<PAGE>
1994
SECOND QUARTER
F O R M 1 0 - Q/A
(AMENDMENT NO. 1 TO FORM 10-Q ORIGINALLY
FILED AUGUST 8,1994)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1994
Commission file number 1-983
NATIONAL STEEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-0687210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): 219-273-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
The number of shares outstanding of the Registrant's Common Stock $.01 par
value, as of July 28, 1994, was 36,364,434 shares.
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Statements of Consolidated Income -
Three Months Ended June 30, 1994 and 1993 3
Statements of Consolidated Income -
Six Months Ended June 30, 1994 and 1993 4
Consolidated Balance Sheets -
June 30, 1994 and December 31, 1993 5
Statements of Consolidated Cash Flows -
Six Months Ended June 30, 1994 and 1993 6
Statements of Changes in Consolidated
Stockholders' Equity and Redeemable
Preferred Stock-Series B -
Six Months Ended June 30, 1994 and
Year Ended December 31, 1993 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Legal Proceedings 14
Submission of Matters to a Vote of Security Holders 16
Exhibits and Reports on Form 8-K 16
2
<PAGE>
PART I. - FINANCIAL INFORMATION
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
1994 1993
-------- --------
<S> <C> <C>
NET SALES $650,682 $622,684
Cost of products sold 573,919 568,962
Selling, general and administrative 31,132 31,850
Depreciation, depletion and amortization 35,589 34,333
Equity (income) loss of affiliates (209) 526
-------- --------
INCOME (LOSS) FROM OPERATIONS 10,251 (12,987)
Financing costs
Interest and other financial income (973) (704)
Interest and other financial expense 15,778 16,282
-------- --------
14,805 15,578
-------- --------
LOSS BEFORE INCOME TAXES (4,554) (28,565)
Income tax credit (5,395) (11,102)
-------- --------
NET INCOME (LOSS) 841 (17,463)
Less: preferred stock dividends 2,740 3,489
-------- --------
Net loss applicable to common stock $ (1,899) $(20,952)
======== ========
PER SHARE DATA APPLICABLE TO COMMON STOCK:
NET LOSS APPLICABLE TO COMMON STOCK $ (.05) $ (.58)
======== ========
Weighted average shares outstanding (in thousands) 36,361 36,295
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1994 1993 (RESTATED)
---------- ---------------
<S> <C> <C>
NET SALES $1,273,420 $1,210,082
Cost of products sold 1,145,578 1,126,370
Selling, general and administrative 67,558 67,279
Depreciation, depletion and amortization 69,690 68,060
Equity (income) loss of affiliates 14 (918)
Unusual gain (110,972) --
---------- ----------
INCOME (LOSS) FROM OPERATIONS 101,552 (50,709)
Financing costs
Interest and other financial income (1,554) (972)
Interest and other financial expense 31,974 32,457
---------- ----------
30,420 31,485
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 71,132 (82,194)
Income tax credit (7,720) (11,066)
---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 78,852 (71,128)
Cumulative effect of accounting change -- 16,453
---------- ----------
NET INCOME (LOSS) 78,852 (87,581)
Less: preferred stock dividends 5,480 7,852
---------- ----------
Net income (loss) applicable to common stock $ 73,372 $ (95,433)
========== ==========
PER SHARE DATA APPLICABLE TO COMMON STOCK:
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 2.02 $ (2.52)
Cumulative effect of accounting change -- (.52)
---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 2.02 $ (3.04)
========== ==========
Weighted average shares outstanding (in thousands) 36,361 31,397
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1994 1993
---------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 82,141 $ 5,322
Receivables - net 265,110 224,709
Inventories:
Finished and semi-finished products 255,421 246,285
Raw materials and supplies 85,849 124,812
---------- ----------
341,270 371,097
---------- ----------
Total current assets 688,521 601,128
Investments in affiliated companies 57,753 58,278
Property, plant and equipment 3,367,009 3,296,792
Less: Allowances for depreciation,
depletion and amortization 1,946,168 1,898,055
---------- ----------
1,420,841 1,398,737
Other assets 256,154 246,057
---------- ----------
TOTAL ASSETS $2,423,269 $2,304,200
========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 190,642 $ 242,294
Accrued liabilities 353,827 303,981
Long-term obligations and related party
indebtedness due within one year 26,438 28,257
---------- ----------
Total current liabilities 570,907 574,532
Long-term obligations 386,185 344,096
Long-term indebtedness to related parties 323,327 329,995
Other long-term liabilities 812,236 797,585
Redeemable Preferred Stock - Series B 67,280 68,030
Stockholders' equity
Common Stock - par value $.01:
Class A - authorized 30,000,000 shares;
issued and outstanding 22,100,000 shares 221 221
Class B - authorized 65,000,000 shares;
issued and outstanding 14,261,100 shares 143 143
Preferred Stock - Series A 36,650 36,650
Additional paid-in-capital 360,314 360,314
Retained deficit (133,994) (207,366)
---------- ----------
Total stockholders' equity 263,334 189,962
---------- ----------
TOTAL LIABILITIES, REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY $2,423,269 $2,304,200
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1994 1993 (RESTATED)
----------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 78,852 $(87,581)
Adjustments to reconcile net income
(loss) to net cash provided (used) by operating activities:
Depreciation, depletion and amortization 69,690 68,060
Carrying charges related to facility
sales and plant closings 14,781 17,730
Equity (income) loss of affiliates 14 (918)
Dividends from affiliates 900 900
Postretirement benefits 27,590 29,600
Deferred income taxes (10,800) (11,100)
Cumulative effect of accounting change -- 16,453
Cash provided (used) by working capital
items:
Receivables (40,401) (29,565)
Inventories 29,827 18,033
Accounts payable (51,652) (54,881)
Accrued liabilities 23,517 22,186
Other 5,981 (10,041)
----------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 148,299 (21,124)
----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment (90,105) (39,765)
----------- --------
NET CASH USED BY INVESTING ACTIVITIES (90,105) (39,765)
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class B Common Stock -- 141,432
Redemption of Series B Redeemable Preferred Stock -- (67,804)
Debt repayments (54,348) (12,403)
Borrowings 87,950 40,541
Payment of released Weirton benefit liabilities (8,979) (11,530)
Dividend payments on Preferred Stock-Series A (1,999) (1,998)
Dividend payments on Preferred Stock-Series B (87) (1,422)
Payment of unreleased Weirton liabilities
and their release in lieu of cash dividends
on Preferred Stock-Series B (3,912) (6,567)
----------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,625 80,249
----------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 76,819 19,360
Cash and Cash Equivalents, Beginning of the Period 5,322 55,220
----------- --------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 82,141 $ 74,580
=========== ========
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED
STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK - SERIES B
(In Thousands of Dollars, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
REDEEMABLE
COMMON COMMON PREFERRED ADDITIONAL RETAINED TOTAL PREFERRED
STOCK - STOCK - STOCK - PAID-IN- EARNINGS STOCKHOLDERS' STOCK -
SERIES A SERIES B SERIES A CAPITAL (DEFICIT) EQUITY SERIES B
-------- -------- ----------- ---------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $255 $ -- $36,650 $218,991 $ 70,795 $ 326,691 $137,802
Net loss (258,861) (258,861)
Redemption of Redeemable
Preferred Stock - Series B (67,804)
Amortization of excess of book
value over redemption value
of Redeemable Preferred Stock
- Series B 1,968 1,968 (1,968)
Cumulative dividends on Preferred
Stocks - Series A and B (15,332) (15,332)
Issuance of Common Stock -
Class B 109 141,323 141,432
Conversion of 3,400,000 shares
of NII Common Stock - Class A
to Common Stock - Class B (34) 34
Minimum pension liability (5,936) (5,936)
---- ---- ------- -------- --------- --------- --------
BALANCE AT DECEMBER 31, 1993 $221 $143 $36,650 $360,314 $(207,366) $ 189,962 $ 68,030
Net Income 78,852 78,852
Amortization of excess of book
value over redemption value
of Redeemable Preferred Stock
- Series B 750 750 (750)
Cumulative dividends on Preferred
Stocks - Series A and B (6,230) (6,230)
---- ---- ------- -------- --------- --------- --------
BALANCE AT JUNE 30, 1994 $221 $143 $36,650 $360,314 $(133,994) $ 263,334 $ 67,280
==== ==== ======= ======== ========= ========= ========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994 (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, except for the unusual gain which is discussed in Note 2,
were of a normal recurring nature. The financial results presented for the
three and six month periods ended June 30, 1994 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, 1993 (the "1993 Form 10-K") contains
additional information and should be read in conjunction with this report.
Financial information for the first six months of 1993 has been retroactively
restated to reflect the implementation of Statement of Financial Accounting
Standards No. 112, "Employer's Accounting for Postemployment Benefits", which
the Company adopted during the fourth quarter of 1993.
Certain items in prior years have been reclassified to conform with current year
presentation.
NOTE 2 - UNUSUAL GAIN
On January 24, 1994, the United States Supreme Court denied the Bessemer & Lake
Erie Railroad's ("B&LE") petition for certiorari in the Iron Ore Antitrust
Litigation, an antitrust lawsuit with the B&LE, thus sustaining the judgment in
favor of the Company against the B&LE in this antitrust lawsuit. On February 11,
1994, the Company received $111.0 million, including interest, in satisfaction
of this judgment, which was recorded as an unusual gain in the first quarter of
1994. The Company used a portion of the proceeds to repurchase $25.2 million
aggregate principal amount of its outstanding First Mortgage Bonds. Pursuant to
the terms of the 1993 labor agreement between the Company and the United
Steelworkers of America (the "USWA"), approximately $11 million of the proceeds
will be deposited into a Voluntary Employee Benefits Association trust (the
"VEBA Trust") established to fund the Company's retiree healthcare obligation
("OPEB") with respect to USWA represented employees. The Company expects to use
remaining proceeds for debt reduction, none of which will be related party
indebtedness, working capital and general corporate purposes.
The Company did not recognize any income taxes associated with these proceeds,
other than alternative minimum tax of $3.1 million, as regular federal income
tax expense was offset by the utilization of previously reserved tax assets.
NOTE 3 - NATIONAL STEEL PELLET COMPANY
As discussed in the 1993 Form 10-K, National Steel Pellet Company, a wholly-
owned subsidiary of the Company ("NSPC"), was temporarily idled in October 1993,
following a strike by the USWA on August 1, 1993, and the subsequent decision to
satisfy the Company's iron ore pellet requirements from external sources. At
December 31, 1993, it was the previous managements' intention (See Management's
Discussion and Analysis-Other) to externally satisfy its iron ore pellet
requirements for a period in excess of two years, which would have caused NSPC
to remain idle for that period. The Company determined that in accordance with
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies", a contingent liability of $108.6 million relating to the idle
period had been incurred which was recorded as an unusual charge during the
fourth quarter of 1993. This charge and the amount reserved at December 31, 1993
was primarily comprised of employee benefits such as pensions and OPEBs, which
totaled $68.6 million, along with $40.0 million of expenses directly related to
the idling of the facility. The $40.0 million idle reserve was comprised of
salary and benefits ($17.4 million), ultilities ($5.2 million), noncancelable
leases ($3.3 million), production taxes ($7.3 million), supplies ($3.2 million)
and other miscellaneous expenses related to the idling ($3.6 million).
Substantially all components of the $108.6 million reserve are expected to
require the future utilization of cash. Minnesota law requires that an idled
facility be maintained in a "hot idled" mode for a period of one year, which
significantly increased the cost to idle NSPC. None of the $108.6 million
reserve, including the $40.0 million related to the idle period, related to the
current or future procurement of iron ore pellets from outside sources in the
marketplace.
Effective June 1, 1994, the Company's Board of Directors appointed a new Chief
Operating Officer and President, a new Chief Financial Officer and Senior Vice
President and a new Vice President-Human Resources. Earlier in the year, new
USWA presidents were elected at both the international and local levels. In an
effort to reduce delivered iron ore pellet costs and improve pellet mix, as well
as to strengthen the cooperative partnership approach to labor relations,
management considered the feasibility of reopening the NSPC facility. They
determined that if a total reduction of $4 per gross ton in delivered pellet
costs from pre-strike costs could be achieved, NSPC could be reopened on a
cost effective basis. After a series of negotiations, a labor agreement (the
"NSPC Labor Agreement") was reached between the USWA and NSPC. The NSPC Labor
Agreement led to negotiations with other stakeholders such as public utilities,
transportation companies, property owners and suppliers and resulted in the
achievement of the requisite $4 per gross ton reduction in delivered pellet
costs and the reopening of the facility in August 1994. While the final number
of employees to elect retirement or remain laid-off has not yet been finalized,
management estimates that the decision to re-open the facility will result in
the restoration of approximately $50 million of the unusual charge recorded in
1993.
The following represents the components of the $108.6 million reserve recorded
at December 31,1993, the cash utilizations during the six month period June 30,
1994 and the balance at June 30, 1994:
<TABLE>
<CAPTION>
December 31, June 30,
1993 Utilizations 1994
----------- ------------ -------
(dollars in thousands)
<S> <C> <C> <C>
Salary & Benefits............. $ 17,444 $(4,125) $13,319
Utilities...................... 5,170 (2,563) 2,607
Leases........................ 3,300 (1,411) 1,889
Production taxes.............. 7,296 - 7,296
Supplies...................... 3,200 (642) 2,558
Other......................... 3,590 (507) 3,083
-------- -------- -------
Total idle reserve...... 40,000 (9,248) 30,752
-------- -------- -------
Special Pension Termination... 31,893 - 31,893
OPEB Curtailment.............. 36,697 - 36,697
-------- -------- -------
Total................... $108,590 $(9,248) $99,342
======== ======== =======
</TABLE>
At December 31,1993, the USWA had filed 19 unfair practice charges with the
National Labor Relations Board (the "NLRB") regarding the NSPC dispute. All NLRB
charges have subsequently been dropped.
8
<PAGE>
NOTE 4 - STOCK OPTIONS
A reconciliation of the Company's stock option activity for 1994 is as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE
OF OPTIONS (WEIGHTED AVERAGE)
---------- ------------------
<S> <C> <C>
Balance outstanding at January 1, 1994 584,168 $13.99
Granted 303,500 14.00
Exercised --
Forfeited (155,139)
Balance outstanding at June 30, 1994 --------
732,529 $14.00
========
Exercisable at June 30, 1994 229,029
========
</TABLE>
Outstanding stock options did not enter into the determination of earnings per
share for 1994 as their effect was not dilutive.
NOTE 5 - RECEIVABLES PURCHASE AGREEMENT
Effective May 16, 1994, the Company entered into a Purchase and Sale Agreement
with National Steel Funding Corporation ("NSFC"), a newly created wholly-owned
subsidiary. Effective on that same date, NSFC entered into a Receivables
Purchase Agreement with a group of twelve banks. The total commitment of the
banks is $180 million, including up to $150 million in letters of credit. To
implement the arrangement, the Company sold substantially all of its accounts
receivable, and will sell additional receivables as they are generated, to NSFC.
NSFC will finance its ongoing purchase of receivables from a combination of cash
received from receivables already in the pool, short-term intercompany notes and
the cash proceeds derived from selling interests in the receivables to the
participating banks from time to time.
The Certificates of Participation sold to the banks by NSFC have been rated AAA
by Standard & Poor's Corporation, resulting in lower borrowing costs to the
Company. As of June 30, 1994 no funded participation interests had been sold
under the facility, although $89.4 million in letters of credit had been issued.
With respect to the pool of receivables at June 30, 1994, after reduction for
letters of credit outstanding, the amount eligible for sale was $83.9 million.
During the period May 16, 1994 through June 30, 1994, the eligible amount ranged
from $79.6 million to $90.6 million. The banks commitments are scheduled to
expire on May 16, 1997, subject to renewal of the agreement. The Company will
continue to act as servicer of the assets sold into the program and will
continue to make billings and collections in the ordinary course of business
according to established practices.
The Company terminated its revolving secured credit facility, which included a
letter of credit facility on May 16, 1994. On that same date, the Company also
terminated its subordinated loan agreement with a U.S. subsidiary of NKK
Corporation.
NOTE 6 - 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.
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
a potentially responsible party ("PRP") 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 NII is required
to indemnify the Company ("NII 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.
In connection with those sites involving NII Environmental Liabilities, in
January 1994, the Company received $10 million from NII as an unrestricted
prepayment for such liabilities for which the Company recorded $10 million as a
liability in its consolidated balance sheet. The Company is required to repay
NII portions of the $10 million to the extent the Company's expenditures for
such NII Environmental Liabilities do not meet specified levels by certain dates
over a twenty year period.
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 any of these environmental matters discussed above progress or the Company
becomes aware of additional matters, the Company may be required to accrue
charges in excess of those previously accrued. However, although 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 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
recorded an aggregate environmental liability of approximately $15 million and
$12 million at June 30, 1994 and December 31, 1993, respectively.
In April 1993, the United States Environmental Protection Agency published a
proposed guidance document establishing minimum water quality standards and
other pollution control policies and procedures for the Great Lakes System.
Until such guidance document is finalized, the Company cannot estimate its
potential costs for compliance, and there can be no assurances that such
compliance will not have a material adverse effect on the Company's financial
condition.
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 the 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 for the applicable period. Certain other
proceedings, if decided adversely to the Company, could have a material adverse
effect on liquidity.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THE THREE-MONTH PERIODS ENDED JUNE 30, 1994 AND 1993
Net Sales
- ---------
Net sales for the second quarter of 1994 increased 4.5% to $650.7 million
compared to $622.7 million for the same period in 1993. This increase is
attributable to an increase in realized selling prices, coupled with a favorable
shift in product mix from lower priced secondary products to higher priced prime
products. These improvements more than offset the effects of a .7% decrease in
shipments. Steel shipments for the current period were 1,274,000 tons compared
to 1,283,000 tons shipped during the same 1993 period. Raw steel production
totaled 1,434,000 tons, a 4.8% increase from the 1,368,000 tons produced in the
second quarter of 1993.
Cost of Products Sold
- ---------------------
The Company's cost of products sold as a percentage of net sales decreased from
96.9% in the second quarter of 1993 to 93.7% in the same 1994 period. In
addition to the factors discussed above, operating performance improvements such
as a reduction in manhours per net ton shipped, as well as an upward trend in
yields were among the more significant factors contributing to lower costs in
the second quarter. Consequently, gross profit as a percentage of net sales
grew from 3.1% in the second quarter of 1993 to 6.3% for the same 1994 period.
Net Income and Third Quarter 1994 Anticipated Results
- -----------------------------------------------------
During the second quarter of 1994, the Company recorded operating and net income
of $10.3 million and $.9 million, respectively. This compares to operating and
net losses of $13.0 million and $17.4 million, respectively, for the same 1993
period. Excluding the effect of accounting changes and an unusual gain, the
second quarter of 1994 represents the Company's first profitable quarter in two
years. Management attributes this return to profitability to a number of
corrective actions aimed at reducing product costs and improving product quality
and delivery performance, along with improvements in realized selling prices.
The Company believes that continued cost reduction efforts together with a
strong market will result in a net profit for the third quarter of 1994.
National Steel Pellet Company
- -----------------------------
As discussed in the 1993 Form 10-K, National Steel Pellet Company, a wholly-
owned subsidiary of the Company ("NSPC"), was temporarily idled in October 1993,
following a strike by the USWA on August 1, 1993, and the subsequent decision to
satisfy the Company's iron ore pellet requirements from external sources. At
December 31, 1993, it was the previous management's intention (See Management's
Discussion and Analysis-Other) to externally satisfy its iron ore pellet
requirements for a period in excess of two years, which would have caused NSPC
to remain idle for that period. The Company determined that in accordance with
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies", a contingent liability of $108.6 million relating to the idle
period had been incurred which was recorded as an unusual charge during the
fourth quarter of 1993. This charge and the amount reserved at December 31, 1993
was primarily comprised of employee benefits such as pensions and OPEBs, which
totaled $68.6 million, along with $40.0 million of expenses directly related to
the idling of the facility. The $40.0 million idle reserve was comprised of
salary and benefits ($17.4 million), ultilities ($5.2 million), noncancelable
leases ($3.3 million), production taxes ($7.3 million), supplies ($3.2 million)
and other miscellaneous expenses related to the idling ($3.6 million).
Substantially all components of the $108.6 million reserve are expected to
require the future utilization of cash. Minnesota law requires that an idled
facility be maintained in a "hot idled" mode for a period of one year, which
significantly increased the cost to idle NSPC. None of the $108.6 million
reserve, including the $40.0 million related to the idle period, related to the
current or future procurement of iron ore pellets from outside sources in the
marketplace.
Effective June 1, 1994, the Company's Board of Directors appointed a new Chief
Operating Officer and President, a new Chief Financial Officer and Senior Vice
President and a new Vice President-Human Resources. Earlier in the year, new
USWA presidents were elected at both the international and local levels. In an
effort to reduce delivered iron ore pellet costs and improve pellet mix, as well
as to strengthen the cooperative partnership approach to labor relations,
management considered the feasibility of reopening the NSPC facility. They
determined that if a total reduction of $4 per gross ton in delivered pellet
costs from pre-strike costs could be achieved, NSPC could be reopened on a
cost effective basis. After a series of negotiations, a labor agreement (the
"NSPC Labor Agreement") was reached between the USWA and NSPC. The NSPC Labor
Agreement led to negotiations with other stakeholders such as public utilities,
transportation companies, property owners and suppliers and resulted in the
achievement of the requisite $4 per gross ton reduction in delivered pellet
costs and the reopening of the facility in August 1994. While the final number
of employees to elect retirement or remain laid-off has not yet been finalized,
management estimates that the decision to re-open the facility will result in
the restoration of approximately $50 million of the unusual charge recorded in
1993.
The following represents the components of the $108.6 million reserve recorded
at December 31, 1993, the cash utilizations during the six month period June
30, 1994 and the balance at June 30, 1994:
<TABLE>
<CAPTION>
December 31, June 30,
1993 Utilizations 1994
----------- ------------ -------
(dollars in thousands)
<S> <C> <C> <C>
Salary & Benefits............. $ 17,444 $(4,125) $13,319
Utilities...................... 5,170 (2,563) 2,607
Leases........................ 3,300 (1,411) 1,889
Production taxes.............. 7,296 -- 7,296
Supplies...................... 3,200 (642) 2,558
Other......................... 3,590 (507) 3,083
------- ------- -------
Total idle reserve...... 40,000 (9,248) 30,752
------- ------- -------
Special Pension Termination... 31,893 -- 31,893
OPEB Curtailment.............. 36,697 -- 36,697
------- ------- -------
Total................... $108,590 $(9,248) $99,342
======== ======== =======
</TABLE>
10
<PAGE>
COMPARISON OF THE SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1993
Net Sales
- ---------
Net sales for the first half of 1994 totaled $1.27 billion, a 5.2% increase when
compared to 1993. This increase was attributable to both an increase in
realized selling prices, as well as an improvement in product mix from lower
priced secondary products to higher priced prime products. Steel shipments for
the first half of 1994 were 2,507,000 tons, a 2.9% decrease from the 2,582,000
tons shipped during the corresponding 1993 period. This slight decrease in
volume was more than offset by the improvement in product mix and selling
prices. Raw steel production increased to 2,795,000 tons, a .3% increase from
the 2,787,000 tons produced during the six month period ended June 30, 1993.
Cost of Products Sold
- ---------------------
Cost of products sold as a percentage of net sales decreased from 98.7% in the
first half of 1993 to 95.4% for the corresponding 1994 period. This decrease is
reflective of improvements in realized selling prices, product mix and
performance yields, as well as a reduction in product costs. Correspondingly,
gross profit as a percentage of net sales grew from 1.3% in the first half of
1993 to 4.6% for the same 1994 period.
Unusual Item
- ------------
As discussed in the 1993 Form 10-K, the Company received approximately $111.0
million of proceeds, including interest, in the first quarter of 1994 from the
B&LE judgment and, as such, recognized an unusual gain upon its receipt. The
Company utilized a portion of the proceeds to repurchase $25.2 million aggregate
principal amount of its outstanding First Mortgage Bonds. Pursuant to the labor
agreement reached between the Company and the USWA in 1993, $11 million of the
proceeds will be deposited into a VEBA Trust established to prefund the
Company's OPEB obligation with respect to USWA represented employees. The
remaining proceeds will be used for further debt reduction, none of which will
be related party indebtedness, working capital and general corporate
purposes.
The Company did not recognize any income taxes associated with these proceeds,
other than alternative minimum taxes of $3.1 million, as regular federal income
tax expense was offset by the utilization of previously reserved tax assets.
OTHER
Change in Management
- --------------------
Effective June 1, 1994, the Company's Board of Directors appointed the following
individuals to serve as executive officers of the Company:
Name Position
- ------------------ ----------------------------------------------------------
V. John Goodwin Director, President and Chief Operating Officer
Robert M. Greer Senior Vice President and Chief Financial Officer
David A. Pryzbylski Vice President-Human Resources and Secretary
Hiroshi Matsumoto Director, Vice President and Assistant to the President
George D. Lukes Vice President-Quality Assurance and Customer Satisfaction
David L. Peterson Vice President and General Manager, Great Lakes Division
Robert G. Pheanis Vice President and General Manager, Midwest Division
Messrs. Goodwin, Greer, Pryzbylski, Lukes, Peterson and Pheanis were formerly
employed by USX Corporation's Gary Works. Prior to joining the Company, Mr.
Matsumoto was employed by a U.S. subsidiary of NKK Corporation.
Effective June 30, 1994, Yoshito Tokumitsu submitted his resignation as a
Director of the Company.
11
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
- --------------------------------
The Company's liquidity needs arise primarily from capital investments, working
capital requirements and principal and interest payments on its indebtedness.
In addition to the Company's 1993 initial public offering of common stock, the
Company has satisfied these liquidity needs with funds provided by long-term
borrowings and cash provided by operations.
On January 24, 1994, the United States Supreme Court denied the B&LE's petition
for certiorari in the Iron Ore Antitrust Litigation, thus sustaining the
judgment in favor of the Company against the B&LE. On February 11, 1994, the
Company received approximately $111 million, including interest, in satisfaction
of this judgment.
Cash and cash equivalents totaled $82.1 million at June 30, 1994 as compared to
$5.3 million at December 31, 1993. This increase is primarily the result of the
B&LE judgment, net of certain uses of the B&LE proceeds. Most significantly, the
Company used a portion of the proceeds to repurchase $25.2 million aggregate
principal amount of the Company's outstanding 8.375% First Mortgage Bonds on
March 31, 1994. The Company will use remaining B&LE proceeds for further debt
reduction, none of which is related party indebtedness, working capital and
general corporate purposes.
Cash Flows from Operating Activities
For the six months ended June 30, 1994, cash provided from operating activities
increased by $169.4 million compared to the same 1993 period. This increase was
primarily attributable to the receipt of $111.0 million of proceeds from the
B&LE judgment along with an improvement in net income (See Results of
Operations). The impact of working capital items reduced cash flows by $38.7
million for the six month period. A decrease in accounts payable had the most
significant negative effect, due primarily to the timing of cash disbursement
clearings. Additionally, an increase in accounts receivable had a negative cash
flow impact due to higher shipments during the second quarter when compared to
the previous fourth quarter. Inventories and accrued liabilities had smaller
cash flow effects, and served to partially offset the aforementioned changes.
Cash Flows from Investing Activities
Capital investments for the first half of 1994 and 1993 amounted to $90.1
million and $39.8 million, respectively. This increase is largely attributable
to the completion of a pickle line servicing the Great Lakes Division (the
"Pickle Line"), which was financed under a turnkey contract and did not become
the property of the Company until completion and acceptance of the facility
during the first quarter of 1994. The Company plans to invest approximately $84
million during the remainder of 1994 for capital expenditures to improve its
plant and equipment.
Cash Flows from Financing Activities
Financing activities included borrowings for the first half of 1994 and 1993 of
$88.0 million and $40.5 million, respectively, representing primarily the
commencement of the permanent financing for the Pickle Line and the remaining
financing commitment for the rebuild of the No. 5 coke oven battery at the Great
Lakes Division, respectively. This increase in borrowings was largely offset by
the repurchase of $25.2 million in First Mortgage Bonds and $14.0 million in
Series 1985 River Rouge Pollution Control Bonds during the first half of 1994.
During the first six months of 1993, the Company completed its initial public
offering of common stock, which generated net proceeds of $141.4 million.
12
<PAGE>
Sources of Financing
The Company's available sources of liquidity consist of a new Receivables
Purchase Agreement with commitments of up to $180 million (See Note 5 to the
financial statements) and $15 million in uncommitted, unsecured lines of credit
(the "Uncommitted Lines of Credit"). On June 30, 1994, there were no cash
borrowings outstanding under the Receivables Purchase Agreement and outstanding
letters of credit under the new agreement amounted to $89.4 million. On
February 7, 1994, the Company borrowed $20 million under various short term loan
agreements, all of which was repaid on February 17, 1994. Additionally, in
February 1994, the Company borrowed a maximum of $5 million under the
Uncommitted Lines of Credit which was repaid later in the month.
Total debt and redeemable preferred stock as a percentage of total
capitalization decreased to 75.3% at June 30, 1994, as compared to 80.2% at
December 31, 1993, as the Company's net income of $78.9 million more than offset
the effect of the commencement of the permanent financing of the Pickle Line.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Baker's Port, Inc. v. National Steel Corporation. With respect to the matter
involving claims arising out of the sale of land in Texas to Baker's Port, Inc.,
previously reported in the 1993 Form 10-K and Form 10-Q for the quarter ended
March 31, 1994 (the "first quarter Form 10-Q"), the Texas Supreme Court declined
to hear any appeals. As a result, the appellate rights available to the parties
have been exhausted and the matter has been remanded to the Trial Court for
further proceedings. The Trial Court has not yet set a trial date.
Detroit Coke Corporation v. NKK Chemical USA, Inc. With respect to the matter
involving the claim of Detroit Coke Corporation ("Detroit Coke") that the
defendants supplied it with defective coal and coal blends which allegedly
caused damage to its coke making facility and environmental problems, previously
reported in the 1993 Form 10-K, Detroit Coke filed a motion for leave to amend
its complaint to clarify its theories of relief, alleging that certain coal and
coke purchase and sale agreements among the parties were one integrated
transaction and that it has suffered damages it believes exceed $150,000,000.
The Company has previously denied all of the allegations of Detroit Coke and is
defending this action. The Company will file a response to Detroit Coke's
motion to file a second amended complaint and file an answer to the second
amended complaint if Detroit Coke's motion is granted.
Donner-Hanna Coke Joint Venture. With respect to the matter previously
reported in the 1993 Form 10-K and first quarter Form 10-Q, involving Hanna
Furnace Corporation ("Hanna") and the Donner-Hanna Coke Joint Venture ("Donner-
Hanna"), on July 8, 1994, the Pension Benefit Guaranty Corporation ("PBGC")
filed an application in the United States District Court for the Western
District of New York to terminate the Donner-Hanna's hourly pension plan
retroactively to July 1, 1991 and the salaried plan retroactively to December
31, 1993. If the Court orders that the Plans be terminated, Hanna will be liable
to the PBGC for the underfunding of the Plans. The Court has set a hearing on
the PBGC's application for August 17, 1994. Hanna has intervened in this action
and will seek to have the Plans terminated as of an earlier date. There has
been no funding in 1994 of either of the Plans. Depending upon the date the
Plans are deemed to have been terminated, Hanna's liability is estimated to
range from $12.3 million to $16.9 million. The Company has accrued the maximum
amount in the range.
USX Corporation v. National Steel Corporation. In June of 1994, USX Corporation
("USX") sued the Company, three of its directors, six other individuals who
became officers of the Company on June 1, 1994 and NKK Corporation in the
Indiana State Court in Hammond, Indiana, alleging that the Company and others
misappropriated trade secrets and other confidential information of USX's Gary
Works, interfered with USX's relationship with its former employees, and engaged
in unfair trade practices involving USX's tin plate and automotive business.
The core of the claims is that the Company had hired five management employees
and one former management employee of USX's Gary Works ("the six former
employees") who had signed confidentiality agreements while employees of USX.
None of the six former USX employees had signed employment agreements or
covenants not to compete. USX requested injunctive relief and unspecified
monetary damages. Following a hearing on the request for the preliminary
injunction, the Indiana Trial Court in June of 1994 denied USX's preliminary
injunction request, holding that there had been no showing that any of the six
former USX employees had misappropriated USX trade secrets or had engaged in any
illegal conduct. USX's claims for a permanent injunction and monetary relief
remain pending. No material developments have occurred in the litigation since
the denial of the request for a preliminary injunction.
Management believes the final disposition of the Baker's Port, Detroit Coke,
Donner-Hanna Coke and USX Corporation matters will not have a material adverse
effect, either individually or in the aggregate, on the Company's financial
condition or results of operations, but could have a material adverse effect on
liquidity.
14
<PAGE>
Environmental Matters
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. In addition to the inactive disposal site located at the
Great Lakes Division facility previously reported in the 1993 Form 10-K, the
Company and certain of its subsidiaries are involved as a potentially
responsible party ("PRP") at a number of off-site CERCLA or state superfund site
proceedings.
The following paragraphs provide updates on previously reported proceedings:
Port of Monroe. With reference to the matter involving the Port of Monroe site
located in Monroe, Michigan, previously reported in the 1993 Form 10-K and first
quarter Form 10-Q, the Michigan Department of Natural Resources ("MDNR") has
agreed to a settlement in which it would accept $500,000 in full payment for all
response costs incurred by it through October 1993. MDNR also agreed that no
interest will be assessed on the $500,000, so long as a payment in full is
received prior to the end of September 1994. The terms of the settlement will
eventually be embodied in a Consent Decree, a draft of which is currently being
reviewed by the various potentially responsible parties. The Company estimates
that its share of the settlement payment will be approximately $50,000, which
has been accrued.
NII Sites
Lowry Landfill Site. With reference to the matter involving the Lowry Landfill
Site in Aurora, Colorado, previously reported in the 1993 Form 10-K, the EPA
issued a Special Notice Letter on May 11, 1994 to Alumet alleging that Alumet
is a PRP under CERCLA for cleanup of the Lowry Landfill Superfund Site and
demanding payment of EPA's past and future response costs. On July 6, 1994, the
Alumet Partnership was served with a complaint filed by the City and County of
Denver, Waste Management of Colorado, Inc. and Chemical Waste Management, Inc.
against multiple companies, including the Alumet Partnership, NII, the Company
and Southwire. The complaint has not yet been served on the Company. The
complaint alleges that Alumet, NII, Southwire and the Company are liable under
CERCLA for the costs of cleaning up the Lowry Landfill. Because this is a
complex site with numerous operable units, PRPs and different types of wastes,
and because remediation activities are occurring in various stages, the Company
is unable to estimate its potential liability at this site.
Other
Great Lakes Division - 80 Inch Hot Strip Mill. With reference to this matter
involving certain outfalls located at the Great Lakes Division facility,
including the outfall at the 80-inch hot strip mill, previously reported in the
1993 Form 10-K and first quarter Form 10-Q, the Coast Guard has issued one
additional penalty assessment in the amount of $8,000. Also, by letter dated
July 12, 1994, the MDNR requested that the Company submit a comprehensive plan
for addressing oil discharges from the 80-inch hot strip mill on or before
August 13, 1994.
Great Lakes Division - Wayne County Air. With reference to the matter involving
alleged violations of air pollution regulations, previously reported in the 1993
Form 10-K, to date, approximately eleven notices of violation have been issued
to the Company in 1994 for various process and fugitive emissions sources. The
Company is not yet able to estimate its liability with respect to these alleged
violations.
In connection with certain of the proceedings described above and certain other
environmental proceedings which the Company is currently involved in, the
Company has only commenced investigation or otherwise does not have sufficient
information to estimate its potential liability if any. Although the outcome of
such proceedings or any fines or penalties that may be assessed in any such
proceedings, to the extent they exceed applicable reserves, 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 any such
outcomes, fines or penalties, whether considered individually or in the
aggregate, will have a material adverse effect on the Company's financial
condition. The Company's accrued environmental liabilities totaled approximately
$15 million at June 30, 1994.
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on April 26, 1994. In connection
with the meeting, proxies were solicited pursuant to the Securities Exchange
Act. The following are the voting results on proposals considered and voted
upon at the meeting, all of which were described in the Company's Proxy
Statement dated March 16, 1994.
1. All nominees for director listed in the Proxy Statement were elected.
NAME VOTES FOR VOTES WITHHELD
-------------------- ---------- --------------
Edwin V. Clarke, Jr. 55,118,318 2,362
Ronald H. Doerr 55,116,518 4,162
Masayuki Hanmyo 55,119,318 1,362
Keisuke Murakami 55,115,518 5,162
Osamu Sawaragi 55,116,518 4,162
Kenichiro Sekino 55,115,518 5,162
Robert J. Slater 55,118,318 2,362
Yoshito Tokumitsu 55,115,518 5,162
2. The proposal to ratify the selection of Ernst & Young as the Company's
outside auditors for 1994 passed. (For 55,115,810, abstained
3,158, against 1,712)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following is an index of the exhibits included in this Report on
Form 10-Q/A:
10-A Purchase and Sale Agreement, dated as of May 16, 1994 between
the Company and National Steel Funding Corporation, a copy of
which is attached hereto.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K (the "report") on June 27,
1994. The report related to the press release issued on June 1, 1994
announcing the appointment of V. John Goodwin as President and Chief
Operating Officer and Robert M. Greer as Senior Vice President and
Chief Financial Officer.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL STEEL CORPORATION
BY /s/Robert M. Greer
----------------------------------------------
Robert M. Greer, Senior Vice President and
Chief Financial Officer
BY /s/ Carl M. Apel
----------------------------------------------
Carl M. Apel, Corporate Controller, Accounting
and Assistant Secretary
Date: January 18, 1995
17
<PAGE>
EXHIBIT 10-A
------------
PURCHASE AND SALE AGREEMENT
dated as of May 16, 1994
between
NATIONAL STEEL CORPORATION,
as Seller
and
NATIONAL STEEL FUNDING CORPORATION,
as Purchaser
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
CERTAIN DEFINITIONS
1.01 Certain Definitions................................................ 1
ARTICLE II
PURCHASE AND SALE OF RECEIVABLES
2.01 Purchase and Sale.................................................. 3
2.02 Purchase Price Adjustment; Repurchase.............................. 4
ARTICLE III
ADMINISTRATION OF PURCHASED RECEIVABLES
3.01 Administration of Purchased Receivables............................ 5
3.02 Further Assurances................................................. 6
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.01 Representations and Warranties of NSFC............................. 7
4.02 Representations and Warranties of the Seller....................... 7
ARTICLE V
CONDITIONS TO PURCHASE
5.01 Conditions to NSFC's Obligation to Purchase........................ 10
i
<PAGE>
Page
----
ARTICLE VI
COVENANTS OF THE SELLER
6.01 General Information................................................. 10
6.02 Information Regarding the Receivables............................... 12
6.03 Preservation of Corporate Existence................................. 12
6.04 Compliance with Laws................................................ 12
6.05 Accounting Treatment................................................ 12
6.06 No Adverse Interests................................................ 12
6.07 No Mergers.......................................................... 12
6.08 Disclosure.......................................................... 12
6.09 Covenants of NSFC................................................... 13
ARTICLE VII
MISCELLANEOUS
7.01 Indemnity........................................................... 13
7.02 Amendment and Waiver................................................ 14
7.03 No Implied Waivers; Cumulative Remedies............................. 14
7.04 Notices............................................................. 14
7.05 Costs and Expenses.................................................. 14
7.06 Survival............................................................ 15
7.07 Waiver of Jury Trial................................................ 15
7.08 No Bankruptcy Petition.............................................. 15
7.09 Assignment.......................................................... 15
7.10 Governing Law....................................................... 16
7.11 Counterparts........................................................ 16
Appendix I Net Purchase Price of Receivables
Appendix II Daily Reconciliation of Intercompany Transactions
ii
<PAGE>
PURCHASE AND SALE AGREEMENT
PURCHASE AND SALE AGREEMENT, dated as of May 16, 1994, between
NATIONAL STEEL CORPORATION, a Delaware corporation, as seller, and NATIONAL
STEEL FUNDING CORPORATION, a Delaware corporation, as purchaser.
RECITALS
WHEREAS, in the ordinary course of its business the Seller generates
trade receivables from the sale of goods and services; and
WHEREAS, the Seller and NSFC wish to set forth the terms pursuant to
which receivables are to be sold by the Seller to NSFC;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
-------------------
1.01 Certain Definitions. Terms not defined in this Agreement shall
have the meanings set forth in the Receivables Purchase Agreement. As used in
this Agreement, the following terms shall, unless the context otherwise
requires, have the following meanings:
"Agreement" means this Purchase and Sale Agreement, as amended from time
to time.
"Eligibility Criteria" means, as to any Receivable:
(a) such Receivable has an original maturity of not greater than 90
days, at the time of its transfer pursuant hereto is not more than 30 days
past due and has been entered into and originated in accordance with the
Credit and Collection Policy;
(b) such Receivable constitutes an "account" under the UCC and is an
"account receivable" constituting part or all of the sales price of
merchandise or services within the meaning of Section 3(c)(5)(A) of the
Investment Company Act of 1940, as amended;
(c) such Receivable is a Dollar-denominated obligation payable in the
United States (and payment of which has been directed to a Lockbox Account) of
(A) a Person domiciled in the United States which is neither (i) an Affiliate
of the Seller nor (ii) the United States of America, or any State or
<PAGE>
any agency or instrumentality or subdivision thereof or (B) a Person otherwise
approved in writing by the Required Buyers and as to which S&P has confirmed
that including of such Obligor will not adversely affect the rating of the
Buyer's Certificates;
(d) such Receivable complies with all applicable requirements of law,
including without limitation, usury laws, the Federal Consumer Credit
Protection Act, the Fair Credit Billing Act, the Federal Truth in Lending Act
and Regulation Z of the Board of Governors of the Federal Reserve System;
(e) such Receivable has been billed to the related Obligor, or the
related Obligor is otherwise liable in respect thereof, and payment in respect
thereof has been directed to a Lockbox Account, and such Receivable is not a
"bill and hold" Receivable;
(f) such Receivable is the legal, valid and binding payment obligation
of the Obligor, enforceable against such Obligor in accordance with its terms,
subject to bankruptcy, insolvency and other similar laws affecting the rights
of creditors generally and is not subject to statutory or regulatory
restrictions or transfer;
(g) all consents, licenses, approvals, or authorizations of required to
be obtained in connection with the creation of such Receivable or the
execution, delivery, creation and performance by the Seller of the related
Contract, or in connection with the sale of such Receivable to NSFC, have been
duly obtained and the sale of such Receivable to NSFC complies with all
applicable requirements of law;
(h) immediately prior to the sale of such Receivable to NSFC, the Seller
is the sole owner of all right, title and interest in and to such Receivable,
any Related Security, any Collections and any proceeds of the foregoing and
has good and marketable title thereto free and clear of all Adverse Interests;
without limiting the generality of the foregoing, such Receivable does not
constitute proceeds of inventory or other assets pledged to another Person;
(i) the transfer of such Receivable under this Agreement constitutes a
valid sale to NSFC of all right, title and interest of the Seller in the
Receivable, any Related Security, any Collections and any proceeds,
enforceable against all creditors of and purchasers from the Seller; and
(j) upon the sale of such Receivable to NSFC, NSFC has a first priority
perfected security interest in such Receivable and owns such Receivable, any
Related Security, any Collections and any proceeds of the foregoing, free of
any Adverse Interest.
2
<PAGE>
"Final Purchase Date" means the earlier of (i) the date specified by either
party hereto, upon not less than 30 days' prior written notice to the other
party hereto, as the last day on which Receivables are to be purchased
hereunder and (ii) the Business Day preceding the day on which any Bankruptcy
Event occurs with respect to the Seller or NSFC.
"NSFC" means National Steel Funding Corporation, a Delaware corporation,
and its successors.
"Receivables Purchase Agreement" means the Receivables Purchase
Agreement, dated as of May 16, 1994, among NSFC, the financial institutions
party thereto, as Buyers, NSC, as Servicer, Morgan Guaranty Trust Company of
New York, The Fuji Bank and Trust Company, The Mitsubishi Bank, Ltd. and
Comerica Bank, as Letter of Credit Issuing Banks, J.P. Morgan Delaware, as
Reserve Letter of Credit Bank, Morgan Guaranty Trust Company of New York, as
Administrative Agent and J.P. Morgan Delaware, as Structuring and Collateral
Agent, as amended from time to time.
"Seller" means National Steel Corporation, a Delaware corporation, and
its successors.
ARTICLE II
PURCHASE AND SALE OF RECEIVABLES
--------------------------------
2.01 Purchase and Sale.
(a) General. Pursuant and subject to the terms and conditions hereof,
the Seller hereby agrees to sell to NSFC, and NSFC hereby agrees to purchase
from the Seller, all of the Seller's right, title and interest in, to and under
(i) each and every Receivable outstanding as of the Closing Date and thereafter
arising through the close of business on the Final Purchase Date, (ii) all
Related Security with respect to each such Receivable, (iii) all Collections
with respect thereto and (iv) all proceeds of the foregoing.
(b) Sale Without Recourse. Subject only to the provisions of Section
2.02, the sale of Receivables by the Seller hereunder shall be without recourse.
(c) Purchase Price. In consideration of the sale of Receivables by the
Seller to NSFC pursuant to this Agreement, NSFC shall pay to Seller, on the
Closing Date and each Business Day thereafter, a purchase price for all
Receivables first booked on such Business Day in an amount equal to the
outstanding face amount of all such Receivables which the Seller has certified
meet the Eligibility Criteria, less adjustments for (i) an interest component,
taking into account the maturity of such
3
<PAGE>
Receivables, (ii) an amount representing the historical losses on such
Receivables and (iii) an amount representing a servicing fee, such purchase
price to be calculated in accordance with Appendix I hereto. The parties hereto
represent that the purchase price so calculated constitutes and represents an
arm's-length fair market value price for the Receivables sold. Receivables
transferred from the Seller to NSFC which are not Eligible Receivables shall be
deemed contributed to the capital of NSFC. The Purchase Price for each
Purchased Receivable shall, be payable (x) to the extent of cash available to
NSFC, in Dollars (or in the case of the purchase of Receivables outstanding on
the Closing Date, by crediting NSC with a capital contribution of $36,000,000)
or (y) to the extent cash is not so available, by a deemed advance under the
Parent Note. In addition, NSFC agrees to procure the issuance of Letters of
Credit pursuant to the Receivables Purchase Agreement, such Letters of Credit to
be as specified by NSC. The amount of any drawing under any such Letter of
Credit shall be credited against the outstanding balance under the Parent Note,
and the amount of L/C fees paid under the Receivables Purchase Agreement shall
be credited against interest accruing under the Parent Note.
(d) True Sale. The Seller and NSFC intend the sales of the Receivables
hereunder to be true sales of all of the Seller's right, title and interest in,
to and under such Receivables, providing NSFC with the full benefits of
ownership of the same, and the Seller and NSFC do not intend this transaction to
be, or for any purpose to be characterized as, a loan secured by such
Receivables. If despite such intention, a court characterizes the sale of
Receivables hereunder as a loan rather than a true sale, then the Seller hereby
grants to NSFC a first priority perfected security interest in, to and under all
of the Seller's right, title and interest in, to and under each and every
Receivable arising on and after the Closing Date through the close of business
on the Final Purchase Date, together with all Related Security with respect
thereto, all Collections with respect thereto and all proceeds of the foregoing,
for the purpose of securing the rights of NSFC under this Agreement.
2.02 Purchase Price Adjustment; Repurchase.
(a) The Seller hereby agrees that if (x) the Seller's representation and
warranty made pursuant to Section 5.01(a) is incorrect when made at the time of
the purchase of a Receivable, (and the provisions of subsection (c) below do not
apply) or (y) a Receivable certified as meeting the Eligibility Criteria on the
date of purchase thereafter becomes evidenced in a form (such as a promissory
note) as to which filing is not the appropriate method of perfection under the
UCC, the Seller shall, within two Business Days of discovery by or notice to the
Seller of such fact, make payment to NSFC, or credit the purchase price
otherwise payable by NSFC hereunder, in an amount equal to the then Outstanding
Balance of such Receivable. Such Receivable
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<PAGE>
shall not be reconveyed to the Seller but Collections subsequently received by
NSFC in respect thereof shall be paid over promptly to the Seller after receipt.
(b) If on any day the Outstanding Balance of a Purchased Receivable (or
the amount thereof treated as an "Eligible Receivable" under the Receivables
Purchase Agreement) is reduced or canceled as a result of any Dilution
Adjustment or dispute, defense, counterclaim or setoff with respect to such
Receivable, NSC shall pay to NSFC on such day (or, if such day is not a Business
Day, the next succeeding Business Day) the amount of such reduction or
cancellation.
(c) If at any time NSFC does not (except due to circumstances described
in clause (y) of subsection (a) above) have a perfected ownership interest in
any Receivable certified as meeting the Eligibility Criteria on the date of
purchase, free and clear of any Adverse Interest, the Seller shall purchase such
Receivable from NSFC for an amount equal to the aggregate then Outstanding
Balance thereof within two Business Days of discovery by or notice to the Seller
of such fact. With respect to all Receivables repurchased by the Seller, NSFC
shall, against receipt of the purchase price therefor, assign, without recourse,
representation or warranty, to the Seller all of NSFC's right, title and
interest in and to such Receivables. NSFC shall execute such documents and
instruments of transfer and assignment prepared by the Seller and take such
other actions as shall be reasonably requested by the Seller to effect the
reconveyance of such Receivables. The Seller shall thereafter assure that
Collections with respect to such Receivables shall not be commingled with the
Collections on Purchased Receivables.
ARTICLE III
ADMINISTRATION OF PURCHASED RECEIVABLES
---------------------------------------
3.01 Administration of Purchased Receivables.
(a) Consistent with NSFC's ownership of the Purchased Receivables, NSFC
shall be solely responsible for servicing, administering and collecting the
Purchased Receivables, and the Seller, as seller, shall have no obligation
whatsoever in this regard. The Seller hereby grants NSFC an irrevocable power
of attorney, with full power of substitution, coupled with an interest, to take
in the name of the Seller all steps necessary or desirable, as determined by
NSFC, to collect all amounts due under any Purchased Receivable, including,
without limitation, endorsing the name of the Seller on checks and other
instruments representing Collections, enforcing such Purchased Receivables and
the related Contracts, and adjusting, settling or compromising the amount or
payment thereof, in the same manner and to the same extent as the Seller would
have been entitled.
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(b) Upon NSFC's request, the Seller shall promptly deliver to NSFC all
records relating to the Purchased Receivables, and, until such delivery, hold
all such records in trust for NSFC. The Seller will clearly indicate in its
corporate records that Purchased Receivables are owned by NSFC or otherwise mark
its records relating to Purchased Receivables with a legend evidencing that NSFC
has purchased and owns such Receivables.
(c) The Seller shall hold in trust for the benefit of NSFC any
Collections received directly by the Seller with respect to any Purchased
Receivables and shall deposit such Collections in the Collection Account within
two Business Days of the receipt thereof.
3.02 Further Assurances.
(a) The Seller shall, from time to time, do and perform any and all acts
and execute any and all documents (including, without limitation any amendment,
supplement or continuation of any financing statements and continuation
statements under the UCC, the execution of any instrument of transfer, the
giving of notice of the sale of Receivables hereunder to any Obligor and the
making of notations in the records) as may be necessary, or as may be requested
by NSFC, in order to effect the purposes of this Agreement and to protect the
interests of NSFC in the Purchased Receivables against all Persons whomsoever.
To the fullest extent permitted by applicable law, NSFC shall be permitted to
sign and file financing and continuation statements with respect to the
Purchased Receivables and amendments thereto without the Seller's execution
thereof.
(b) The Seller shall not change its name, identity or corporate
structure (within the meaning of Section 9-402(7) of the UCC) or relocate its
chief executive office or any office where records are kept unless it shall have
(i) given NSFC at least 30 days' prior written notice thereof and (ii) delivered
an opinion of counsel (which counsel and which opinion shall be satisfactory to
NSFC) to the effect that all financing statements and amendments or supplements
thereto, continuation statements and other documents required to be recorded or
filed in order to perfect and protect the interest of NSFC in the Purchased
Receivables, for the period specified in such opinion, against all creditors of
and purchasers from the Seller have been filed in each filing office necessary
for such purpose and that all filing fees and taxes, if any, payable in
connection with such filings have been paid in full. The Seller shall at all
times maintain its chief executive office within the jurisdiction of the United
States in which Article 9 of the Uniform Commercial Code (1972 or later
revision) is in effect.
(c) The Seller agrees that, subject to applicable laws, NSFC shall have
the right, if the Seller fails to do so, to do
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all such acts and things as it may deem necessary to protect the interests of
NSFC, including, without limitation, confirmation and verification of the
existence, amount and status of the Purchased Receivables and collection and
enforcement of the Purchased Receivables, and that the Seller shall cooperate
fully to give effect to the foregoing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
4.01 Representations and Warranties of NSFC.
NSFC hereby makes the representations set forth in Sections 4.01 through
4.05 of the Receivables Purchase Agreement.
4.02 Representations and Warranties of the Seller.
The Seller hereby represents and warrants that:
(a) Organization and Qualification. It is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, and it is duly qualified to do business in each jurisdiction in
which the ownership of its properties or the nature of its activities requires
it to be so qualified or, if not so qualified, the failure to so qualify would
not have a material adverse effect on the collectibility of the Receivables or
its ability to perform its obligations under the Program Documents.
(b) Corporate Power. It has the corporate power and authority to execute
and deliver the Program Documents and to perform its obligations thereunder.
(c) Execution and Binding Effect. Each of the Program Documents to which
it is a party has been duly and validly authorized, executed and delivered by it
and constitutes a legal, valid and binding agreement of NSFC enforceable in
accordance with its terms.
(d) Authorizations and Filings. No authorization, consent, approval,
license, exemption or other action by, and no registration, qualification or
filing (other than the filing of Form UCC-1 financing statements) with, any
governmental office or agency is or will be necessary or advisable in connection
with the execution and delivery by it of the Program Documents to which it is a
party or the performance by it of or the compliance by it with the terms and
conditions thereof.
(e) Absence of Conflicts. The execution and delivery by it of the
Program Documents and the performance by it of and the compliance by it with the
terms and conditions thereof do not and
7
<PAGE>
will not (i) violate any law, statute, rule or regulation or (ii) conflict with
or result in a breach of or a default under (A) its charter or by-laws or (B)
any agreement or instrument to which it is a party or by which it or any of its
properties bound or result in the creation or imposition of any Lien pursuant to
the terms of any such instrument or agreement upon any of its property.
(f) Perfection Information. As of the Closing Date: (i) the information
set forth regarding the Seller in the perfection certificate delivered pursuant
to the Receivables Purchase Agreement is true and correct, (ii) the information
set forth in the Appendices thereto with respect to the locations and values of
off-site inventory are generally representative of the locations and values of
the Seller's off-site inventory, and (iii) no Receivables arise from the sale of
inventory by any Subsidiary or other Affiliate of the Seller or any other Person
other than the Seller.
(g) Accurate and Complete Disclosure. No information furnished in
writing by it pursuant to or in connection with this Agreement is false or
misleading in any material respect as of the date as of which such information
was furnished (including by omission of material information necessary to make
such information not misleading).
(h) Litigation. There are no proceedings or investigations pending, or
to its knowledge, threatened, against it (A) asserting the invalidity of the
Program Documents, (B) seeking to prevent the consummation of any of the
transactions contemplated by the Program Documents, or (C) seeking any
determination or ruling that might materially and adversely affect (i) the
performance by it of its obligations under the Program Documents or (ii) the
validity or enforceability of the Program Documents or the collectibility of the
Receivables.
(i) Bulk Sales Act. No transaction contemplated hereby requires
compliance with any bulk sales act or similar law.
(j) Financial Condition. (i) The consolidated balance sheet of the
Seller and its consolidated subsidiaries as of December 31, 1993 and the
related consolidated statements of income and cash flows for the fiscal year
then ended, reported on by Ernst & Young, a copy of which has been delivered
to NSFC, fairly present, in conformity with GAAP, the consolidated financial
position of the Seller and its consolidated subsidiaries as of such date and
their consolidated results of operations and cash flows for such fiscal year.
(ii) Since December 31, 1993 there has been no material adverse change in
the business, financial position, results of operations or prospects of the
Seller and its consolidated
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<PAGE>
subsidiaries, considered as a whole, or in its ability to perform its
obligations under the Program Documents.
(k) Margin Regulations. None of the funds provided by NSFC hereunder
will be used, directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of buying or carrying any "margin stock" within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System.
(l) Environmental Matters. In the ordinary course of its business, the
Seller conducts an ongoing review of the effect of Environmental Laws on the
business, operations and properties of the Seller and its Subsidiaries, in the
course of which it identifies and evaluates associated liabilities and costs
(including, without limitation, any capital or operating expenditures required
for clean-up or closure of properties presently or previously owned, any capital
or operating expenditures required to achieve or maintain compliance with
environmental protection standards imposed by law or as a condition of any
license, permit or contract, any related constraints on operating activities,
including any periodic or permanent shutdown of any facility or reduction in the
level of or change in the nature of operations conducted thereat and any actual
or potential liabilities to third parties, including employees, and any related
costs and expenses). On the basis of this review, the Seller has reasonably
concluded that Environmental Laws are unlikely to have a material adverse effect
on the business, financial condition, results of operations or prospects of the
Seller and its Consolidated Subsidiaries, considered as a whole.
(m) Investment Company Act. It is not an "investment company" or a
company controlled by an "investment company" within the meaning of the
Investment Seller Act of 1940, as amended.
(n) Solvency. The Seller is not insolvent and will not be insolvent
following the consummation of the transactions contemplated by this Agreement.
NSFC will have given reasonably equivalent and fair value to the Seller in
consideration for the transfer to NSFC of each Receivable, and such transfer
will not have been made for or on account of an antecedent debt owed by the
Seller to NSFC.
(o) Taxes. Each of the Seller and its Subsidiaries has filed all federal
and all other material tax returns required to be filed by it and has paid all
taxes payable pursuant to such returns or pursuant to other material assessments
received by it.
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<PAGE>
ARTICLE V
CONDITIONS TO PURCHASE
----------------------
5.01 Conditions to NSFC's Obligation to Purchase.
The obligation of NSFC to purchase Receivables on any date pursuant to
Section 2.01 is subject to the condition that the Seller shall have certified to
NSFC the Outstanding Balance of all Receivables to be purchased on such date
which meet the Eligibility Criteria on and as of such date (such certificate to
constitute a representation and warranty by the Seller to such effect).
ARTICLE VI
COVENANTS OF THE SELLER
-----------------------
The Seller covenants that:
6.01 General Information. Promptly upon becoming aware thereof, the
Seller shall give NSFC notice of any event or condition which could reasonably
be expected to have a material adverse effect on the collectibility of a
material amount of the Purchased Receivables or the ability of the Servicer to
service such Purchased Receivables or the ability of the Seller to perform its
obligations under the Program Documents. In order to verify compliance with
this Section and otherwise verify compliance with this Agreement, the Seller
shall furnish the following to NSFC:
(a) as soon as available and in any event within 90 days after the end of
each fiscal year of the Seller, a consolidated balance sheet of the Seller and
its consolidated subsidiaries as of the end of such fiscal year and the
related consolidated statements of income and cash flows for such fiscal year,
setting forth in each case in comparative form the figures for the previous
fiscal year, reported on by Ernst & Young or other independent public
accountants of nationally recognized standing;
(b) as soon as available and in any event within 45 days after the end of
the first three quarters of each fiscal year of the Seller, a consolidated
balance sheet of the Seller and its consolidated subsidiaries as of the end of
such quarter and the related consolidated statements of income for such
quarter and for the portion of the Seller's fiscal year ended at the end of
such quarter, setting forth in each case in comparative form the responding
portion of the Seller's previous fiscal year, all certified (subject to normal
year-
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end adjustments) as to fairness of presentation, GAAP and consistency by the
chief financial officer or the chief accounting officer of the Seller;
(c) together with the financial statements required in clauses (i) and
(ii) above, a certificate of its chief financial officer or chief accounting
officer stating that, as of the date of the relevant financial statements, no
Termination Event or Potential Termination Event exists, or if any Termination
Event or Potential Termination Event exists, stating the nature and status
thereof;
(d) as soon as possible, and in any event within ten Business Days of
its knowledge thereof, notice of any litigation, investigation or proceeding
against it which may exist at any time which, in its reasonable judgment,
could have a material adverse effect on the collectibility of the Purchased
Receivables or its ability to perform its obligations under Program Documents;
(e) if and when any member of the ERISA Group (i) gives or is required
to give notice to the PBGC of any "reportable event" (as defined in Section
4043 of ERISA) with respect to any Plan which might constitute grounds for a
termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multiemployer
Plan is in reorganization, is insolvent or has been terminated, a copy of such
notice; (iii) receives notice from the PBGC under Title IV of ERISA of an
intent to terminate, impose liability (other than for premiums under Section
4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a
copy of such notice; (iv) applies for a waiver of the minimum funding standard
under Section 412 of the Internal Revenue Code, a copy of such application;
(v) gives notice of intent to terminate any Plan under Section 4041(c) of
ERISA, a copy of such notice and other information filed with the PBGC; (vi)
gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a
copy of such notice; or (vii) fails to make any payment or contribution to any
Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes
any amendment to any Plan or Benefit Arrangement which has resulted or could
result in the imposition of a Lien or the posting of a bond or other security,
a certificate of the chief financial officer or the chief accounting officer
of the Borrower setting forth details as to such occurrence and action, if
any, which the Borrower or applicable member of the ERISA Group is required or
proposes to take; and
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(f) promptly upon becoming aware of any Termination Event or Potential
Termination Event, notice thereof.
6.02 Information Regarding the Receivables. The Seller shall furnish to
NSFC such information with respect to the Receivables as NSFC may request.
6.03 Preservation of Corporate Existence. Except as permitted pursuant
to Section 6.07 hereof, the Seller shall preserve and maintain its corporate
existence and good standing in the jurisdiction of its incorporation, and
qualify and remain qualified in good standing as a foreign corporation in each
jurisdiction where the failure to preserve and maintain such existence, rights,
franchises, privileges and qualification would materially adversely affect (i)
the interests of the NSFC hereunder or (ii) its ability to perform its
obligations under the Program Documents.
6.04 Compliance with Laws. The Seller shall comply in all material
respects with all laws applicable to it except to the extent that the failure so
to comply could not reasonably be expected to materially adversely effect (i)
the interests of the Buyers hereunder or (ii) its ability to perform its
obligations under the Program Documents.
6.05 Accounting Treatment. For accounting purposes, the Seller shall
treat each purchase made hereunder as a sale of the receivables subject thereto.
6.06 No Adverse Interests. The Seller will not cause or permit any of
the Receivables, or any Related Security, any collections thereon or any
proceeds of the foregoing or any Lockbox or Lockbox Account or the Collection
Account to be sold, pledged, assigned or transferred or to be subject to an
Adverse Interest other than the sale to NSFC hereunder.
6.07 No Mergers. The Seller will not consolidate or merge with or into
any other Person or sell all or substantially all of its assets to any other
Person, provided, that the Seller may merge with a corporation if (i) 100% of
the capital stock of such corporation is owned by the Seller, (ii) such
corporation is not NSFC and none of the capital stock of such corporation is
owned by NSFC, (iii) the Seller is the surviving corporation in such merger and
(iv) immediately after giving effect to such merger, no Termination Event or
Potential Termination Event shall have occurred and be continuing.
6.08 Disclosure. The Seller agrees that it shall make clear disclosure
in its financial statements (or in the footnotes thereto), and any other similar
information upon which its creditors rely, that it has sold the Receivables to
NSFC.
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6.09 Covenants of NSFC. The Seller agrees, as relevant, that it shall
comply with, and to cause NSFC to comply with, Section 5.08 of the Receivables
Credit Agreement.
ARTICLE VII
MISCELLANEOUS
-------------
7.01 Indemnity.
(a) The Seller agrees to indemnify, defend and save harmless NSFC and
its directors, officers, employees and agents (each an "indemnitee"), other than
for the indemnitee's own gross negligence or willful misconduct, forthwith on
demand, from and against any and all losses, claims, damages, liabilities, costs
and expenses (including, without limitation, all reasonable attorneys' fees and
expenses and expenses of settlement, litigation or preparation therefor) which
such indemnitee may incur or which may be asserted against such indemnitee by
any Person (including, without limitation, any Obligor) arising from or incurred
in connection with:
(i) any breach of a representation, warranty or covenant by the Seller
made or deemed made hereunder or in connection herewith or the transactions
contemplated hereby,
(ii) any action taken or, if the Seller is otherwise obligated to take
action, failed to be taken, by the Seller with respect to the Receivables or
any of its obligations hereunder, including, without limitation, the Seller's
failure to comply with an applicable law or regulation,
(iii) any failure attributable to the Seller to vest and maintain vested
in NSFC an ownership interest in the Receivables, free and clear of any
Adverse Interest,
(iv) any products liability claim arising out of or relating to the
Receivables or the related contracts,
(v) any failure to pay when due any taxes required to be paid by the
Seller, including without limitation any sales tax, excise tax or other
similar tax or charge payable in connection with the Receivables and their
creation or satisfaction,
(vi) any dispute, suit, action, claim, proceeding or governmental
investigation, pending or threatened, whether based on statute, regulation or
order (including any such suit, action, claim or proceeding alleging a
violation of any Federal or state securities laws, on tort, on contract or
otherwise) which arises out of or relates to the Receivables
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<PAGE>
or related contracts, or the use of the proceeds of the sale of the Purchased
Receivables pursuant hereto; or
(vii) any amount required to be paid by NSFC pursuant to Section 2.07(a)
of the Receivables Purchase Agreement or any indemnity required to be paid by
NSFC pursuant to Section 8.01, 8.02 or 8.03 of the Receivables Purchase
Agreement.
7.02 Amendment and Waiver.
This Agreement may be amended, or the provisions hereof waived, from time
to time by a written amendment or waiver duly executed and delivered by the
Seller and, subject to Section 7.09, NSFC.
7.03 No Implied Waivers; Cumulative Remedies.
No course of dealing and no delay or failure of NSFC in exercising any
right, power or privilege under the Program Documents shall affect any other or
future exercise thereof or the exercise of any other right, power or privilege;
nor shall any single or partial exercise of any such right, power or privilege
or any abandonment or discontinuance of steps to enforce such a right, power or
privilege preclude any further exercise thereof or of any other right, power or
privilege. The rights and remedies of NSFC under the Program Documents are
cumulative and not exclusive of any rights or remedies which NSFC would
otherwise have.
7.04 Notices.
All communications and notices pursuant hereto to either party shall be
in writing (including by facsimile transmission) and addressed or delivered to
it at its address (or in case of facsimile transmission, at its telecopier
number at such address) at such address as may be designated by it by notice to
the other party and, if mailed or sent by facsimile transmission, shall be
deemed given when received.
7.05 Costs and Expenses.
The Seller will pay all expenses incident to the performance of its
obligations under this Agreement and the Seller agrees to pay all reasonable
out-of-pocket costs and expenses of NSFC in connection with the perfection as
against third parties of NSFC's right, title and interest in and to the
Receivables and the enforcement of any obligation of the Seller hereunder.
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7.06 Survival
This Agreement shall continue in full force and effect so long as any
Receivables remain outstanding; provided that Section 7.01 shall survive
termination of this Agreement.
7.07 Waiver of Jury Trial. EACH OF THE PARTIES HERETO IRREVOCABLY
WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
7.08 No Bankruptcy Petition.
The Seller hereby covenants and agrees that, prior to the date which is
one year and one day after the Final Payment Date, it will not institute
against, or join any other Person in instituting against, NSFC any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceeding or other
similar proceeding under the laws of the United States or any State of the
United States.
7.09 Assignment.
(a) The Seller acknowledges that NSFC will, pursuant to the Receivables
Purchase Agreement, convey an ownership interest in the Receivables to the
Buyers and assign all of its rights and remedies under this Agreement to the
Collateral Agent as security for its obligations under the Receivables Purchase
Agreement, and that, without limiting the generality of the foregoing, the
representations and warranties contained in this Agreement and the rights of
NSFC under Section 2.02 hereof and the indemnification provisions of Section
7.01 hereof are intended to benefit the Agents, the Issuing Banks and the
Buyers. The Seller hereby consents to such conveyances and such assignment and
to the terms of the Receivables Purchase Agreement and further acknowledges that
pursuant to the Receivables Purchase Agreement the consent of the Required
Buyers is required in respect of amendments hereof and waivers by NSFC of its
rights hereunder.
(b) The Seller shall not assign any of its rights or obligations
hereunder.
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7.10 Governing Law.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK. The Seller hereby submits to the non-exclusive
jurisdiction of the United States District Court for the Southern District of
New York and of any New York State court sitting in New York City for purposes
of all legal proceedings arising out of or relating to this Agreement or the
transactions contemplated hereby. The Seller waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an inconvenient
forum.
7.11 Counterparts. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts each
of which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be
executes by their respective officers thereunto duly authorized as of the date
and year first above written.
NATIONAL STEEL CORPORATION
By____________________________
Name:
Title:
NATIONAL STEEL FUNDING
CORPORATION
By____________________________
Name:
Title:
16
<PAGE>
APPENDIX I
NET PURCHASE PRICE OF RECEIVABLES
---------------------------------
For each Business Day
A. Face amount of new Receivables meeting the
Eligibility Criteria 0.00
B. A X Average Loss to Liquidation Ratio for
the last three Full Years X 1.5 0.00
C. A - B 0.00
D. C X Yield Rate X 3 month average Days
Sales Outstanding X 1.5
---------------------------------
360
Yield Rate = Base Rate printed in
the Wall Street Journal on such
Business Day 0.00
E. C - D 0.00
F. C X 2% X Days Sales Outstanding X 1.5
---------------------------------
360 0.00
G. E - F [Purchase Price of New Receivables] 0.00
H. Less - credits under Section 2.02 of PSA 0.00
I. G - H [Net Purchase Price of New Receivables] 0.00
J. Percent of new eligible Receivables %
<PAGE>
APPENDIX II
DAILY RECONCILIATION OF
INTERCOMPANY TRANSACTIONS
-------------------------
A. Net Purchase Price of New Receivables 0.00
B. Collections available for reinvestment 0.00
C. Proceeds of new dollar funding 0.00
D. Lesser of A and (B + C) paid to NSC 0.00 cash
0.00
E. If A less than (B + C), the
difference to be:
- held at NSFC 0.00
- paid on parent note 0.00
- paid as a dividend 0.00
F. If (B + C) less than A, the
difference drawn on parent note 0.00
2
