred tax assets
   
 
3.2
 
   
 
3.2
 
Other
   
 
24.2
 
   
 
15.5
 
    
  
Total current assets
   
 
581.1
 
   
 
637.1
 
Investments in affiliated companies
   
 
16.6
 
   
 
16.3
 
Property, plant and equipment, net
   
 
1,306.9
 
   
 
1,385.3
 
Deferred tax assets
   
 
44.5
 
   
 
44.5
 
Intangible pension asset
   
 
126.0
 
   
 
126.0
 
Other assets
   
 
98.6
 
   
 
98.4
 
    
  
    
$
2,173.7
 
   
$
2,307.6
 
    
  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
              
Current liabilities
                  
Accounts payable
   
$
109.6
 
   
$
165.6
 
Current portion of long-term obligations
   
 
—  
 
   
 
29.3
 
Short-term borrowings
   
 
—  
 
   
 
100.0
 
Salaries, wages, benefits and related taxes
   
 
54.2
 
   
 
119.0
 
Pension
   
 
—  
 
   
 
169.8
 
Income taxes
   
 
0.1
 
   
 
6.5
 
Property taxes
   
 
11.7
 
   
 
40.3
 
Other accrued liabilities
   
 
46.6
 
   
 
84.1
 
    
  
Total current liabilities
   
 
222.2
 
   
 
714.6
 
Debtor-in-possession financing
   
 
78.1
 
   
 
—  
 
Long-term obligations
   
 
—  
 
   
 
809.7
 
Long-term pension liabilities
   
 
—  
 
   
 
4.7
 
Minimum pension liabilities
   
 
— 
 
   
 
502.3
 
Postretirement benefits other than pensions
   
 
22.3
 
   
 
476.1
 
Other long-term liabilities
   
 
13.6
 
   
 
110.9
 
Liabilities subject to compromise
   
 
2,233.3
 
   
 
—  
 
Commitments and contingencies
                  
Stockholders’ deficit
                  
Common Stock—par value $.01:
                  
Class A—authorized 30,000,000 shares, issued and outstanding 22,100,000
   
 
0.2
 
   
 
0.2
 
Class B—authorized 65,000,000 shares; issued 21,188,240; outstanding 19,188,240
   
 
0.2
 
   
 
0.2
 
Additional paid-in-capital
   
 
491.8
 
   
 
491.8
 
Retained deficit
   
 
(495.2
)
   
 
(408.0
)
Treasury stock, at cost: 2,000,000 shares
   
 
(16.3
)
   
 
(16.3
)
Accumulated other comprehensive loss:
                  
Unrealized loss on derivative instruments
   
 
(0.2
)
   
 
(2.3
)
Minimum pension liability
   
 
(376.3
)
   
 
(376.3
)
    
  
Total stockholders’ deficit
   
 
(395.8
)
   
 
(310.7
)
    
  
    
$
2,173.7
 
   
$
2,307.6
 
    
  
 
See notes to consolidated financial statements.

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Table of Contents
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions of Dollars)
(Unaudited)
 
    
Six Months Ended June 30,
  
    
2002
     
2001
  
Cash Flows from Operating Activities
                  
Net loss
   
$
(87.2
)
   
$
(219.0
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
                  
Depreciation
   
 
80.5
 
   
 
83.9
 
Reorganization items
   
 
13.6
 
   
 
—  
 
Net gain on disposal of non-core assets
   
 
—  
 
   
 
(1.5
)
Cumulative effect of change in accounting principle
   
 
—  
 
   
 
(17.2
)
Deferred income taxes
   
 
—  
 
   
 
39.0
 
Changes in assets and liabilities:
                  
Receivables—trade
   
 
(35.2
)
   
 
11.2
 
Receivables—allowance
   
 
8.3
 
   
 
2.1
 
Receivables sold
   
 
—  
 
   
 
15.0
 
Inventories
   
 
88.8
 
   
 
37.6
 
Accounts payable
   
 
124.7
 
   
 
0.2
 
Pension liability (net of change in intangible pension asset)
   
 
18.1
 
   
 
15.9
 
Postretirement benefits
   
 
13.5
 
   
 
16.5
 
Accrued liabilities
   
 
39.5
 
   
 
(9.0
)
Other
   
 
(10.4
)
   
 
(10.9
)
    
  
Net Cash Provided by (Used in) Operating Activities Before Reorganization Items
   
 
254.2
 
   
 
(36.2
)
Reorganization items (excluding non-cash charges of $7.6 million)
   
 
(6.0
)
   
 
—  
 
    
  
Net Cash Provided by (Used in) Operating Activities
   
 
248.2
 
   
 
(36.2
)
Cash Flows from Investing Activities
                  
Purchases of property and equipment
   
 
(8.1
)
   
 
(31.1
)
Net proceeds from settlement
   
 
5.3
 
   
 
—  
 
Net proceeds from disposal of non-core assets
   
 
—  
 
   
 
1.5
 
    
  
Net Cash Used in Investing Activities
   
 
(2.8
)
   
 
(29.6
)
Cash Flows from Financing Activities
                  
Debt repayment
   
 
(5.0
)
   
 
(14.5
)
Borrowings—net
   
 
(235.5
)
   
 
80.4
 
Debt issuance costs
   
 
(5.2
)
   
 
—  
 
    
  
Net Cash Provided by (Used in) Financing Activities
   
 
(245.7
)
   
 
65.9
 
    
  
Net Increase in Cash and Cash Equivalents
   
 
(0.3
)
   
 
0.1
 
Cash and cash equivalents at the beginning of the period
   
 
1.4
 
   
 
1.6
 
    
  
Cash and cash equivalents at the end of the period
   
$
1.1
 
   
$
1.7
 
    
  
Supplemental Cash Payment (Receipt) Information
                  
Interest and other financing costs
   
$
14.1
 
   
$
31.3
 
Income taxes, net
   
 
(53.1
)
   
 
(17.9
)
 
See notes to consolidated financial statements.
 

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Table of Contents
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In Millions of Dollars, Except Share Amounts)
 
    
Common Stock—
Class A
   
Common Stock—
Class B
   
Additional Paid-In Capital
   
Retained Earnings
(Deficit)
     
Treasury
Stock
       
Accumulated Other Comprehensive Loss
       
Total
Stockholders’
Equity
(Deficit)
  
Balance at January 1, 2001 (Note 1)
   
$
0.2
   
$
0.2
   
$
491.8
   
$
244.1
 
   
$
(16.3
)
     
$
(2.3
)
     
$
717.7
 
Comprehensive loss:
                                                             
Net loss
                        
 
(652.1
)
                         
 
(652.1
)
Other comprehensive income (loss):
                                                             
Minimum pension liability
                                            
 
(374.0
)
     
 
(374.0
)
Cumulative effect of the adoption of SFAS 133
                                            
 
23.8
 
     
 
23.8
 
Net activity relating to derivative instruments
                                            
 
(26.1
)
     
 
(26.1
)
                                                        
Comprehensive loss
                                                       
 
(1,028.4
)
    
  
  
  
  
    
    
Balance at December 31, 2001 (Note 1)
   
 
0.2
   
 
0.2
   
 
491.8
   
 
(408.0
)
   
 
(16.3
)
     
 
(378.6
)
     
 
(310.7
)
Comprehensive loss:
                                                             
Net loss
                        
 
(87.2
)
                         
 
(87.2
)
Other comprehensive income:
                                                             
Net activity relating to derivative instruments
                                            
 
2.1
 
     
 
2.1
 
                                                        
Comprehensive loss
                                                       
 
(85.1
)
    
  
  
  
  
    
    
Balance at June 30, 2002 (Unaudited)
   
$
0.2
   
$
0.2
   
$
491.8
   
$
(495.2
)
   
$
(16.3
)
     
$
(376.5
)
     
$
(395.8
)
    
  
  
  
  
    
    
 
See notes to consolidated financial statements.

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Table of Contents
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 (Unaudited)
 
NOTE 1 — VOLUNTARY PETITION FOR REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
 
On March 6, 2002, National Steel Corporation and forty-one of its domestic subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Court”). The case was assigned to the Hon. John H. Squires and is being jointly administered under case number 02-08699. National Steel Corporation and its majority owned subsidiaries (the “Company”) also obtained Court approval of a $450 million Secured Super Priority Debtor In Possession Credit Agreement (“DIP Facility”) with the existing senior secured bank group which combined with other actions is being used to fund post-petition operating expenses as well as supplier and employee obligations. The Company filed for protection under Chapter 11 in order to obtain the necessary time to stabilize its finances and to attempt to develop a plan of reorganization that will enable it to return to sustained profitability.
 
Under bankruptcy law, actions by creditors to collect amounts owed by the Company at the filing date are stayed and other pre-petition contractual obligations may not be enforced against the Company, without approval by the Court to settle these claims. The Company received approval from the Court to pay certain of its pre-petition claims, including employee wages and certain employee benefits. In addition, the Company has the right, subject to Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties affected by these rejections may file claims with the Court. The amounts of claims filed by creditors could be significantly different from the recorded amounts. Due to material uncertainties, it is not possible to predict the length of time the Company will operate under Chapter 11 protection, the outcome of the proceedings in general, whether the Company will continue to operate under its current organizational structure, the effect of the proceedings on its businesses or the recovery by its creditors and equity holders.
 
NOTE 2 — BASIS OF PRESENTATION
 
The accompanying consolidated financial statements presented herein have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business and do not reflect adjustments that might result if the Debtors are unable to continue as a going concern. As a result of the Debtors’ Chapter 11 filings, however, such matters are subject to significant uncertainty. The Debtors intend to file a plan of reorganization with the Court. Continuing on a going concern basis is dependent upon, among other things, the Debtors’ formulation of an acceptable plan of reorganization, the success of future business operations, and the generation of sufficient cash from operations and financing sources to meet the Debtors’ obligations. The accompanying consolidated financial statements do not reflect (a) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities, (b) aggregate prepetition liability amounts that may be allowed for claims or contingencies, or their status or priority, (c) the effect of any changes to the Debtors’ capital structure or in the Debtors’ business operations as the result of an approved plan of reorganization, or (d) adjustments to the carrying value of assets or liability amounts that may be necessary as the result of actions by the Court.
 
The Company’s financial statements as of June 30, 2002, have been presented in conformity with the AICPA’s Statement of Position No. 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, issued November 19, 1990 (“SOP 90-7”). SOP 90-7 requires a segregation of liabilities subject to compromise by the Court as of the filing date and identification of all transactions and events that are directly associated with the reorganization of the Company. Prior year’s comparative balances have not been reclassified to conform to current year balances stated under SOP 90-7. Certain majority owned subsidiaries reported in the Company’s consolidated

7

Table of Contents
results were not included in the Chapter 11 filings. Total assets for these entities were $7.8 million as of June 30, 2002 and the net income for the quarter and six-month period ended June 30, 2002 was $5.5 million and $5.4 million, respectively.
 
In the opinion of management the consolidated financial statements presented herein include all adjustments necessary for the fair presentation on a going concern basis of the results for the periods indicated. All such adjustments made were of a normal recurring nature except for the items discussed in Notes 4 and 6. The financial results presented for the three-month and six-month periods ended June 30, 2002 and 2001 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, 2001 (the “2001 Form 10-K”) contains additional information and should be read in conjunction with this report.
 
The Company has engaged Ernst & Young LLP to conduct a review of the consolidated financial statements presented herein, in accordance with standards established by the American Institute of Certified Public Accountants. Their review report is included as an exhibit to this Form 10-Q.
 
Certain amounts in the 2001 financial statements have been reclassified to conform to current presentation.
 
NOTE 3—INVENTORIES
 
Inventories are as follows:
 
Dollars in millions
   
June 30,
2002
   
December 31,
2001
Inventories
              
Finished and semi-finished
   
$
290.7
   
$
339.0
Raw materials and supplies
   
 
137.3
   
 
176.9
    
  
    
 
428.0
   
 
515.9
Less LIFO reserve
   
 
126.4
   
 
125.5
    
  
    
$
301.6
   
$
390.4
    
  
 
NOTE 4—REORGANIZATION ITEMS
 
Reorganization items are comprised of items of income, expense and loss that were realized or incurred by the Company as a result of its decision to reorganize under Chapter 11 of the Bankruptcy Code. The following summarizes the reorganization charges provided by the Company during the quarter and six-month period ended June 30, 2002:
 
Dollars in millions
     
Quarter Ended
June 30, 2002
     
Six Months Ended
June 30, 2002
Professional and other fees
     
$
5.2
     
$
8.1
Write-down of deferred financing costs
     
 
—  
     
 
2.3
Provision for rejected derivative contract
     
 
—  
     
 
1.3
Other
     
 
1.2
     
 
1.9
      
    
      
$
6.4
     
$
13.6
      
    
 
NOTE 5—INTEREST EXPENSE
 
Interest at the stated contractual amount on unsecured debt that was not charged to earnings for the quarter and six months ended June 30, 2002 was approximately $12.8 million and $16.4 million, respectively.

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Table of Contents
NOTE 6—INCOME TAXES
 
In the first quarter of 2002, the Company recorded an income tax benefit of $53.0 million. On March 9, 2002, President Bush signed the Job Creation and Worker Assistance Act of 2002 (the “Act”). The Act, among other provisions, provides for an expansion of the carryback of net operating losses (“NOLs”) from two years to five years for NOLs arising in 2001 and 2002. The Company was able to carryback its loss recorded during 2001 to the 1996 through 1998 tax years when it paid an alternative minimum tax. This carryback allowed the Company to recover the entire amount of alternative minimum taxes paid during those prior taxable years. During the first quarter of 2002, the Company received a refund of $53.2 million.
 
NOTE 7—SEGMENT INFORMATION
 
    
June 30, 2002
     
June 30, 2001
  
Dollars in millions
   
Steel
     
All
Other
     
Total
     
Steel
     
All
Other
     
Total
  
Six months ended:
                                                      
Revenues from external customers
   
$
1,251.8
 
   
$
10.3
 
   
$
1,262.1
 
   
$
1,254.9
 
   
$
7.7
 
   
$
1,262.6
 
Intersegment revenues
   
 
227.1
 
   
 
112.2
 
   
 
339.3
 
   
 
257.5
 
   
 
1,291.5
 
   
 
1,549.0
 
Segment loss from operations before reorganization items
   
 
(37.3
)
   
 
(70.6
)
   
 
(107.9
)
   
 
(65.3
)
   
 
(101.2
)
   
 
(166.5
)
Segment assets
   
 
1,354.3
 
   
 
819.4
 
   
 
2,173.7
 
   
 
1,637.3
 
   
 
777.0
 
   
 
2,414.3
 
Three months ended:
                                                      
Revenues from external customers
   
$
653.0
 
   
$
5.1
 
   
$
658.1
 
   
$
669.4
 
   
$
3.8
 
   
$
673.2
 
Intersegment revenues
   
 
117.0
 
   
 
74.0
 
   
 
191.0
 
   
 
133.1
 
   
 
701.2
 
   
 
834.3
 
Segment income (loss) from operations before reorganization items
   
 
2.6
 
   
 
(26.1
)
   
 
(23.5
)
   
 
(24.1
)
   
 
(56.9
)
   
 
(81.0
)
 
Included in the “All Other” intersegment revenues is $1,188.4 million in 2001 of qualified trade receivables sold to National Steel Funding Corporation, a wholly-owned subsidiary.
 
NOTE 8—LIABILITIES SUBJECT TO COMPROMISE
 
The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be subject to future adjustment depending on Court action, further developments with respect to disputed claims, or other events. Additional claims may arise resulting from rejection of additional executory contracts or unexpired leases by the Company. Under an approved final plan of reorganization, these claims may be settled at amounts substantially less than their allowed amounts.

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Table of Contents
Recorded liabilities subject to compromise under the Chapter 11 proceedings as of June 30, 2002 consisted of the following:
 
Accounts payable
   
$
184.9
Short-term borrowings
   
 
100.0
Salaries, wages, benefits and related taxes
   
 
66.3
Pension liabilities
   
 
192.6
Minimum pension liabilities
   
 
502.3
Property taxes
   
 
42.6
Income taxes
   
 
6.6
Other accrued liabilities
   
 
57.6
Long-term obligations
   
 
520.5
Postretirement benefits other than pensions
   
 
470.1
Other long-term liabilities
   
 
89.8
    
    
$
2,233.3
    
 
NOTE 9—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. Costs for environmental assessments or remediation activities, or penalties or fines that may be imposed for noncompliance with environmental laws and regulations, are accrued when it is probable that liability for such costs will be incurred and the amount of such costs can be reasonably estimated.
 
The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), and similar state 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 and other environmental cleanup proceedings. At some of these sites, the Company does not have sufficient information regarding the nature and extent of the contamination, the wastes contributed by other PRPs, or the required remediation activity to estimate its potential liability.
 
The Company has also recorded the reclamation and other costs to restore its coal mines at its shutdown locations to their original and natural state, as required by various federal and state mining statutes.
 
The Company is jointly liable with LTV for environmental clean-up and other potential costs related to the closed Donner Hanna Coke plant. The Company entered into a consent order pertaining to this site that was filed with the U.S. District Court for the Western District of New York on July 15, 2002. As a result, the Company recorded a $2.0 million charge to income in the second quarter of 2002 to increase its share of the environmental clean-up costs to $4.4 million (See Part II, Item 1 “Legal Proceedings” for further discussion).
 
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

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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. Although the outcome of any of the matters described, to the extent they exceed any applicable reserves or insurance coverages, could have a material adverse effect on the Company’s results of operations and liquidity for the applicable period, the Company has no reason to believe that such outcomes, whether considered individually or in the aggregate, will have a material adverse effect on the Company’s financial condition. The Company has recorded an aggregate environmental liability of approximately $18.4 million and $17.6 million at June 30, 2002 and December 31, 2001, respectively, which as of June 30, 2002 are included in the caption “Liabilities Subject to Compromise” on its consolidated balance sheet.
 
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 10—OTHER COMMITMENTS AND CONTINGENCIES
 
In the fourth quarter of 2001, Bethlehem Steel Corporation (“Bethlehem”) filed for Chapter 11 protection under U.S. bankruptcy laws. The Company has a 50% interest in a joint venture coating facility with Bethlehem and a 13% interest in a joint venture family health care facility with Bethlehem and another steel company. The Company is uncertain what effect, if any, the Bethlehem bankruptcy will have on its future earnings and financial position.
 
In the fourth quarter of 2001, LTV Steel Company, Inc. (“LTV”) announced its intention to initiate an orderly liquidation in accordance with U.S. bankruptcy laws. The Company is uncertain what ongoing effect other than those related to its environmental obligations related to the Donner Hanna Coke Plant (See Note 9), if any, the LTV liquidation will have on its future earnings and financial position.
 
During the second quarter of 2002, the Company recorded a $6.0 million credit to income through cost of products sold due to adjusting the liability for its pension obligations to the United Mine Workers of America Pension Plan. The Company previously withdrew its coal mining subsidiaries from the United Mine Workers of America Pension Plan. Under the Multiemployer Pension Plan Amendments Act of 1980, a company that withdraws from a multiemployer pension plan covered under Title IV of ERISA is liable to the plan for a portion of the plan’s unfunded vested benefits. The Comptroller of the UMWA Health and Retirement Funds notified the Company that the official withdrawal date from the Plan was August 1997, rather than that previously estimated by the Company, and calculated the withdrawal liability to be $19 thousand. Accordingly, the Company adjusted its reserve to reflect this change in estimate.

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
This commentary should be read in conjunction with the second quarter 2002 consolidated financial statements and selected notes and the 2001 Form 10-K for a full understanding of our financial condition and results of operations.
 
Chapter 11 Proceedings
 
On March 6, 2002, National Steel Corporation and forty-one of its domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Court”). The case was assigned to the Hon. John H. Squires and is being jointly administered under case number 02-08699. We continue to manage our properties and operate our businesses under Sections 1107(a) and 1108 of the Code as a debtor-in-possession. Due to material uncertainties, it is not possible to predict the length of time we will operate under Chapter 11 protection, the outcome of the proceedings in general, whether we will continue to operate under our current organizational structure, the effect of the proceedings on our businesses or the recovery by our creditors and equity holders.
 
The accompanying consolidated interim financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business and do not reflect adjustments that might result if we are unable to continue as a going concern. As a result of our Chapter 11 filings, however, such matters are subject to significant uncertainty. Continuing on a going concern basis is dependent upon, among other things, our formulation of an acceptable plan of reorganization, the success of future business operations, and the generation of sufficient cash from operations and financing sources to meet our obligations.
 
We are pursuing various strategic alternatives including, among other things, possible consolidation opportunities, a stand-alone plan of reorganization and liquidation of part or all of our assets. Such alternatives are in an early state and have not been implemented, nor can there be any assurance which alternative will be implemented. After further consideration of such alternatives and negotiations with various parties in interest, we expect to present a Chapter 11 plan, which will likely cause a material change to the carrying amount of assets and liabilities in the financial statements. The accompanying consolidated interim financial statements do not reflect (a) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities, (b) aggregate prepetition liability amounts that may be allowed for claims or contingencies, or their status or priority, (c) the effect of any changes to our capital structure or in our business operations as the result of an approved plan of reorganization, or (d) adjustments to the carrying value of assets or liability amounts that may be necessary as the result of actions by the Court.
 
The matters described herein, to the extent that they relate to future events or expectations, may be significantly affected by the Chapter 11 proceedings. Those proceedings will involve, or result in, various restrictions on our activities, limitations on financing, the need to obtain Court approval for various matters and uncertainty as to relationships with vendors, suppliers, customers and others with whom we may conduct or seek to conduct business.
 
Results of Operations—Three Months Ended June 30, 2002 and 2001
 
Net Sales
 
Net sales for the second quarter of 2002 decreased $15.1 million, or 2.2%, compared to the second quarter of 2001. Shipments were 245,000 tons, or 16%, lower than prior year levels due to reduced production levels in the current year related to the idling of one of our blast furnaces at our Great Lakes facility. Partially offsetting this decrease was an increase in our average selling price of $63 per ton, or 16%. This increase is partially due to steadily increasing market prices resulting from the reduced supply of flat rolled steel products following the recently enacted Section 201 trade tariffs and the temporary idling of steelmaking capacity by some of our competitors. In addition, we experienced a shipment mix change from lower priced hot rolled products to value-added coated

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products. Value-added cold-rolled and coated products approximated 64% of our prime steel shipments representing an 11 percentage point improvement over the prior year period.
 
Loss from Operations before Reorganization Items
 
We reported an operating loss before reorganization items of $23.5 million for the second quarter of 2002, an improvement of $57.5 million compared to the corresponding 2001 period. Several factors contributed to our improved operating performance:
 
 
•
 
The improved value-added mix of products and average selling prices favorably impacted current year results by approximately $28.7 million.
 
 
•
 
Natural gas costs were lower than the prior year by $12.7 million mainly due to the abnormally high prices in the prior year. In addition, electricity prices were lower by $2.7 million. All other raw material prices were $1.5 million lower than the year earlier period.
 
 
•
 
During the second quarter of 2002, we recorded a $6.0 million credit to income due to adjusting the liability for our pension obligations to the United Mine Workers of America Pension Plan. We previously withdrew our coal mining subsidiaries from the United Mine Workers of America Pension Plan. Under the Multiemployer Pension Plan Amendments Act of 1980, a company that withdraws from a multiemployer pension plan covered under Title IV of ERISA is liable to the plan for a portion of the plan’s unfunded vested benefits. The Comptroller of the UMWA Health and Retirement Funds notified us that the official withdrawal date from the Plan was August 1997, rather than that previously estimated by us, and calculated the withdrawal liability to be $19 thousand. Accordingly, we adjusted our reserve to reflect this change in estimate.
 
 
•
 
Overall spending and other charges were $14.2 million lower primarily as a result of improved product claims experience, improved manpower utilization and lower repair and maintenance charges.
 
 
•
 
During the second quarter of 2002, we recorded a $2.0 million charge to income to increase our share of environmental clean-up costs related to the closed Donner Hanna Coke plant to $4.4 million. (See Note 9 to the unaudited financial statements for additional information.)
 
 
•
 
Partially offsetting these improvements was an unfavorable effect of slightly lower yields and higher material usage and the effect of unusual items recorded in the prior year related to the settlement of property tax issues at our Midwest and Great Lakes facilities and the Staff Retirement Incentive Program offered in the prior year. These items resulted in a combined unfavorable effect of $6.3 million as compared to the year earlier period.
 
Reorganization Items
 
Reorganization items are comprised of items of income, expense and loss that were realized or incurred by us as a direct result of our decision to reorganize under Chapter 11 of the Bankruptcy Code. Such items for the second quarter of 2002 consisted of the following:
 
Professional and other fees
   
$
5.2
Other
   
 
1.2
    
    
$
6.4
    
 
Income Taxes
 
In the second quarter of 2002, we recorded a non-cash tax expense of $0.2 million due to certain state tax requirements. After reviewing our future taxable income and tax planning strategies, we determined that no change to our deferred tax asset was necessary. As a result, no additional income tax benefit or expense was recorded related to deferred tax assets.

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In the second quarter of 2001, we recorded a non-cash tax expense of $14.4 million utilizing a negative effective tax rate of 15%. After reviewing our future taxable income and tax planning strategies, we determined that the use of a negative effective tax rate was necessary in order to increase our valuation allowance on our deferred tax asset.
 
Results of Operations—Six Months Ended June 30, 2002 and 2001
 
Net Sales
 
Net sales for the first six months of 2002 decreased $0.5 million compared to the first six months of 2001. Net revenue was essentially flat as compared to the prior year despite a reduction in shipments of 264,000 tons, or 9%, due to reduced production levels in the current year related to the idling of one of our blast furnaces at our Great Lakes facility. This volume decrease was almost entirely offset by an increase of $37 per ton, or 9%, in average selling prices. This increase is partially due to steadily increasing market prices resulting from the reduced supply of flat rolled steel products following the recently enacted Section 201 trade tariffs and the temporary idling of steelmaking capacity by some of our competitors. In addition, we experienced a shipment mix change from lower priced hot rolled products to value-added coated products. Value-added cold-rolled and coated products approximated 61% of our prime steel shipments representing an 8 percentage point improvement over the prior year period.
 
Loss from Operations before Reorganization Items
 
We reported an operating loss before reorganization items of $107.9 million for the first six months of 2002, an improvement of $58.6 million compared to the corresponding 2001 period. Our results improved in the current year despite the recognition in the prior-year period of a net unusual credit of $28.0 million related to the sale of a natural gas derivative contract and the settlement of property tax issues at our Midwest and Great Lakes facilities offset slightly by certain expenses relating to a Staff Retirement Incentive Program for Salaried Non-Represented Employees. Excluding the effect of these one-time unusual impacts, our operating results improved $86.6 million. Several factors contributed to our improved operating performance:
 
 
•
 
The improved value-added mix of products and average selling prices, partially offset by the lower shipping volumes, favorably impacted current year results by approximately $23.6 million.
 
 
•
 
Natural gas prices were lower than the prior year by $23.1 million mainly due to the abnormally high prices in the prior year. In addition, electricity prices were lower by $5.4 million. All other raw material prices were $2.1 million lower than the year earlier period.
 
 
•
 
During the second quarter of 2002, we recorded a $6.0 million credit to income due to adjusting the liability for our pension obligations to the United Mine Workers of America Pension Plan. We previously withdrew our coal mining subsidiaries from the United Mine Workers of America Pension Plan. Under the Multiemployer Pension Plan Amendments Act of 1980, a company that withdraws from a multiemployer pension plan covered under Title IV of ERISA is liable to the plan for a portion of the plan’s unfunded vested benefits. The Comptroller of the UMWA Health and Retirement Funds notified us that the official withdrawal date from the Plan was August 1997, rather than that previously estimated by us, and calculated the withdrawal liability to be $19 thousand. Accordingly, we adjusted our reserve to reflect this change in estimate.
 
 
•
 
During the second quarter of 2002, we recorded a $2.0 million charge to income to increase our share of environmental clean-up costs related to the closed Donner Hanna Coke plant to $4.4 million. (See Note 9 to the unaudited financial statements for additional information.)
 
 
•
 
Manpower utilization improved from the prior year period favorably impacting current year results by $5.4 million.
 
 
•
 
Overall spending and other charges were $23.0 million lower primarily as a result of improved product claims experience, lower purchases of outside steel products and general reductions in spending.

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Reorganization Items
 
Reorganization items are comprised of items of income, expense and loss that were realized or incurred by us as a direct result of our decision to reorganize under Chapter 11 of the Bankruptcy Code. Such items for the first six months of 2002 consisted of the following:
 
Professional and other fees
   
$
8.1
Write-down of deferred financing costs
   
 
2.3
Provision for rejected derivative contract
   
 
1.3
Other
   
 
1.9
    
    
$
13.6
    
 
Income Taxes
 
In the first half of 2002, we recorded an income tax benefit of $52.8 million. On March 9, 2002, President Bush signed the Job Creation and Worker Assistance Act of 2002 (the “Act”). The Act, among other provisions, provides for an expansion of the carryback of net operating losses (“NOLs”) from two years to five years for NOLs arising in 2001 and 2002. We were able to carryback our loss recorded during 2001 to the 1996 through 1998 tax years when we paid an alternative minimum tax. This carryback allowed us to recover the entire amount of alternative minimum taxes paid during those prior taxable years. During the first quarter of 2002, we received a refund of $53.2 million. After reviewing our future taxable income and tax planning strategies, we determined that no change to our deferred tax asset was necessary. As a result, no additional income tax benefit or expense was recorded related to deferred tax assets.
 
In the first six months of 2001, we recorded a non-cash tax expense of $39.5 million utilizing a negative effective tax rate of 25% in the first quarter and 15% in the second quarter. After reviewing our future taxable income and tax planning strategies, we determined that the use of a negative effective tax rate was necessary in order to increase our valuation allowance on our deferred tax assets.
 
Change in Accounting Principle
 
Effective January 1, 2001, we changed our method of accounting for investment gains and losses on pension assets used in the calculation of net periodic pension cost. The cumulative effect of this change on prior periods was a credit of $17.2 million.
 
Discussion of Liquidity and Sources of Capital
 
Overview
 
Our liquidity needs generally arise from working capital requirements, capital investments, principal and interest payments on our indebtedness, and retiree health care funding requirements. We have satisfied these liquidity needs with funds provided by borrowings, the sale of non-core assets and cash provided by operations. Additionally, during 2002 we received $53.2 million in federal tax refunds.
 
In conjunction with our Chapter 11 Filing, we obtained Court approval of a $450 million Secured Super Priority Debtor in Possession Credit Agreement (the “DIP Facility”) with our existing senior secured bank group. As part of the DIP Facility, all cash received by us or any of our subsidiaries is applied to outstanding claims under our previously existing Credit Agreement and after all such claims have been paid, to outstanding obligations under the DIP Facility. Proceeds of loans under the DIP will be used solely to pay certain pre-petition claims approved by the Court, for post-petition operating expenses incurred in the ordinary course of business and certain other costs and expenses of administration of the cases as will be specified and as approved by the Court.

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Availability under the DIP Facility is subject to a borrowing base calculated by applying advance rates to eligible accounts receivable and eligible inventory. Availability under the DIP Facility will be subject to: (i) certain eligibility reserves and availability reserves, (ii) a reserve for certain professional and bankruptcy court expenses related to our Chapter 11 cases and (iii) a liquidity reserve of $35 million. Outstanding pre-petition claims under the previously existing Credit Agreement also reduce availability.
 
All amounts owed by us under the DIP Facility at all times will constitute allowed super-priority administrative expense claims in our Chapter 11 cases, generally having priority over all our administrative expenses. In addition, all amounts owed by us under the DIP Facility will be secured by valid and perfected security interests in, and liens on substantially all of our assets.
 
On June 30, 2002, cash borrowings under our DIP Facility were $78.1 million with an annual interest rate of 6.2%.
 
Total liquidity, which includes cash balances plus available borrowing capacity under the DIP Facility, net of reserves, was $213 million at June 30, 2002 as compared to $32 million at December 31, 2001 under our previously existing credit facility.
 
Cash Flows from Operating Activities before Reorganization Items
 
For the six months ended June 30, 2002, cash provided by operating activities before reorganization items amounted to $254.2 million, which is primarily attributed to our federal income tax refund, reduced inventory levels and increased accounts payables and other liability accounts. Partially offsetting these positive effects was an increase in our accounts receivables balances.
 
Cash Flows from Investing Activities
 
Capital investments for the six months ended June 30, 2002 and 2001 amounted to $8.1 million and $31.1 million, respectively. The 2002 spending relates primarily to those projects necessary to maintain our facilities in current operating status.
 
During the first quarter of 2002, we settled certain claims in conjunction with a Turnkey Engineering and Construction Contract with NKK Steel Engineering, Inc. (“NKK SE”), a subsidiary of NKK Corporation, our majority shareholder. This settlement resulted in NKK SE paying us $5.3 million for the late startup and for other performance issues. This amount reduced the cost basis of our continuous galvanizing line at our Great Lakes Operations and will result in lower depreciation charges in the future.
 
Cash Flows from Financing Activities
 
Net cash used in financing activities amounted to $245.7 million during the second quarter of 2002. This results from a net reduction in borrowings under our revolving credit agreements of $235.5 million, scheduled payments on long-term debt prior to our bankruptcy filing and debt issuance costs related to our new DIP facility.
 
Forward Looking Information
 
As we look to the third quarter, we anticipate continued strong demand for our products and higher selling prices. We anticipate that our average selling prices will increase approximately 2% to 5% during the third quarter as a result of increased demand and positive impacts from import tariffs. We expect to see shipment levels increase during the third quarter to levels approximately 2% to 4% higher than levels reported in the second quarter of 2002.
 
Our liquidity position remains our highest priority. We expect to be cash neutral for the third quarter. However, total liquidity is expected to increase as availability under the DIP Facility will increase. Capital spending will

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remain at low levels, with a $12 to $15 million spending forecast for the third quarter. Our vendors have responded well to our Chapter 11 filing. Our payment terms have improved and are expected to continue to improve during the third quarter. Additionally, our customers have responded well and we believe that we have not lost any significant sales opportunities due to our Chapter 11 filing. We continue to closely monitor our accounts receivable balances with our customers, but it is possible that customers will file for bankruptcy protection or otherwise default in their payment to us which would adversely impact our cash flow and financial condition.
 
Other Operational and Financial Disclosure Matters
 
Sale of Interest in DNN Galvanizing Limited Partnership
 
On August 13, 2002, the Court approved our motion to sell our 10% ownership interest in DNN Galvanizing Limited Partnership (“DNN”) to an affiliate of NKK, our majority shareholder and will receive gross proceeds of approximately $4.3 million in the third quarter. Pursuant to our DNN Agreements, our voluntary filing of Chapter 11 was treated as a default. In connection with this transaction, we entered into agreements with affiliates of NKK and Dofasco whereby we obtain the right to process material at DNN during the next 16 months. Over that period we will be reducing the tons processed at DNN and move the material to our own galvanizing lines. We anticipate no disruption to our customers in supply, delivery or quality as a result of this transition.
 
Impact of Recently Issued Accounting Standards
 
In April 2002, the FASB issued SFAS No. 145, Recession of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”), which will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS 4. SFAS 145 also amends SFAS 13 to require certain modifications to capital leases be treated as a sales-leaseback. We have not yet determined the effect, if any, that adopting SFAS 145 will have on our future earnings or financial position.
 
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), which changes financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized as incurred rather than at the date a company commits to an exit plan as currently required. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002.
 
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
 
Statements made in our 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 our actual results and experience to differ materially from those we expect or expressed in our forward looking statements. These factors include, but are not limited to, the following:
 
 
1)
 
changes in market prices and market demand for our products;
 
 
2)
 
changes in our mix of products sold;
 
 
3)
 
changes in the costs or availability of the raw materials and other supplies used by us in the manufacture of our products;
 
 
4)
 
equipment failures or outages at our steelmaking and processing facilities;
 
 
5)
 
losses of customers;

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  6)
 
changes in the levels of our operating costs and expenses;
 
 
  7)
 
collective bargaining agreement negotiations, strikes, labor stoppages or other labor difficulties;
 
 
  8)
 
actions by our competitors, including domestic integrated steel producers, foreign competitors, mini-mills and manufacturers of steel substitutes, such as plastics, aluminum, ceramics, glass, wood and concrete;
 
 
  9)
 
changes in industry capacity;
 
 
10)
 
changes in economic conditions in the United States and other major international economies, including rates of economic growth and inflation;
 
 
11)
 
worldwide changes in trade, monetary or fiscal policies including changes in interest rates;
 
 
12)
 
changes in the legal and regulatory requirements applicable to us;
 
 
13)
 
the effect of trade litigation and proceedings, including tariffs imposed pursuant to Section 201 of the Trade Act of 1974;
 
 
14)
 
the impact of our Chapter 11 bankruptcy filing on our business; and
 
 
15)
 
the effects of extreme weather conditions.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
In the normal course of business, our operations are exposed to continuing fluctuations in commodity prices, foreign currency values and interest rates that can affect the cost of operating, investing and financing. Accordingly, we address a portion of these risks, primarily commodity price risk, through a controlled program of risk management that includes the use of derivative financial instruments. Our objective is to reduce earnings volatility associated with these fluctuations to allow management to focus on core business issues. Our derivative activities, all of which are for purposes other than trading, are initiated within the guidelines of a documented corporate risk-management policy. We do not enter into any derivative transactions for speculative purposes. Our market risk has not changed materially from that reported in the 2001 Form 10-K.
 
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
Chapter 11 Bankruptcy Proceedings
 
This matter was reported in the Company’s 2001 Form 10-K and Form 10-Q for the First Quarter of 2002. On March 6, 2002, the Company and forty-one of its wholly owned subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Court”), for reorganization relief under Chapter 11 of the Bankruptcy Code. The case was assigned to the Hon. John H. Squires of the Court and is being jointly administered under case number 02-08699. The Company and its subsidiaries continue to manage and operate their businesses as debtors and debtors in possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code. The Company also obtained Court approval of a new debtor-in-possession credit facility that provides for up to $450 million in financing from the existing senior secured bank group, which combined with other actions, will be used to fund post-petition operating expenses as well as supplier and employee obligations. The Company filed for protection under Chapter 11 in order to obtain the necessary time to stabilize the Company’s finances and to attempt to develop a plan of reorganization that will enable us to return to sustained profitability. Under bankruptcy law, actions by creditors to collect amounts owed by the Company at the filing date are stayed and other pre-petition contractual obligations may not be enforced against it, without approval by the Court to settle these claims. The Company received approval from the Court to pay certain of its pre-petition claims, including employee wages and certain employee benefits. In addition, the Company has the right, subject to Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties affected by these rejections may file claims with the Court. The Company has submitted the schedules setting forth all of its assets and liabilities as of the date of the petition as reflected in its accounting records. The amounts of claims filed by creditors could be significantly different from the recorded amounts. The last date for filing claims by creditors other than governmental units is August 15, 2002 and for governmental units is September 6, 2002. Due to material uncertainties, it is not possible to predict the length of time the Company will operate under Chapter 11 protection, the outcome of the proceedings in general, whether it will continue to operate under its current organizational structure, the effect of the proceedings on its businesses or the recovery by its creditors and equity holders. The exclusive period within which only the debtor can file a plan of reorganization continues through November 5, 2002 and is subject to extension by the Court after notice and an opportunity for a hearing.
 
Trade Litigation
 
This matter was reported in the Company’s 2001 Form 10-K and Form 10-Q for the first quarter of 2002 and relates to several on-going trade litigation proceedings. These proceedings generally originated with petitions filed by the Company and a number of other U.S. steel producers with the Department of Commerce (the “DOC”) and the International Trade Commission (the “ITC”).

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Regarding the investigations of cold-rolled carbon steel flat products (“Cold-Rolled Steel”) that were initiated in 2001, on July 10, 2002, the DOC made final determinations that Cold-Rolled Steel from Australia, India, Japan, Sweden, and Thailand had been dumped. The final ITC determinations in those investigations are scheduled to be made in August 2002. The final DOC determinations in the other antidumping and countervailing duty investigations of Cold-Rolled Steel are expected to be made in September 2002, with the final ITC determinations in those investigations being made thereafter. Antidumping or countervailing duties will be imposed against those imports for which the DOC makes an affirmative final dumping or countervailing duty determination and for which the ITC makes an affirmative final injury determination.
 
Regarding the five-year review of the antidumping duty order on corrosion-resistant carbon steel flat products from Japan, on April 4, 2002, the Japanese government requested the establishment of a dispute settlement panel to review the DOC and ITC determinations pursuant to the dispute settlement mechanism of the World Trade Organization (“WTO”). A panel was appointed by the WTO on July 17, 2002 and is scheduled to issue its report publicly on April 25, 2003.
 
Regarding the relief ordered by the President on steel imports pursuant to Section 201 of the Trade Act of 1974, numerous parties have requested exclusions of products from the relief, which, if granted in significant numbers, could weaken the effectiveness of the relief. The Company is participating in all phases of the proceedings before the United States Trade Representative and the DOC in which parties are requesting such exclusions and remains active in opposing unjustified requests. Proceedings for the consideration of exclusion requests will be conducted in each year in which the relief remains in effect. Additionally, the governments of the European Communities, Japan, Korea, the People’s Republic of China, Switzerland, Norway, New Zealand, and Brazil have all requested the establishment of a dispute settlement panel to review the relief ordered by the President pursuant to the WTO’s dispute settlement mechanism. On July 25, 2002, the WTO appointed a single panel to rule on all of these challenges to the relief. Furthermore, one foreign steel producer has commenced a challenge against the relief ordered by the President with respect to tin-mill products in the U.S. Court of International Trade.
 
Donner Hanna Coke Plant
 
This matter was reported in the Company’s 2001 Form 10-K and Form 10-Q for the First Quarter of 2002 and relates to (i) the environmental remediation being undertaken by the Company’s wholly owned subsidiary, The Hanna Furnace Corporation (“Hanna Furnace”) and LTV Steel Company, Inc. (“LTV”) at the former site of the Donner Hanna Coke Plant, and (ii) certain litigation related to that site.
 
Regarding the litigation in the U.S. District Court for the Western District of New York filed by LTV and Hanna Furnace against the City of Buffalo (“City”) and the Buffalo Urban Renewal Agency (“BURA”), on May 9, 2002, the Court partially granted Hanna Furnace’s and LTV’s motions for a stay pursuant to the Bankruptcy Code of the counterclaims of the City and BURA, but permitted certain City and BURA counterclaims for injunctive relief to abate environmental conditions to proceed to trial.
 
On July 15, 2002, LTV, Hanna Furnace, the City, and BURA entered into a Consent Order that was lodged with the U.S. District Court for the Western District of New York. The primary terms of the Consent Order are as follows:
 
 
1.
 
Hanna Furnace and LTV will transfer the former Donner Hanna Coke plant and other specified properties owned by LTV (collectively the “Properties”) to Steelfields LLC (“Steelfields”), an independent third-party developer.
 
 
2.
 
Hanna Furnace and LTV will place $16.5 million in an escrow account, to be drawn from for remediation of the Properties by Steelfields. Of the amount placed in escrow, Hanna Furnace will pay $7.7 million, a portion of which is expected to be reimbursed by its insurers under an environmental insurance litigation settlement agreement. LTV will pay $2.2 million cash and assign the rights to $6.6 million of its insurance settlement into the escrow, for a total of $8.8 million.

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3.
 
Steelfields will remediate the Properties pursuant to a voluntary cleanup agreement with the New York State Department of Environmental Conservation (“DEC”) and an approved workplan. If Steelfields defaults in its obligations, the balance of the escrow will go to DEC to complete the work.
 
 
4.
 
The City and BURA discharge Hanna Furnace (as well as its parents and affiliates) and LTV from all liabilities at the Properties and adjacent residential properties, and the parties dismiss with prejudice all claims and counterclaims in the Western District of New York case.
 
There are a number of conditions precedent to the Consent Order, including approval by the bankruptcy courts for the Company and LTV bankruptcy cases and negotiation and execution of the collateral documents. All actions contemplated by the Consent Order are to be completed by August 31, 2002. The parties are to report back to the Court on September 3, 2002, and if the actions have not been completed, proceed with a hearing on September 16, 2002 regarding the City’s and BURA’s counterclaims for injunctive relief to abate environmental conditions on and around the Properties.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
As a result of its Chapter 11 filing, the Company has not made principal or interest payments on substantially all secured and unsecured indebtedness incurred prior to March 6, 2002.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
(a) See attached Exhibit Index
 
(b) Reports on Form 8-K
 
The Company filed a report on Form 8-K dated April 4, 2002 reporting on Item 5, Other Events and Regulation FD Disclosure and Item 7, Financial Statements and Exhibits.
 
The Company filed a report on Form 8-K dated May 9, 2002 reporting on Item 5, Other Events and Regulation FD Disclosure and Item 7, Financial Statements and Exhibits.
 
The Company filed a report on Form 8-K dated May 24, 2002 reporting on Item 7, Financial Statements and Exhibits and Item 9, Regulation FD Disclosure.
 
The Company filed a report on Form 8-K dated June 25, 2002 reporting on Item 7, Financial Statements and Exhibits and Item 9, Regulation FD Disclosure.

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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/    HISASHI TANAKA        
   
Hisashi Tanaka
Chairman of the Board and Chief Executive Officer
 
By:
  
/S/    KIRK A. SOBECKI        
   
Kirk A. Sobecki
Senior Vice President and Chief Financial Officer
 
Date: August 14, 2002
 

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NATIONAL STEEL CORPORATION
 
QUARTERLY REPORT ON FORM 10-Q
 
EXHIBIT INDEX
 
For the quarterly period ended June 30, 2002
 
10-A
   
Employee Retention and Severance Program
15-A
   
Independent Accountants’ Review Report
15-B
   
Acknowledgment Letter on Unaudited Interim Financial Information
99
   
Certification of Chief Executive Officer and Chief Financial Officer

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