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1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 1-983
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NATIONAL STEEL CORPORATION
(Exact name of registrant as specified in its charter)
25-0687210
Incorporated under the Laws of the (I.R.S. Employer Identification No.)
State of Delaware
(State or other jurisdiction of
incorporation or organization)
4100 Edison Lakes Parkway, 46545-3440
Mishawaka, IN (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area
code: 219-273-7000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Class B Common Stock New York Stock Exchange
First Mortgage Bonds, 8 3/8% Series due 2006 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
----------------
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
At February 1, 1999, there were 41,906,040 shares of the registrant's common
stock outstanding.
Aggregate market value of voting stock held by non-affiliates: $182,965,639.
The amount shown is based on the closing price of National Steel
Corporation's Common Stock on the New York Stock Exchange on February 1, 1999.
Voting stock held by officers and directors is not included in the
computation. However, National Steel Corporation has made no determination
that such individuals are "affiliates" within the meaning of Rule 405 under
the Securities Act of 1933.
DOCUMENTS INCORPORATED BY REFERENCE:
Selected portions of the 1999 Proxy Statement of National Steel Corporation
are incorporated by reference into Part III of this Report on Form 10-K.
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<PAGE>
NATIONAL STEEL CORPORATION
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
Part I
Item 1 Business.............................................................................. 3
Item 2 Properties............................................................................ 12
Item 3 Legal Proceedings..................................................................... 14
Item 4 Submission of Matters to a Vote of Security Holders................................... 19
Part II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters.................. 21
Item 6 Selected Financial Data............................................................... 22
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. 23
Item 7A Quantitative and Qualitative Disclosures about Market Risk............................ 33
Item 8 Financial Statements and Supplementary Data........................................... 34
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 62
Part III
Item 10 Directors and Executive Officers of the Registrant.................................... 62
Item 11 Executive Compensation................................................................ 62
Item 12 Security Ownership of Certain Beneficial Owners and Management........................ 63
Item 13 Certain Relationships and Related Transactions........................................ 63
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 63
</TABLE>
2
<PAGE>
PART I
Item 1. Business
Introduction
National Steel Corporation, a Delaware corporation, (together with its
consolidated subsidiaries, the "Company") is the fourth largest integrated
steel producer in the United States and is engaged in the manufacture and sale
of a wide variety of flat rolled carbon steel products, including hot rolled,
cold rolled, galvanized, tin and chrome plated steels. The Company targets
high value-added applications of flat rolled carbon steel for sale primarily
to the automotive, construction and container markets. The Company's principal
executive offices are located at 4100 Edison Lakes Parkway, Mishawaka, Indiana
46545-3440; telephone (219) 273-7000.
The Company was formed through the merger of Great Lakes Steel Corporation,
Weirton Steel Corporation and Hanna Iron Ore Company and was incorporated in
Delaware on November 7, 1929. The Company built a finishing facility, now the
Midwest operations in Portage, Indiana ("Midwest"), in 1961, and in 1971
purchased Granite City Steel Corporation, now the Granite City Division. On
September 13, 1983, the Company became a wholly-owned subsidiary of National
Intergroup, Inc., (which subsequently changed its name to FoxMeyer Health
Corporation and then to Avatex Corporation and is hereinafter referred to as
"Avatex"). On January 11, 1984, the Company sold the principal assets of its
Weirton Steel Division and retained certain liabilities related thereto. On
August 31, 1984, NKK Corporation (collectively, with its subsidiaries, "NKK")
purchased a 50% equity interest in the Company from Avatex. In connection with
this purchase, Avatex agreed to indemnify the Company for (i) certain
environmental liabilities related to the Company's former Weirton Steel
Division and the Company's subsidiary, Hanna Furnace Corporation and (ii)
certain pension and employee benefit liabilities related to the Weirton Steel
Division (together, the "Indemnification Obligations"). On June 26, 1990, NKK
purchased an additional 20% equity interest in the Company from Avatex. In
connection with this purchase, Avatex was issued shares of the Company's
Series B Redeemable Preferred Stock and NKK was issued shares of the Company's
Series A Preferred Stock. In April 1993, the Company completed an initial
public offering of its Class B Common Stock. In October 1993, Avatex converted
all of its shares of Class A Common Stock to an equal number of shares of
Class B Common Stock and subsequently sold substantially all of its shares of
Class B Common Stock in the market in January 1994, resulting in NKK owning a
75.6% voting interest in the Company at December 31, 1994. On February 1,
1995, the Company completed a primary offering of 6.9 million shares of Class
B Common Stock. Subsequent to that transaction, NKK's voting interest
decreased to 67.6%. In November 1997, the Company entered into an agreement
with Avatex to redeem all of the Series B Redeemable Preferred Stock held by
Avatex and to release Avatex from the Indemnification Obligations. In December
1997, the Company completed the redemption of the Series A Preferred Stock
held by NKK for a redemption price of $36.7 million, plus accrued dividends of
approximately $0.6 million. Following this transaction, and the settlement
with Avatex described above, the Company no longer has any preferred stock
outstanding.
Recent Developments
Trade Cases. During 1998, imports of steel mill products, which had soared
to record levels in 1997, continued to escalate. New monthly records were set
in 1998 as imports captured over 34% of apparent steel supply in the third
quarter of 1998. This surge in imports led to a significant decline in
operating rates for many steel manufacturers. On September 30, 1998 the
Company joined a number of other U.S. steel producers in filing certain unfair
trade petitions before the Department of Commerce and International Trade
Commission. These unfair trade petitions were filed against foreign steel
companies in Brazil, Japan, and Russia alleging widespread dumping of imported
hot-rolled carbon steel flat products and in the case of Brazil, substantial
subsidization of those products. The Company joined as a petitioner in these
cases except the one involving Japan. A final resolution to these trade cases
is expected on or shortly before June 19, 1999. (See Item 3. Legal
Proceedings).
3
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Expansion of Value-Added Processing Capacity. During 1998 the Company
continued to strengthen its value-added processing capacity. In February 1998,
the Company announced that it had entered into a joint venture with Robinson
Steel Co., Inc. to form National Robinson L.L.C. which will produce value
added cut-to-length steel plates and sheets with superior quality, flatness
and dimensional tolerances. In April 1998, construction was completed and
production began on a new galvanizing line at Midwest with a capacity of
270,000 tons. In October 1998, the Company entered into a contract for the
construction of a new 450,000 ton hot dip galvanizing facility at its Great
Lakes operations in Ecorse and River Rouge, Michigan ("Great Lakes"), which
will serve the automotive industry.
Property Tax Settlement. During the third quarter of 1998, the Company
recorded an unusual credit of $26.6 million resulting from the settlement of a
lawsuit seeking a reduction in the assessed value of the Company's real and
personal property at Great Lakes relating to the 1991 through 1997 tax years.
The Company received tax refunds and was granted a lower assessment base that
is expected to result in future tax savings.
Common Stock Repurchase Program and Common Stock Dividends. On August 26,
1998, the Board of Directors authorized the repurchase of up to two million
shares of the Company's Class B Common Stock. As of December 31, 1998, the
Company had acquired 1,109,700 shares at a cost of $8.4 million. In addition,
the Company purchased 272,500 shares through February 1, 1999 at a cost of
$2.6 million. Also during 1998, the Company paid quarterly dividends of $0.07
per common share (or a total in 1998 of $0.28 per common share or $12.1
million). On February 9, 1999, the Board of Directors authorized a quarterly
dividend of $0.07 per common share, payable on March 10, 1999 to stockholders
of record on February 23, 1999.
Strategy
The Company's strategy is to improve and sustain overall profitability,
thereby enhancing stockholder value, by reducing the cost of production,
improving productivity and product quality, shifting its product mix to higher
value-added products and strengthening its overall capital structure.
Management has developed a number of strategic initiatives designed to achieve
the Company's goals.
Continued Reduction of Production Costs. Reducing all costs associated with
the production process is essential to the Company's overall cost reduction
program. It is management's ongoing focus to reduce the total cost of
producing finished steel, of which the single largest component remains the
production of hot rolled bands. Specific initiatives have included (i)
improving labor productivity and production yields; (ii) installing a
predictive maintenance program designed to maximize production time and
equipment life while minimizing unscheduled outages; (iii) reducing shipments
of secondary and limited warranty steel; (iv) enhancing production capacity;
and (v) reducing overall headcount.
Capital Investments in Higher Value-Added Processing Capacity. In order to
improve productivity, operating costs and product quality, the Company has
made substantial investments in capital improvements at the Company's
steelmaking and finishing operations. Specific capital projects to enhance
value-added processing capacity have included (i) the construction of the
270,000 ton #3 galvanizing line at Midwest completed in 1998, (ii) a
substantial upgrade of the Company's existing 72-inch galvanizing facility at
Midwest, including a capacity increase to 450,000 tons completed in 1997,
(iii) the construction of a 270,000 ton galvanizing facility ("Triple G") at
Granite City completed in 1996, (iv) the construction of a 270,000 ton joint
venture galvanizing facility near Jackson, Mississippi, which commenced
operations in 1994 ("Double G"), and (v) the construction of a 400,000 ton
joint venture hot dip galvanizing facility in Windsor, Ontario, which
commenced operations in 1993 ("DNN"). The Company is committed to utilize 50%
of each of Double G's and DNN's line time. The Company entered into a contract
for the construction of a new 450,000 ton hot dip galvanizing line at Great
Lakes to serve the automotive industry. Total expenditures for this facility
are expected to be approximately $175 million, and start-up is scheduled for
the first half of 2000. Including the new facility, the Company's total annual
coated products capacity is expected to exceed 3.5 million tons in 2001, an
increase of over 45% since 1994. With the completion of this facility, the
Company believes that total annual coated shipments could account for
approximately 60% of total shipments in 2001 as compared to approximately 38%
in 1994.
4
<PAGE>
Investments in Downstream Processing Businesses. To further increase the
Company's shipments of higher value-added products, enhance profitability and
reduce competitive threats, the Company has invested in several downstream
businesses, including (i) a 50% interest in National Robinson LLC, formed in
1998 to construct and operate a temper mill and provide other value-added
processing for 200,000 tons of the Company's hot rolled bands annually; (ii) a
56% interest in ProCoil Corporation ("ProCoil"), a joint venture formed to
provide blanking, slitting, cutting-to-length and laser welding for the
automotive markets, to which the Company ships approximately 250,000 tons of
steel coils per year; and (iii) a 25% interest in Tinplate Holdings, Inc.
("Tinplate"), a tin mill service center for which the Company is the largest
supplier.
Increased Focus on the Growing Construction Market. This market demands
high-quality products, on-time delivery and effective, efficient technical
support and customer service. In recent years, the Company has increased its
focus on the construction market. This increased focus on the construction
market is designed to increase operating margins, reduce competitive threats
and maintain high capacity utilization rates while diversifying the Company's
dependence on any one market. Of the Company's coating capacity constructed
since 1994, 675,000 tons are targeted towards the construction industry. Since
1994, the Company has increased shipments to the construction industry by 47%
from 0.8 million tons to 1.1 million tons in the year ended December 31, 1998.
The Company believes it is the largest U.S. supplier of flat rolled steel to
the construction industry, with a market share of approximately 23%. The
construction market has historically been a growing and important customer
base for the Company, accounting for approximately 27% of net sales in 1998.
Increased Penetration in Higher Value-Added Sectors of the Automotive
Market. In order to better serve this customer group while enhancing margins,
the Company has targeted additional opportunities to sell higher value-added
products, including galvanized products and steel used in exposed automotive
applications. The Company's initiatives have included: (i) upgrading its 72-
inch galvanizing line at Midwest to service demand for critically exposed
automotive applications; (ii) investing in ProCoil to provide laser welding
and blanking; (iii) establishing the Product Application Center and Technical
Research Center near Great Lakes, centrally located near the major automotive
manufacturers; and (iv) constructing a new hot dip galvanizing facility at
Great Lakes. The Company believes it is one of the largest U.S. suppliers of
flat rolled steel to the automotive industry with a market share of
approximately 11%. The automotive industry has historically been an important
customer base for the Company, accounting for approximately 30% of net sales
in 1998.
Strengthened Capital Structure. Management intends to continue to strengthen
the Company's financial position with cash from operations as well as
evaluating alternatives for the monetization of certain assets. Since 1994,
the Company has decreased debt and preferred stock obligations from $774.0
million to $323.0 million primarily by prepaying certain obligations,
including the Great Lakes No. 5 coke battery loans, and redeeming the
Company's 11% Series A Preferred Stock and the 11% Series B Redeemable
Preferred Stock. Funding for these prepayments has been provided from cash
flow from operations and the proceeds from the sale of certain assets. In
addition, the Company has reduced its net unfunded pension and other
postretirement employee benefit liabilities primarily by prefunding its
obligations and benefiting from favorable investment returns.
Overall Quality Improvement. An important element of the Company's strategy
is to reduce the cost of poor quality production which currently results in
the sale of nonprime products at lower prices and requires substantial
additional processing costs. The Company has made significant improvements in
this area by changing certain work practices, increasing process control and
utilizing employee-based problem solving, thus eliminating dependence on final
inspection and reducing internal rejections and additional processing. Since
1994, the Company has reduced its shipment of secondary and limited warranty
steel from approximately 12% of total shipments to approximately 8% of total
shipments for the year ended December 31, 1998. The Company is currently ISO
9002/QS 9000 registered.
Alliance with NKK
The Company has a strong alliance with its principal stockholder, NKK, the
second largest steel company in Japan. Since 1984, the Company has had access
to a wide range of NKK's steelmaking, processing and
5
<PAGE>
applications technology. The Company's engineers include approximately 31
engineers transferred from NKK, who serve primarily at the Company's
divisions. These engineers, as well as engineers and technical support
personnel at NKK's facilities in Japan, assist in improving operating
practices and developing new manufacturing processes. This support also
includes providing input on ways to improve raw steel production and finished
product yields and enhance overall productivity. In addition, NKK has provided
financial assistance to the Company in the form of investments, loans and
introductions to Japanese financial institutions and trading companies;
however, there can be no assurance given as to the extent of NKK's future
financial support beyond existing contractual commitments.
This alliance with NKK was further strengthened by the Agreement for the
Transfer of Employees with NKK Corporation entered into by the Company and NKK
effective as of May 1, 1995 (superseding a prior arrangement). The agreement
was unanimously approved by all directors of the Company who were not then,
and never have been, employees of NKK. Pursuant to the terms of this
agreement, technical and business advice is provided through NKK employees who
are transferred to the employ of the Company. The agreement further provides
that the initial term can be extended from year to year after expiration of
the initial term, if approved by NKK and a majority of the directors of the
Company who were not then, and never have been, employees of NKK. The
agreement has been extended through the calendar year 1999 in accordance with
this provision. Pursuant to the terms of the agreement, the Company will
reimburse NKK for the costs and expenses incurred by NKK in connection with
the transfer of these employees, subject to an agreed upon cap. The cap was
$11.7 million during the initial term and $7.0 million during each of 1999,
1998, and 1997. The Company incurred approximately $6.0 million, $6.6 million
and $6.4 million under this agreement, during 1998, 1997 and 1996,
respectively. In addition, the Company utilized various other engineering
services provided by NKK outside of the agreement and incurred approximately
$0.9 million, $1.3 million and $0.3 million for these services during 1998,
1997 and 1996, respectively.
Customers
Automotive. The Company is a major supplier of hot and cold rolled steel and
higher value-added galvanized coils to the automotive industry, one of the
most demanding group of steel consumers. The Company's steel has been used in
a variety of automotive applications including exposed and unexposed panels,
wheels and bumpers. Automotive manufacturers require wide sheets of steel,
rolled to exact dimensions. In addition, formability and defect-free surfaces
are critical. The Company has been able to successfully meet these demands.
Construction. The Company is also a leading supplier of steel to the
construction market. Roof and building panels are the principal applications
for galvanized and Galvalume(R) steel in this market. Steel framing is growing
in popularity with contractors. Management believes that demand for
Galvalume(R) steel will exhibit strong growth for the next several years,
partially as a result of a trend away from traditional building products, and
that the Company is well positioned to profit from this growth as a result of
both its position in this market and its additional capacity referred to
above.
Container. The Company produces chrome and tin plated steels to exacting
tolerances of gauge, shape, surface flatness and cleanliness for the container
industry. Tin and chrome plated steels are used to produce a wide variety of
food and non-food containers. In recent years, the market for tin and chrome
plated steels has been relatively stable and profitable for the Company.
Pipe and Tube. The Company supplies the pipe and tube market with hot
rolled, cold rolled and coated sheet. The Company is a key supplier to
transmission pipeline, downhole casing and structural pipe producers.
Service Centers. The Company also supplies the service center market with
hot rolled, cold rolled and coated sheet. Service centers generally purchase
steel coils from the Company and may process them further or sell them
directly to third parties without further processing.
6
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The following table sets forth the percentage of the Company's revenues from
various markets for the past three years.
<TABLE>
<CAPTION>
1998 1997 1996
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<S> <C> <C> <C>
Automotive........................................... 29.5% 27.0% 27.6%
Construction......................................... 26.6 24.8 21.6
Containers........................................... 11.3 11.0 10.6
Pipe and Tube........................................ 5.6 7.3 6.5
Service Centers...................................... 19.5 21.3 20.2
All Other............................................ 7.5 8.6 13.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
No customer accounted for more than 10% of net sales in 1998, 1997 or 1996.
Export sales accounted for approximately 2.1% of revenues in 1998, 2.0% in
1997 and 0.8% in 1996.
The Company's products are sold through sales offices located in Chicago,
Detroit, Houston, Indianapolis, Kansas City, Cleveland and St. Louis.
Substantially all of the Company's orders are for short-term delivery.
Accordingly, backlog is not meaningful when assessing future results of
operations.
Approximately two-thirds of the Company's products are sold under long-term
sales arrangements, most of which are negotiated on an annual basis. Any sales
arrangements with a term of six months or more are considered to be "long-
term." A significant amount of the Company's flat rolled steel sales to larger
customers in the automotive and container markets are made pursuant to such
sales arrangements. The Company's sales arrangements generally provide for set
prices for the products ordered during the period that they are in effect. As
a result, the Company may experience a delay in realizing price changes
related to its long-term business. Much of the remainder of the Company's
products are sold under contracts covering shorter periods at the then
prevailing market prices for such product.
Customer Partnership. The Company's customer partnership program provides
superior quality and service through technical assistance, local customer
service and sales support. Management believes it is able to further
differentiate the Company's products and to promote customer loyalty by
establishing close relationships through early customer involvement, providing
technical services and support and utilizing its Product Application Center
and Technical Research Center facilities while exposing a customer to a number
of Company personnel.
The Company's Technical Research Center near Great Lakes develops new
products, improves existing products and develops more efficient operating
procedures to meet the constantly increasing demands of the automotive,
construction and container markets. The Company employs approximately 55
chemists, physicists, metallurgists and engineers in connection with its
research activities. The research center is responsible for, among other
things, the development of five new high strength steels for automotive weight
reduction and a new galvanized steel for the construction market. In addition,
the Company operates a Product Application Center near Detroit dedicated to
providing product and technical support to customers. The Product Application
Center assists customers with application engineering (selecting optimum metal
and manufacturing methods), application technology (evaluating product
performance) and technical developments (performing problem solving at
plants). The Company spent $11.0 million, $10.9 million and $11.1 million for
research and development in 1998, 1997 and 1996, respectively. In addition,
the Company participates in various research efforts through the American Iron
and Steel Institute (the "AISI").
Operations
The Company operates three principal facilities: two integrated steel
plants, the Granite City Division in Granite City, Illinois, near St. Louis,
and Great Lakes in Ecorse and River Rouge, Michigan, near Detroit, and a
finishing facility, Midwest in Portage, Indiana, near Chicago. Great Lakes and
Midwest operate as the Regional Division, a single business enterprise, in
order to improve the planning and coordination of production at both plants
and enhance the ability of the Company to monitor its costs and utilize its
resources, thereby allowing the Company to more effectively meet customer
needs.
7
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The Company's centralized corporate structure, the close proximity of the
Company's principal steel facilities and the complementary balance of
processing equipment shared by them, will enable the Company to closely
coordinate the operations of these facilities in order to maintain high
operating rates throughout its processing facilities and to maximize the
return on its capital investments.
The following table details effective steelmaking capacity, actual
production, effective capacity utilization and percentage of steel
continuously cast for the Company and the domestic steel industry for the
years indicated.
<TABLE>
<CAPTION>
Raw Steel Production Data
---------------------------------------------
Effective Percentage
Effective Actual Capacity Continuously
Capacity Production Utilization Cast
--------- ---------- ----------- ------------
(Thousands of net tons)
<S> <C> <C> <C> <C>
The Company
1998......................... 6,600 6,087 92.2% 100.0%
1997......................... 6,800 6,527 96.0 100.0
1996......................... 7,000 6,557 93.7 100.0
1995......................... 6,300 6,081 96.5 100.0
1994......................... 6,000 5,763 96.1 100.0
Domestic Steel Industry*
1998......................... 125,300 107,643 85.9 95.3
1997......................... 121,400 108,561 89.4 94.7
1996......................... 116,100 105,309 90.7 93.2
1995......................... 112,500 104,930 93.3 91.1
1994......................... 108,200 100,579 93.0 89.5
</TABLE>
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*Information as reported by the AISI. The 1998 industry information is
preliminary.
In 1998, effective capacity decreased to 6.6 million net tons primarily as a
result of the scheduled reline of the Great Lakes "A" blast furnace. Effective
capacity in 1997 was lowered from 1996 to reflect more realistic operating
levels based on the Company's operating practices in 1996. In 1996, effective
capacity increased to 7 million net tons primarily due to successfully
negotiated environmental relief at the Granite City Division. In 1995,
effective capacity increased to 6.3 million net tons due to improved operating
efficiencies, primarily at Great Lakes.
Raw Materials
Iron Ore. The metallic iron requirements of the Company are supplied
primarily from iron ore pellets that are produced from a concentration of low
grade ores. The Company, through its wholly owned subsidiary, National Steel
Pellet Company ("NSPC"), has reserves of iron ore adequate to produce
approximately 353 million gross tons of iron ore pellets. The Company's iron
ore reserves are located in Minnesota and Michigan. Excluding the effects of
the thirteen month period from August 1, 1993 through August 28, 1994 when
NSPC was idled, a significant portion of the Company's average annual
consumption of iron ore pellets was obtained from the deposits of the Company
during the last five years. The remaining iron ore pellets consumed by the
Company were purchased from third parties. Iron ore pellets available to the
Company from its own deposits and outside suppliers are expected to be
sufficient to meet the Company's total iron ore requirements at competitive
market prices for the foreseeable future.
The Company previously owned a minority equity interest in Iron Ore Company
of Canada ("IOC"). On April 1, 1997, the Company completed the sale of that
equity interest to North Limited. The Company continues to purchase iron ore
at fair market value from IOC pursuant to long-term supply agreements.
Coal. In 1992, the Company decided to exit the coal mining business and sell
or dispose of its coal reserves and related assets. The remaining coal assets
constitute less than 0.3% of the Company's total assets.
8
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The Company believes that supplies of coal, adequate to meet the Company's
needs, are readily available from third parties at competitive market prices.
Coke. On June 12, 1997, the Company sold the machinery, equipment,
improvements and other personal property and fixtures constituting the Great
Lakes No. 5 coke battery, together with the related coal inventories, to a
subsidiary of DTE Energy Company, and received proceeds (net of taxes and
expenses) of approximately $234 million. The Company will continue to operate
and maintain the coke battery on a contract basis and will purchase the
majority of the coke produced from the battery under a requirements contract,
with the price being adjusted during the term of the contract, primarily to
reflect changes in production costs.
The Company also operates two efficient coke batteries servicing the Granite
City Division. Approximately 60% of the Company's annual coke requirements can
be supplied by the Great Lakes and Granite City coke batteries. The remaining
coke requirements are met through competitive market purchases.
The Company fully implemented a pulverized coal injection process in
February 1997 at its blast furnaces at Great Lakes, which continues to reduce
the Company's dependency on outside coke supplies.
Limestone. An affiliated company in which the Company holds a minority
equity interest has limestone reserves of approximately 70 million gross tons
located in Michigan. During the last five years, approximately 70% of the
Company's average annual consumption of limestone was derived from these
reserves. The Company's remaining limestone requirements were purchased at
competitive market prices from unaffiliated third parties.
Scrap and Other Materials. Supplies of steel scrap, tin, zinc and other
alloying and coating materials are readily available at competitive market
prices.
Patents and Trademarks
The Company has the patents and licenses necessary for the operation of its
business as now conducted. The Company does not consider its patents and
trademarks to be material to the business of the Company.
Employees
As of December 31, 1998, the Company employed 9,230 people. The Company has
labor agreements with the United Steelworkers of America ("USWA"), the
International Chemical Workers Council of the United Food and Commercial
Workers and other labor organizations which collectively represent
approximately 82% of the Company's employees. In 1993, the Company entered
into labor agreements, which expire on July 31, 1999, with these various labor
organizations ("1993 Settlement Agreement"). Scheduled negotiations reopened
in 1996 and were ultimately resolved utilizing the arbitration provisions
provided for in the 1993 Settlement Agreement, without any disruption to the
Company's operations.
The Company's ability to operate could be impacted by strike or work
stoppage if it is unable to negotiate a new agreement with its represented
employees when the existing agreement expires on July 31, 1999. The USWA's
labor agreements with certain other domestic integrated steel producers also
expire on July 31, 1999. There can be no assurances that work stoppages will
not occur in the future in connection with contract negotiations or otherwise,
or as to the financial impact of such a stoppage. A prolonged general work
stoppage would have a material adverse effect on the Company's results of
operations and financial condition. Also, the Company's profitability could be
adversely affected if increased costs associated with any future contract are
not recoverable through productivity improvements, price increases or other
cost reductions.
9
<PAGE>
Competition
The Company is in direct competition with domestic and foreign flat rolled
carbon steel producers and producers of plastics, aluminum and other materials
which can be used in place of flat rolled carbon steel. Steel industry
participants compete primarily on price, service and quality. The Company
believes it is able to differentiate its products from those of its
competitors by, among other things, providing technical services and support,
utilizing its Product Application Center and Technical Research Center
facilities, and by its focus on improving product quality through, among other
things, capital investment and research and development, as previously
described. The Company competes with domestic integrated and mini-mill steel
producers, some of which have greater resources than the Company.
Imports. Domestic steel producers face significant competition from foreign
producers and, from time to time, have been adversely affected by what the
Company believes to be unfairly traded imports. The intensity of foreign
competition is substantially affected by the relative strength of foreign
economies and fluctuations in the value of the United States dollar against
foreign currencies. Steel imports increase when the value of the dollar is
strong in relation to foreign currencies. The recent economic slowdown in
certain foreign markets, particularly Japan, has resulted in an increase in
imports at depressed prices over recent months. Imports of finished steel
products accounted for approximately 19% of the domestic market during 1993 to
1997 and approximately 26% in 1998. Some foreign steel producers are owned,
controlled or subsidized by their governments. Decisions by these foreign
producers with respect to production and sales may be influenced to a greater
degree by political and economic policy considerations than by prevailing
market conditions.
Reorganized/Reconstituted Mills. The intensely competitive conditions within
the domestic steel industry have been exacerbated by the continued operation,
modernization and upgrading of marginal steel production facilities through
bankruptcy reorganization procedures, thereby perpetuating overcapacity in
certain industry product lines. Overcapacity is also caused by the continued
operation of marginal steel production facilities that have been sold by
integrated steel producers to new owners, who operate such facilities with a
lower cost structure.
Mini-mills. Mini-mills also provide significant competition in certain
product lines, including hot rolled and cold rolled sheets, which represented,
in the aggregate, approximately 53% of the Company's shipments in 1998. Mini-
mills are relatively efficient, low-cost producers which make steel from scrap
in electric furnaces, with lower employment and environmental costs and
targeted regional markets. Thin slab casting technologies have allowed mini-
mills to enter certain sheet markets which have traditionally been supplied by
integrated producers. Certain companies have announced plans for, or have
indicated that they are currently considering, additional mini-mill plants for
sheet products in the United States.
Steel Substitutes. In the case of many steel products, there is substantial
competition from manufacturers of other products, including plastics,
aluminum, ceramics, glass, wood and concrete. Conversely, the Company and
certain other manufacturers of steel products have begun to compete in recent
years in markets not traditionally served by steel producers.
Environmental Matters
The Company's operations are subject to numerous laws and regulations
relating to the protection of human health and the environment. The Company
has made capital expenditures of $1.0 million in connection with matters
relating to environmental control during 1998. The Company currently estimates
that it will incur capital expenditures in connection with matters relating to
environmental control of approximately $8 million and $20 million for 1999 and
2000, respectively. In addition, the Company recorded expenses for
environmental compliance, including depreciation, of $62.5 million in 1998 and
expects to record expenses of approximately $63 million in each of 1999 and
2000. Since environmental laws and regulations are becoming increasingly
stringent, the Company's environmental capital expenditures and costs for
environmental compliance may increase in the future. In addition, due to the
possibility of future changes in circumstances or regulatory
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requirements, the amount and timing of future environmental expenditures could
vary substantially from those currently anticipated. The costs for
environmental compliance may also place the Company at a competitive
disadvantage with respect to foreign steel producers, as well as manufacturers
of steel substitutes, that are subject to less stringent environmental
requirements.
In 1990, Congress passed amendments to the Clean Air Act which impose
stringent standards on air emissions. The Clean Air Act amendments will
directly affect the operations of many of the Company's facilities, including
its coke ovens. Under such amendments, coke ovens generally will be required
to comply with progressively more stringent standards over the thirty-year
period beginning on the date of enactment of the amendments. The Company
believes that the costs for complying with the Clean Air Act amendments will
not have a material adverse effect, on an individual site basis or in the
aggregate, on the Company's financial position, results of operations or
liquidity.
The Resource Conservation Recovery Act of 1976, as amended ("RCRA") imposes
certain investigation and corrective action obligations on facilities that are
operating under a permit, or are seeking a permit, to treat, store or dispose
of hazardous wastes. The Company has conducted an investigation at its Midwest
facility and is currently waiting for approval from the United States
Environmental Protection Agency ("EPA") regarding the results of the
investigation and proposed corrective actions. Upon final approval of the RCRA
corrective action program by the EPA, the Company will begin the remediation.
The Company has accrued approximately $2 million as a liability for this
project, which represents the minimum amount that can be reasonably estimated,
as of December 31, 1998. At the present time, the Company's other facilities
are not subject to corrective action.
The Company has recorded an aggregate liability of approximately $2.0
million at December 31, 1998 for the reclamation costs to restore its coal and
iron ore mines at its shut down locations to their original and natural state,
as required by various federal and state mining statutes. These matters are
discussed under the caption "Coal Mine Reclamation Proceedings" in Item 3,
"Legal Proceedings".
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state statutes generally impose joint
and several liability on present and former owners and operators, transporters
and generators for remediation of contaminated properties regardless of fault.
The Company and certain of its subsidiaries are involved as potentially
responsible parties ("PRPs") in a number of CERCLA and other environmental
cleanup proceedings. These matters are discussed under the caption "CERCLA and
Other Environmental Cleanup Proceedings" in Item 3, "Legal Proceedings". With
respect to those sites, the Company has accrued an aggregate liability of
$11.2 million as of December 31, 1998.
During 1997, the Company settled substantially all of the claims it had
previously filed against certain of its insurance carriers seeking coverage
under its comprehensive general liability insurance policies for its
environmental liabilities. In connection with this settlement, the Company
recognized insurance proceeds (net of taxes and expenses) aggregating
approximately $13.6 million. The settlement with the insurance carriers also
included an agreement by certain carriers to provide partial insurance
coverage for certain existing and future major environmental liabilities.
Forward Looking Statements
Statements made by the Company in this Form 10-K that are not historical
facts constitute "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward looking statements,
by their nature, involve risk and uncertainty. A variety of factors could
cause business conditions and the Company's actual results and experience to
differ materially from those expected by the Company or expressed in the
Company's forward looking statements. These factors include, but are not
limited to, (1) changes in market prices and market demand for the Company's
products; (2) changes in the costs or availability of raw materials and other
supplies used by the Company in the manufacture of its products; (3) equipment
failures or outages at the Company's steelmaking, mining and processing
facilities; (4) losses of customers; (5) changes in
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the levels of the Company's operating costs and expenses; (6) collective
bargaining agreement negotiations, strikes, labor stoppages or other labor
difficulties; (7) actions by the Company's competitors, including domestic
integrated steel producers, foreign competitors, mini-mills and manufacturers
of steel substitutes such as plastics, aluminum, ceramics, glass, wood and
concrete; (8) changes in industry capacity; (9) changes in economic conditions
in the United States and other major international economies, including rates
of economic growth and inflation; (10) worldwide changes in trade, monetary or
fiscal policies, including changes in interest rates; (11) changes in the
legal and regulatory requirements applicable to the Company; and (12) the
effects of extreme weather conditions.
Item 2. Properties
The Granite City Division.
The Granite City Division, located in Granite City, Illinois, has an annual
hot rolled band production capacity of approximately 3.6 million tons. All
steel at Granite City is continuous cast. Granite City also uses ladle
metallurgy to refine the steel chemistry to enable it to meet the exacting
specifications of its customers. The facility's ironmaking facilities consist
of two coke batteries and two blast furnaces. Finishing facilities include an
80-inch hot strip mill, a continuous pickler, a tandem mill and three hot dip
galvanizing lines. Construction of the third hot dip galvanizing line, a
270,000 ton coating facility producing higher value added products for the
construction market, was completed in 1996. This facility, known as Triple G,
cost approximately $85.0 million. Granite City ships approximately 10% of its
total production to Midwest for finishing. Principal products of the Granite
City Division include hot rolled, hot dipped galvanized and Galvalume(R),
grain bin and high strength, low alloy steels.
The Granite City Division is located on 1,540 acres and employs 2,990
people. The Division's proximity to the Mississippi River and other interstate
transit systems, both rail and highway, provides easy accessibility for
receiving raw materials and supplying finished steel products to customers.
The Regional Division.
Great Lakes
Great Lakes, located in Ecorse and River Rouge, Michigan, is an integrated
facility engaged in steelmaking primarily for use in the automotive market
with an annual hot rolled band production capacity of approximately 4.4
million tons. All steel at this location is continuous cast. Great Lakes
ironmaking facilities consist of three blast furnaces, and a rebuilt 85-oven
coke battery which was sold in 1997 to a subsidiary of DTE Energy Company.
Great Lakes also operates two basic oxygen process vessels, a vacuum degasser
and a ladle metallurgy station. Finishing facilities include a hot strip mill,
a skinpass mill, a shear line, a high speed pickle line, a tandem mill, a
batch annealing station, two temper mills, two customer service lines, and an
electrolytic galvanizing line. Great Lakes ships approximately 45% of its
production to Midwest and to joint venture coating operations for value-added
processing. Principal products include hot rolled, cold rolled, electrolytic
galvanized, and high strength, low alloy steels.
Great Lakes is located on 1,100 acres and employs 3,636 people. The facility
is strategically located with easy access to water, rail and highway transit
systems for receiving raw materials and supplying finished steel products to
customers.
Midwest
Midwest, located in Portage, Indiana, finishes hot rolled bands produced at
Great Lakes and Granite City primarily for use in the automotive, construction
and container markets. All of the processes performed at Midwest help enhance
the Company's profitability by turning commodity grades of hot rolled steel
into higher value-added products. Midwest facilities include a continuous
pickling line, two cold reduction mills, two continuous galvanizing lines, a
48 inch wide line which can produce galvanized or Galvalume(R) steel products
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and which services the construction market, and a 72 inch wide line which
services the automotive market; finishing facilities for cold rolled products
consisting of a batch annealing station, a sheet temper mill and a continuous
stretcher leveling line, an electrolytic cleaning line, a continuous annealing
line, two tin temper mills, two tin recoil lines, an electrolytic tinning line
and a chrome line which services the container markets. During 1997, the
Company completed an expansion of the 72^ galvanizing line. In addition, in
the second quarter of 1998, Midwest completed construction of a 270,000 ton
coating line to serve the construction market. Principal products include tin
mill products, hot dipped galvanized and Galvalume(R) steel, cold rolled, and
electrical lamination steels.
Midwest is located on 1,100 acres and employs 1,557 people. Its location
provides excellent access to rail, water and highway transit systems for
receiving raw materials and supplying finished steel products to customers.
National Steel Pellet Company
National Steel Pellet Company ("NSPC") is located on the western end of the
Mesabi Iron Ore Range in Keewatin, Minnesota, and mines, crushes, concentrates
and pelletizes low grade taconite ore into iron ore pellets. NSPC operations
include two primary crushers, ten primary mills, five secondary mills, a
concentrator and a pelletizer. The facility has a current annual effective
iron ore pellet capacity of approximately 5.3 million gross tons and reserves
in excess of 350 million gross tons. NSPC also has a combination of rail and
vessel access to the Company's integrated steel mills.
Joint Ventures and Equity Investments
In order to increase its production of higher value-added products, the
Company has entered into the following joint ventures.
DNN Galvanizing Limited Partnership. As part of its strategy to focus its
marketing efforts on high quality steels for the automotive industry, the
Company entered into an agreement with NKK and Dofasco Inc., a large Canadian
steel producer ("Dofasco"), to build and operate DNN, a 400,000 ton per year,
hot dip galvanizing facility in Windsor, Ontario, Canada. This facility
incorporates state-of-the-art technology to galvanize steel for critically
exposed automotive applications. The Company owns a 10% equity interest in
DNN, NKK owns a 40% equity interest and Dofasco owns the remaining 50%. The
facility is modeled after NKK's Fukuyama Works Galvanizing Line that has
provided high quality galvanized steel to the Japanese automotive industry for
several years. The Company is committed to utilize 50% of the available line
time of the facility and pay a tolling fee designed to cover fixed and
variable costs with respect to 50% of the available line time, whether or not
such line time is utilized. The plant began production in January 1993 and is
currently operating at capacity. The Company's steel substrate requirements
are provided to DNN by Great Lakes.
Double G Coatings, L.P. To continue to meet the needs of the growing
construction market, the Company and Bethlehem Steel Corporation formed a
joint venture to build and operate Double G Coatings, L.P. ("Double G"). The
Company owns a 50% equity interest in Double G. Double G is a 270,000 ton per
year hot dip galvanizing and Galvalume(R) steel facility near Jackson,
Mississippi. The facility is capable of coating 48 inch wide steel coils with
zinc to produce a product known as galvanized steel and with a zinc and
aluminum coating to produce a product known as Galvalume(R) steel. Double G
primarily serves the metal buildings segment of the construction market in the
south central United States. The Company is committed to utilize 50% of the
available line time of the facility and pay a tolling fee designed to cover
fixed and variable costs with respect to 50% of the available line time,
whether or not such line time is utilized. The joint venture commenced
production in the second quarter of 1994 and reached full operating capacity
in 1995. The Company's steel substrate requirements are provided to Double G
by Great Lakes.
ProCoil Corporation. ProCoil Corporation ("ProCoil") is a joint venture
between the Company and Marubeni Corporation, located in Canton, Michigan.
ProCoil operates a steel processing facility to which the Company ships
approximately 250,000 tons of steel coil per year. ProCoil began operations in
1988 and a warehousing facility which began operations in 1992. The Company
owns a 56% equity interest in ProCoil, and Marubeni Corporation owns the
remaining 44%. ProCoil blanks, slits and cuts steel coils to desired lengths
to
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service automotive market customers and will provide laser welding services in
1999. In addition, ProCoil warehouses material to assist the Company in
providing just-in-time delivery to customers. Effective as of May 31, 1997,
the consolidated financial statements of the Company include the accounts of
ProCoil.
Tinplate Holdings, Inc. In April 1997, a wholly owned subsidiary of the
Company purchased 25% of the outstanding common stock of Tinplate Holdings,
Inc. ("Tinplate"). Tinplate operates a tin mill service center in Gary,
Indiana. In connection with this transaction, the Company also entered into a
supply agreement pursuant to which Tinplate will purchase certain minimum
quantities of tin mill products from the Company through 2001.
National Robinson LLC. In February 1998, the Company entered into an
agreement with Robinson Steel Co., Inc. to form a joint venture company, named
National Robinson LLC. The Company owns a 50% equity interest in National
Robinson LLC. This new company will operate a temper mill, leveler and cut to
length facility in Granite City, Illinois to produce high value added cut-to-
length steel plates and sheets with superior quality, flatness and dimensional
tolerances. National Robinson LLC is expected to process approximately 200,000
tons of hot rolled steel supplied by the Company. Construction of the new
facility is expected to be completed in the first quarter of 1999.
Other Information With Respect to the Company's Properties
In addition to the properties described above, the Company owns its
corporate headquarters facility in Mishawaka, Indiana. Generally, the
Company's properties are well maintained, considered adequate and being
utilized for their intended purposes. The Company's steel production
facilities are owned in fee by the Company except for (i) a continuous caster
and related ladle metallurgy facility which service Great Lakes, (ii) an
electrolytic galvanizing line, which services Great Lakes, and (iii) a portion
of the coke battery, which services the Granite City Division, each of which
are owned by third parties and leased to the Company pursuant to the terms of
operating leases. The electrolytic galvanizing line lease, the coke battery
lease and the continuous caster and related metallurgy facility lease are
scheduled to expire in 2001, 2004, and 2008, respectively. Upon expiration,
the Company has the option to extend the respective lease or purchase the
facility at fair market value.
Substantially all of the land (excluding certain unimproved land), buildings
and equipment (excluding, generally, mobile equipment) that are owned in fee
by the Company at Great Lakes, Midwest and the Granite City Division are
subject to a lien securing the Company's First Mortgage Bonds, 8 3/8% Series
due 2006 ("First Mortgage Bonds"). Included among the items which are not
subject to this lien are a vacuum degassing facility and a pickle line which
service Great Lakes and a continuous caster facility which services the
Granite City Division; however, each of these items is subject to a mortgage
granted to the respective lender that financed the construction of the
facility. The Company has also agreed to grant to the Voluntary Employees'
Benefit Association Trust ("VEBA Trust") a second mortgage on that portion of
the property which is covered by the lien securing the First Mortgage Bonds
and which is located at Great Lakes. The VEBA Trust was established in
connection with the 1993 Settlement Agreement for the purpose of prefunding
certain postretirement employee benefit obligations for USWA represented
employees.
For a description of certain properties related to the Company's production
of raw materials, see the discussion under the caption "Raw Materials" in Item
1, "Business".
Item 3. Legal Proceedings
In addition to the matters discussed below, the Company is involved in
various legal proceedings occurring in the normal course of its business. In
the opinion of the Company's management, adequate provision has been made for
losses that are likely to result from these actions.
Securities and Exchange Commission Investigation
In the third quarter of 1997, the Audit Committee of the Company's Board of
Directors was informed of allegations about managed earnings, including excess
reserves and the accretion of such reserves to income over multiple periods,
as well as allegations about deficiencies in the Company's system of internal
controls. The
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Audit Committee engaged legal counsel who, with the assistance of an
accounting firm, inquired into these matters. Based upon this inquiry, the
Company determined the need to restate its financial statements for certain
prior periods. On January 29, 1998, the Company filed an amended Form 10-K for
1996 and amended Forms 10-Q for the first, second and third quarters of 1997
reflecting the restatements. On December 15, 1997, the Board of Directors
approved the termination of the Company's Vice President--Finance in
connection with the Audit Committee inquiry. During January 1998, legal
counsel to the Audit Committee issued its report to the Audit Committee, and
the Audit Committee approved the report and concluded its inquiry. On January
21, 1998, the Board of Directors accepted the report and approved the
recommendations, except for the recommendation to revise the Audit Committee
Charter, which was approved on February 9, 1998. The report found certain
misapplications of generally accepted accounting principles and accounting
errors, including excess reserves, which have been corrected by the
restatements referred to above. The report found that the accretion of excess
reserves to income during the first, second and third quarters of 1997, as
described in the amended Forms 10-Q for those quarters, may have had the
appearance of management of earnings as the result of errors in judgment and
misapplication of generally accepted accounting principles. However, the
report concluded that these errors do not appear to have involved the
intentional misstatement of the Company's accounts. The report also found
weaknesses in internal controls and recommended various improvements in the
Company's system of internal control, a comprehensive review of such controls,
a restructuring of the Company's finance and accounting department, and
expansion of the role of the internal audit function, as well as corrective
measures to be taken related to the specific causes of the accounting errors.
The Company is in the process of implementing these recommendations with the
involvement of the Audit Committee. In accordance with the recommendations, a
major independent accounting and consulting firm was engaged in early 1998 to
examine and report on the Company's written assertion about the effectiveness
of the internal control over financial reporting. Its report is expected to be
completed in March 1999. The Securities and Exchange Commission ("Commission")
has authorized an investigation pursuant to a formal order of investigation
relating to the matters described above. The Company has been cooperating with
the Staff of the Commission and intends to continue to do so.
Steinmetz v. National Steel Corporation, et. al.
A complaint was filed on May 13, 1998 in the United States District Court
for the Northern District of Indiana by Hyman Steinmetz seeking shareholder
class action status and alleging violations of the federal securities laws
against the Company, its majority shareholder, NKK U.S.A. Corporation, Osamu
Sawaragi, the Company's former chairman and chief executive officer, and
another former officer of the Company. The complaint generally relates to the
Company's restatement of its financial statements for certain prior periods
which was announced in October 1997. The complaint seeks unspecified money
damages, interest, costs and fees. The Company believes that the lawsuit is
without merit and intends to defend against it vigorously.
Trade Litigation
On September 30, 1998, the Company joined a number of other U.S. steel
producers in filing certain unfair trade petitions before the Department of
Commerce and the International Trade Commission (the "ITC"). These unfair
trade petitions were filed against foreign steel companies in Brazil, Japan
and Russia, alleging widespread dumping of imported hot-rolled carbon steel
flat products ("hot rolled steel") and in the case of Brazil, substantial
subsidization of those products. The Company joined as a petitioner in these
cases, except the one involving Japan. On November 13, 1998, the ITC made
affirmative preliminary determinations in the cases, finding that there is a
reasonable indication that the domestic hot-rolled steel industry is
threatened with material injury by the imports in question. On February 12,
1999, the Department of Commerce preliminarily determined that the imported
products at issue have been dumped and, in the case of Brazil, subsidized. The
affected imports are now subject to bonding requirements, with the amount of
security calculated based on preliminary duty rates. Antidumping duties and,
in the case of Brazil, countervailing duties, will be imposed against those
imports for which the Department of Commerce makes an affirmative final
dumping or countervailing duty determination and for which the ITC makes an
affirmative injury determination. Such duties are designed to offset dumping
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and the advantages of subsidies and create a level playing field for domestic
producers. The final Department of Commerce decisions are expected to be made
on May 5, 1999, and the final ITC determination is expected to be made on or
shortly before June 19, 1999.
Environmental Matters
CERCLA and Other Environmental Cleanup Proceedings
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state statutes generally impose joint
and several liability on present and former owners and operators, transporters
and generators for remediation of contaminated properties, regardless of
fault. Currently, an inactive site located at the Great Lakes facility is
listed on the Michigan Environmental Response Act Site List, but remediation
activity has not been required by the Michigan Department of Environmental
Quality ("MDEQ"). The Company and its subsidiaries have been conducting steel
manufacturing and related operations at numerous locations, including their
present facilities, for over sixty years. Although the Company believes that
it has utilized operating practices that were standard in the industry at the
time, hazardous materials may have been released on or under these currently
or previously owned sites. Consequently, the Company potentially may be
required to remediate contamination at some of these sites. However, based on
its past experience and the nature of environmental remediation proceedings,
the Company believes that if any such remediation is required, it will occur
over an extended period of time.
In addition, the Company and certain of its subsidiaries are involved as
potentially responsible parties ("PRPs") in a number of off-site CERCLA and
other environmental cleanup proceedings. The outcome of these proceedings is
not expected to have a material adverse effect on the financial position,
results of operations or liquidity of the Company. The more significant of
these matters are described below:
Ilada Energy Company Site. The Company and certain other PRPs have performed
a removal action pursuant to an order issued by the U.S. Environmental
Protection Agency ("EPA") under Section 106 of CERCLA at this waste
oil/solvent reclamation site located in East Cape Girardeau, Illinois. The
Company and the other PRPs also entered into an Administrative Order of
Consent ("AOC") pursuant to which they agreed to perform a remedial
investigation and feasibility study ("RI/FS") at this site to determine
whether the residual levels of contamination of soil and groundwater remaining
after the removal action pose any threat to either human health or the
environment and therefore whether or not the site will require further
remediation. The PRPs submitted a draft RI/FS to the EPA and the Illinois
Environmental Protection Agency ("IEPA") and have responded to the agencies'
comments on that document. The EPA and IEPA have not yet approved the RI/FS
report, and it is therefore not known whether any further remediation will be
required at the site. To date, the Company has paid approximately $2 million
for work and oversight costs. The Company estimates that it will cost
approximately $100,000 to complete the RI/FS. In addition, the PRPs remain
obligated to reimburse the EPA for approximately $200,000 of oversight costs.
Under the terms of the PRP Agreement, the Company is obligated to pay
approximately 33% of these RI/FS and oversight costs.
Buck Mine Complex. This is a proceeding involving a large site in Iron
County, Michigan, called the Buck Mine Complex, two discrete portions of which
were formerly owned or operated by a subsidiary of the Company, which has
since been merged into the Company. The MDEQ alleges that this site
discharged, and continues to discharge, heavy metals into the environment,
including the Iron River. The MDEQ has conducted an RI/FS at the site and has
implemented a remedy for the acid mine drainage. Prior to implementation, the
MDEQ estimated that the cost of the remedy, including past costs, as well as
future operating and maintenance costs, but excluding natural resource
damages, would be approximately $750,000. It is expected that the MDEQ will
seek recovery of these amounts from the Company and approximately 8 other PRPs
at the site. The Company has advised the MDEQ that it is interested in
pursuing a "cash-out" settlement of this matter; however, the MDEQ has advised
that it is not prepared to discuss settlement at this time.
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Port of Monroe Site. In February 1992, the Company received a notice of
potential liability from the MDEQ with respect to this landfill located near
the Port of Monroe in Michigan. In 1994, the Company, along with certain other
PRPs, entered into a Consent Decree that resolved MDEQ's claim for response
costs that it had incurred at the site through October 1993. The MDEQ agreed
to accept $500,000 as reimbursement for these costs, and the Company's share
of the settlement was $50,000. The owner/operator PRPs have performed an RI/FS
for the site at an estimated cost of $280,000. The Company did not contribute
to the cost of the RI/FS, and it is likely that the owner/operator PRPs will
seek contribution from the Company and other non-participating PRPs. Although
a final remedy for the site has not yet been selected, the owner/operator PRPs
have advised the Company that the overall cost of the remedy is expected to be
less than $10 million; however, the Company does not have sufficient
information to determine whether this estimate is accurate. Based on currently
available information, the Company believes that its proportionate share of
the ultimate liability at this site will be no more than 10% of the total
costs.
Rasmussen Site. The Company and nine other PRPs have entered into a Consent
Decree with the EPA pursuant to which they have agreed to implement the
remedial action at this disposal site located in Livingston, Michigan.
Pursuant to a participation agreement among the PRPs, the Company's share of
the costs of the remedial action is 2.25%. To date, the Company has paid
approximately $285,000. The PRP Group has estimated that the remaining costs
of the remedial action will be approximately $4.2 million. Therefore, the
Company's estimated future liability is approximately $95,000.
Buckeye Site. The Company and certain other PRPs have entered into a Consent
Decree with EPA to perform the remedial action at this site. Pursuant to this
Consent Decree, the Company has agreed to pay 2.8 percent of the response
costs associated with the site. Total response costs for the site are
estimated to be approximately $30.0 million. Approximately $10.0 million of
that total has already been paid by the settling PRPs, with the Company having
paid approximately $200,000. The Company's share of the projected future costs
is expected to be approximately $560,000, a significant portion of which is
expected to be paid by the Company over the next two to three years.
Weirton Steel--WVDEP Investigation. In January 1993, the Company was
notified that the West Virginia Division of Environmental Projection ("WVDEP")
had conducted an investigation on Brown's Island, Weirton, West Virginia,
which was formerly owned by the Company's Weirton Steel Division and is
currently owned by Weirton Steel Corporation ("Weirton Steel"). The WVDEP
alleged that samples taken from four groundwater monitoring wells located at
this site contained elevated levels of contamination. WVDEP informed Weirton
Steel that additional investigation, possible groundwater and soil
remediation, and on-site housecleaning were required at the site. Weirton
Steel has spent approximately $210,000 to date on remediation of an emergency
wastewater lagoon located on Brown's Island. The Company has reimbursed
Weirton Steel for that amount pursuant to certain indemnity provisions
contained in the agreements between Weirton Steel and the Company which were
entered into at the time that the Company sold the assets of its former
Weirton Steel Division to Weirton Steel ("Weirton Indemnification"). It is
likely that Weirton Steel will seek reimbursement of any additional
investigation and remediation costs involving this lagoon from the Company
pursuant to the Weirton Indemnification. The Company can not yet determine
whether WVDEP will require any additional investigation or remediation at the
Brown's Island facility. Weirton Steel has completed a three-year groundwater
monitoring program at the facility; however, no groundwater remediation has
been required to date.
Weirton Steel--EPA Order. On September 16, 1996, EPA issued a unilateral
administrative order under the Resource Conservation and Recovery Act
("RCRA"), requiring Weirton Steel to undertake certain investigative
activities with regard to cleanup of possible environmental contamination on
Weirton Steel property. Weirton Steel has informed the Company that the
Mainland Coke Plant, Brown's Island, and the Avenue H Disposal Site are likely
to be included within the areas of investigation required by EPA and that
Weirton Steel considers these areas to be within the scope of the Weirton
Indemnification. Weirton Steel has forwarded to the Company an initial claim
for reimbursement of costs which it incurred in the remediation of
environmental hazards during the demolition of the Mainland Coke Plant and by-
products area totaling approximately $2.5 million. The Company is currently
evaluating the documentation submitted by Weirton Steel
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in support of this claim. Additional costs are likely to be incurred by
Weirton Steel as a result of the unilateral administrative order under RCRA.
In that event, it is also likely that Weirton Steel will make additional
claims against the Company for reimbursement pursuant to the Weirton
Indemnification.
Donner Hanna Coke Plant. The Donner Hanna coke plant was operated from
approximately 1920 to 1982, and for the majority of that time was a part of a
joint venture between the Company and LTV Steel Company, Inc. (or its
predecessor). In 1989 and 1990, the plant was demolished. The City of Buffalo,
in partnership with the City of Lackawanna, Erie County and the Erie County
Industrial Development Agency, has developed a conceptual plan for
redevelopment of over 1,200 acres of inactive industrial properties in South
Buffalo, including the Donner Hanna coke plant. The Company, through its
subsidiary, The Hanna Furnace Corporation, is participating in a voluntary
effort with LTV to perform a site assessment and cleanup at Donner Hanna, with
a goal of eventually transferring ownership of the property to either the City
of Buffalo or a third party. Preliminary cost estimates for the voluntary site
assessment and cleanup are approximately $12.7 million over a two year period.
Hanna Furnace's share of these costs would be approximately $6.3 million, as a
result of LTV's equal contribution to the costs of the cleanup.
Other Sites. The Company has been notified that it may be a PRP at eleven
other CERCLA or state superfund sites. At these sites, either (i) the
Company's liability is not expected to be material or (ii) 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.
Coal Mine Reclamation Proceedings
The Company is involved in the following reclamation proceedings with
respect to its former coal mining properties:
Isabella Mine. National Mines Corporation ("NMC"), a wholly-owned subsidiary
of the Company, previously owned and operated a coal mine and coal refuse
disposal area in Pennsylvania commonly known as the Isabella Mine. The area
covered under NMC's mining permit was approximately 140 acres. A reclamation
bond in the amount of $1.2 million was held by the Pennsylvania Department of
Environmental Protection ("DEP") in connection with NMC's activities. In June
1993, NMC sold the Isabella property to Global Coal Recovery, Inc. ("Global"),
a coal refuse reprocessor. Global applied for and received a new mining permit
from DEP for a total area of approximately 375 acres, including the area
previously covered under NMC's permit. In connection with the sale, NMC agreed
to allow Global to use NMC's $1.2 million reclamation bond as security to
obtain the new permit from the DEP. Global was obligated to repay NMC the $1.2
million. Global also assumed all environmental liability associated with the
Isabella Mine as part of the transaction. Global was ultimately unable to
operate the Isabella Mine at a profit. As a result, it defaulted on its
agreements with NMC and abandoned the site in October 1995. The DEP
subsequently took enforcement actions against Global and revoked its mining
permit. Additionally, on November 1, 1996, the DEP issued a notice of
forfeiture with respect to the $1.2 million reclamation bond posted by NMC.
NMC has appealed this forfeiture to the Environmental Hearing Board. NMC has
presented DEP with a plan pursuant to which NMC would perform reclamation of
the site, in lieu of the forfeiture of the bond. Negotiations with DEP are
ongoing.
Environmental Regulatory Enforcement Proceedings
From time to time, the Company is involved in proceedings with various
regulatory authorities relating to violations of environmental laws and
regulations which may require the Company to pay various fines and penalties,
comply with applicable standards or other requirements or incur capital
expenditures to add or change certain pollution control equipment or
processes. The more significant of these proceedings which are currently
pending are described below:
Great Lakes--Wayne County Air Pollution Control Department
Proceeding. During 1997, the Wayne County Air Quality Management Division
issued 28 Notices of Violations ("NOVs") to the Company at the Great Lakes
facility. Settlement discussions are ongoing.
18
<PAGE>
Great Lakes--Particulate Standards NOV. On March 9, 1998, the Company's
Great Lakes facility received an NOV from the EPA which alleged nine
violations of the particulate standards at the No. 2 Basic Oxygen Furnace Shop
and the D-4 Blast Furnace Casthouse. Six of the days on which exceedances
allegedly occurred are covered by the Wayne County NOVs described immediately
above. No demand or proposal for penalties or other sanctions was contained in
the Notice. The Company met with EPA on May 7, 1998 to discuss the NOV. EPA
has indicated that it will review the settlement between Wayne County and the
Company, when it is finalized, to determine whether it will also serve to
resolve this NOV.
Granite City Division--IEPA Violation Notice. On October 18, 1996, the IEPA
issued a Violation Notice alleging (1) releases to the environment between
1990 and 1996; (2) violations of solid waste requirements; and (3) violations
of the National Pollutant Discharge Elimination System ("NPDES") water permit
limitations, at the Company's Granite City Division. No demand or proposal for
penalties or other sanctions was contained in the Notice; however, the Notice
does contain a recommendation by IEPA that the Company conduct an
investigation of these releases and, if necessary, remediate any contamination
discovered during that investigation. The Company submitted a written response
to the Notice on December 4, 1996 and met with IEPA on December 18, 1996. The
Company submitted certain additional information requested by IEPA in 1997.
IEPA has not responded to the Company since receiving this additional
information.
Midwest--NPDES Permit Violations. On October 1, 1998, the Company received a
Notice of Violation from the Indiana Department of Environmental Management
("IDEM") which alleges exceedances of the Company's NPDES permit limitations
between September 1995 and August 1998. IDEM has proposed a penalty of
$354,250 for these alleged violations. Additionally, under IDEM's proposal,
the Company would be required to install certain equipment to help prevent
future violations. Settlement negotiations with IDEM are ongoing.
Detroit Water and Sewerage Department NOVs. The Detroit Water and Sewerage
Department ("DWSD") issued NOVs to the Company's Great Lakes facility on
November 25, 1998 and January 8, 1999. The NOVs allege that the Company's
discharge to the DWSD contained levels of cyanide and mercury in excess of the
permitted limits. No demand or proposal for penalties or other sanctions was
contained in the NOVs. Settlement negotiations with the DWSD are ongoing.
Item 4. Submission of Matters To a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
Executive Officers of the Registrant
The following sets forth certain information with respect to the executive
officers of the Company. Executive officers are elected by the Board of
Directors of the Company, generally at the first meeting of the Board after
each annual meeting of stockholders. Officers of the Company serve at the
discretion of the Board of Directors and are subject to removal at any time.
Yutaka Tanaka, Chairman and Chief Executive Officer. Mr. Tanaka, age 62, has
been a director of the Company since April 1, 1998. Mr. Tanaka was appointed
Vice Chairman of the Company in April 1998 and Chairman of the Board and Chief
Executive Officer in September 1998. Mr. Tanaka served as President of
Adchemco Corporation, a manufacturer of chemical products and a wholly owned
subsidiary of NKK, from June 1996 to April 1998. Prior thereto, he was
employed in various capacities by NKK, where he most recently served as
Managing Director from June 1992 to June 1996.
John A. Maczuzak, President and Chief Operating Officer. Mr. Maczuzak, age
57, joined the Company as Vice President and General Manager--Granite City
Division in May 1996. He was appointed Executive Vice President and Acting
Chief Operating Officer in August 1996 and assumed his present position in
December, 1996. Mr. Maczuzak was formerly employed by ProTec Coating Company
as General Manager and USS/Kobe Steel Company as Vice President of Operations
and has more than 31 years of broad-based experience in the steel industry.
19
<PAGE>
Glenn H. Gage, Senior Vice President and Chief Financial Officer. Mr. Gage,
age 56, joined the Company in August 1998 as Senior Vice President and Chief
Financial Officer. Mr. Gage was formerly Senior Vice President--Finance at
Uarco Incorporated from 1995 until August 1998, and was a partner with Ernst &
Young LLP from 1981 to 1995.
John F. Kaloski, Senior Vice President--Regional Division. Mr. Kaloski, age
49, joined the Company in August 1998 as Senior Vice President--Regional
Operations and was appointed to his present position in October 1998. Prior to
joining the Company, Mr. Kaloski served in various capacities at U.S. Steel,
including General Manager--U.S. Steel--Gary Works from 1996 to 1998, General
Manager--U.S. Steel Mon Valley Works from 1994 to 1996 and General Manager--
U.S. Steel Minnesota Ore Operations, from 1992 to 1994.
David L. Peterson, Senior Vice President--Business Development, Production
Planning and Technical Services. Mr. Peterson, age 49, joined the Company in
June 1994 as Vice President and General Manager--Great Lakes Division. In
January 1997 he was appointed to the position of Group Vice President--
Regional Operations, and he assumed his present position in August of 1998.
Mr. Peterson had formerly been employed by U.S. Steel since 1971. He was
promoted to the plant manager level at U.S. Steel in 1988 and directed all
operating functions from cokemaking to sheet and tin products. In 1988 he was
named Plant Manager--Primary Operations at U.S. Steel's Gary Works facility.
James H. Squires, Senior Vice President and General Manager--Granite City
Division. Mr. Squires, age 60, began his career with the Company in 1956 as a
laborer in the blast furnace area and went on to hold numerous positions as an
hourly worker. In 1964, he accepted a salaried position and advanced through
the operating organization. In October 1996, he was appointed Vice President
and General Manager--Granite City Division and assumed his current position in
October 1998.
Thomas A. Baird, Vice President, Automotive and Container Sales. Mr. Baird,
age 57, began his career with the Company in 1964. He has held numerous
positions in the marketing and sales organization of the Company, including
General Manager, Automotive Sales from October 1993 to October 1998. He was
appointed to his present position in October 1998.
LeRoy A. Bordeaux, Vice President, Construction and Sheet Sales. Mr.
Bordeaux, age 54, began his career with the Company in 1968. He has held
numerous positions in the marketing and sales organization of the Company,
including General Manager, Sheet Sales from August 1997 to October 1998,
Manager, Sheet Sales from May 1994 to August 1997, and Manager, Customer
Service from March 1992 to May 1994. He was appointed to his present position
in October 1998.
Joseph R. Dudak, Vice President, Strategic Sourcing. Mr. Dudak, age 51,
began his career with the Company as an engineer at Midwest in 1970. In 1973,
he moved to Granite City Division and served as Superintendent of Energy
Management & Utilities from 1977 until moving to corporate headquarters in
1981. He served as Director of Energy & Environmental Affairs from 1981 to
1994, when he was appointed General Manager, Strategic Sourcing. He was
appointed to his present position in 1995.
Leon L. Judd, Vice President, Human Resources. Mr. Judd, age 55, joined the
Company in 1966. He has held various positions of increasing responsibility
including Assistant General Manager Administration--Great Lakes Division from
September 1990 to March 1995, Director--Human Resources Planning and
Communications from March 1995 to August 1996, and Director--Human Resources
and Corporate Affairs from August 1996 to August 1998. Mr. Judd was appointed
to his present position in August 1998.
Ronald J. Werhnyak, Vice President, General Counsel and Secretary. Mr.
Werhnyak, age 53, joined the Company in January 1996 as Senior Counsel. He had
previously served as the Company's Assistant General Counsel commencing in
1989 through an independent contractual arrangement with the Company. Mr.
Werhnyak was appointed Acting General Counsel and Secretary in August 1998,
and to his current position in December 1998.
20
<PAGE>
Robert G. Pheanis, Vice President and General Manager--Midwest Division. Mr.
Pheanis, age 65, joined the Company in June 1994 as Vice President and General
Manager--Midwest Division. Mr. Pheanis formerly served in various management
positions at U.S. Steel at the Gary Works facility for 35 years and in 1992
was named its Plant Manager--Finishing Operations, with responsibility for its
total hot rolled, sheet and tin operations.
William E. McDonough, Treasurer. Mr. McDonough, age 40, began his career
with the Company in 1985 in the Financial Department. He has held various
positions of increasing responsibility including Assistant Treasurer and
Manager, Treasury Operations and was elected to his present position in
December 1995.
Kirk A. Sobecki, Corporate Controller. Mr. Sobecki, age 37, joined the
Company in January 1999 as Corporate Controller. From September 1997 to
December 1998, he served as Chief Financial Officer of Luitpold
Pharmaceuticals, Inc. From June 1986 to August 1997 Mr. Sobecki held various
positions with Zimmer, Inc., a Division of Bristol-Myers Squibb, including
Director of Finance/Controller from 1995 to 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Class B Common Stock is traded under the symbol "NS" on the
New York Stock Exchange. The following table sets forth, for the periods
indicated, the high and low sales prices of the Class B Common Stock on a
quarterly basis as reported on the New York Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
Period High Low
------ ------- --------
<S> <C> <C>
1998
First Quarter.......................................... $21 3/4 $10 9/16
Second Quarter......................................... 19 3/4 11
Third Quarter.......................................... 13 6 1/8
Fourth Quarter......................................... 8 5/8 5 1/16
1997
First Quarter.......................................... $10 1/8 $ 7 5/8
Second Quarter......................................... 16 7/8 7 1/2
Third Quarter.......................................... 21 1/2 14
Fourth Quarter......................................... 18 3/4 10 3/4
</TABLE>
As of December 31, 1998, there were approximately 213 registered holders of
Class B Common Stock. (See Note 3. Capital Structure for further discussion).
The Company did not pay any dividends on its Class A Common Stock or Class B
Common Stock in 1997. During 1998, the Company paid quarterly dividends of
$0.07 per common share (or a total in 1998 of $0.28 per common share). The
decision whether to continue to pay dividends on the Common Stock will be
determined by the Board of Directors in light of the Company's earnings, cash
flows, financial condition, business prospects and other relevant factors.
Holders of Class A Common Stock and Class B Common Stock are entitled to share
ratably, as a single class, in any dividends paid on the Common Stock.
In addition, any dividend payments must be matched by a like contribution
into the VEBA Trust, the amount of which is calculated under the terms of the
1993 Settlement Agreement between the Company and the USWA, until the asset
value of the VEBA Trust exceeds $100.0 million. The asset value of the VEBA
Trust at December 31, 1998 was approximately $112.6 million. No matching
dividend contribution to the VEBA Trust was required for the year ended
December 31, 1998. Various debt and certain lease agreements include
restrictions on the amount of stockholders' equity available for the payment
of dividends. Under the most restrictive of these covenants, stockholders'
equity in the amount of $454.6 million was free of such limitations at
December 31, 1998.
21
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in millions, except per
share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.............................. $2,848 $3,140 $2,954 $2,954 $2,700
Cost of products sold.................. 2,497 2,674 2,618 2,529 2,337
Depreciation........................... 129 135 144 146 142
Gross margin........................... 222 331 192 279 221
Selling, general and administrative
expense............................... 154 141 137 154 138
Unusual charges (credits).............. (27) -- -- 5 (25)
Income from operations................. 96 191 65 129 113
Financing costs (net).................. 11 15 36 39 56
Income before income taxes,
extraordinary items and cumulative
effect of accounting change........... 88 235 32 90 169
Extraordinary items.................... -- (5) -- 5 --
Cumulative effect of accounting
changes............................... -- -- 11 -- --
Net income............................. 84 214 54 108 185
Net income applicable to common stock.. 84 203 43 97 174
Basic and diluted per share data:
Income before extraordinary items and
cumulative effect of accounting
change.............................. 1.94 4.82 .74 2.13 4.79
Net income........................... 1.94 4.70 .99 2.26 4.79
Diluted earnings per share applicable
to common stock....................... 1.94 4.64 .99 2.22 4.70
Cash dividends paid per common share... 0.28 -- -- -- --
<CAPTION>
December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............. $ 138 $ 313 $ 109 $ 128 $ 162
Working capital........................ 333 367 279 250 252
Net property, plant and equipment...... 1,271 1,229 1,456 1,469 1,394
Total assets........................... 2,484 2,453 2,558 2,669 2,500
Current maturities of long term
obligations........................... 37 32 38 36 36
Long-term obligations.................. 286 311 470 502 671
Redeemable Preferred Stock--Series B... -- -- 64 65 67
Stockholders' equity................... 850 837 645 600 401
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Other Data:
Shipments (net tons, in thousands)..... 5,587 6,144 5,895 5,564 5,208
Raw steel production (net tons, in
thousands)............................ 6,087 6,527 6,557 6,081 5,763
Effective capacity utilization......... 92.2% 96.0% 93.7% 96.5% 96.1%
Number of employees (year end)......... 9,230 9,417 9,579 9,474 9,711
Capital investments.................... $ 171 $ 152 $ 129 $ 215 $ 138
Total debt and redeemable preferred
stock as a percent of total
capitalization........................ 27.5% 29.0% 47.0% 50.1% 65.9%
Common shares outstanding at year end
(in thousands)........................ 42,178 43,288 43,288 43,288 36,376
</TABLE>
22
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
National Steel Corporation (together with its majority owned subsidiaries,
the "Company") is a domestic manufacturer engaged in a single line of
business, the production and processing of steel. The Company targets high
value-added applications of flat rolled carbon steel for sale primarily to the
automotive, construction and container markets. The Company has two principal
divisions: The Granite City Division which is a fully integrated steelmaking
facility located near St. Louis; and The Regional Division comprised of Great
Lakes, a fully integrated steelmaking facility located near Detroit, and
Midwest, a steel finishing facility located near Chicago. These two divisions
have been aggregated for financial reporting purposes and represent the
Company's only reportable segment--Steel. (See Note 4. Segment Information for
further discussion.) The discussion and analysis which follows is on a
consolidated basis, but due to its significance, focuses primarily on factors
relating to the Steel segment.
General Overview
Comparative operating results for the three years ended December 31, are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
Dollars and tons in
millions
(except earnings per share
amounts)
<S> <C> <C> <C>
Net sales..................................... $2,848.0 $3,139.7 $2,954.0
Income from operations........................ 96.3 191.0 64.5
Net income.................................... 83.8 213.5 53.9
Basic earnings per share...................... 1.94 4.70 .99
Diluted earnings per share.................... 1.94 4.64 .99
Net tons shipped.............................. 5.587 6.144 5.895
</TABLE>
The Company's 1998 operating results are indicative of the challenges
encountered by the domestic steel industry this year. Steel shipments fell to
5.587 million net tons, 9.1% below the record set in 1997. This reduction in
steel shipments, along with a decrease in selling prices offset by an improved
product mix, resulted in a similar 9.3% decrease in our net sales and a
decrease in net income as compared to 1997. The primary factors contributing
to the decrease in tons shipped were (i) the Great Lakes "A" blast furnace
reline early in the year, (ii) high levels of low-priced imported steel, and
(iii) above normal steel inventory levels at service centers.
Income from operations and net income were positively affected by continuing
cost reduction efforts and an unusual credit of $26.6 million. Cost reductions
resulted primarily from improved yields and material usage and reduced
spending, particularly the emphasis on minimizing overtime. These efforts were
overshadowed by lower shipment and production levels along with increased
spending on Year 2000 remediation and professional services that negatively
impacted both income from operations and net income in 1998. The unusual
credit of $26.6 million related to the settlement of a lawsuit, which resulted
in refunds of property taxes associated with the 1991 through 1997 tax years.
Lower property tax assessment bases attributable to the settlement are
expected to result in future tax savings for Great Lakes.
The Company has experienced significant competition from low-priced foreign
imports in 1998 and is uncertain as to the effect such competition from
foreign imports may have on the Company's results of operations in 1999. The
final outcome of trade cases pending with the Department of Commerce and the
International Trade Commission are expected shortly on or before June 19,
1999. It is hoped that the outcome of these trade cases will have a positive
impact on the Company's shipments and pricing, although there can be no
assurances as to such favorable outcome. In the meantime, the Company
continues to emphasize increasing shipments of higher value-added products,
many of which do not compete directly with imports, as well as additional cost
reduction initiatives along with implementing customer-focused strategies that
are intended to enhance operating performance.
23
<PAGE>
Results of Operations
Net Sales
Net sales for 1998 decreased $291.7 million or 9.3% compared to record net
sales in 1997. A decrease in net tons shipped of 557,000 tons combined with a
net $1 per ton decrease in average selling price as compared to 1997 are the
primary reasons for the decrease in net sales. Increased competition from low-
priced imports is the primary cause of the decrease in net tons shipped and
the decrease in average selling price. The Great Lakes "A" blast furnace
outage also contributed to the reduction in net tons shipped.
Net sales for 1997 increased $185.7 million or 6.3%, and net tons shipped
increased 249,000 as compared to 1996. Higher shipment levels resulted in
approximately $122.0 million of higher sales in 1997 compared to 1996. Also
contributing to the sales increase in 1997, as compared to 1996, was higher
pricing as a result of improved market conditions which increased sales by
approximately $34.0 million and the impact of improved customer and product
mix which increased sales by approximately $66.0 million. Non-steel related
revenues fell by approximately $36.0 million in 1997 due to lower pellet
shipments and lower by-product sales.
Gross Margin
The table below compares gross margin, calculated as net sales less cost of
products sold and depreciation for the last three years.
<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Gross margin (dollars in millions)................ $222.1 $330.7 $191.5
Gross margin as a percentage of net sales......... 7.8% 10.5% 6.5%
</TABLE>
Gross margin in 1998 decreased $108.6 million as compared to 1997. The
decreases in shipments and average selling price and the Great Lakes "A" blast
furnace outage had a negative impact of approximately $183.0 million on gross
margin. This was partially offset by continued cost reductions, improved
operating unit yield performances, lower costs as a result of the 1997
settlement with Avatex Corporation, and lower depreciation expense which, in
the aggregate, positively impacted gross margin by approximately $75.0
million.
The improved gross margin level in 1997 as compared to 1996 was a result of
the net sales improvements discussed above, cost reductions, reduced
depreciation expense in 1997 and more stable operations in 1997 as compared to
1996. These cost improvements were partially offset by higher prices for coke
and zinc. In addition, insurance recoveries aggregating approximately $8.5
million were received in 1997, which positively impacted gross margin.
Depreciation expense was $129.2 million in 1998 as compared to $134.5
million and $144.4 million in 1997 and 1996, respectively. The lower levels of
depreciation in 1998 and 1997 principally resulted from the sale of the Great
Lakes No. 5 coke battery in the second quarter of 1997.
Selling, General and Administrative Expense
Selling, general and administrative expense comparative data for the last
three years is as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Selling, general and administrative expense
(dollars in millions)........................... $153.6 $141.3 $136.7
Selling, general and administrative expense, as a
percentage of net sales......................... 5.4% 4.5% 4.6%
</TABLE>
Selling, general and administrative expense increased by $12.3 million in
1998 as compared to 1997. Approximately $5.7 million of the increase was
attributable to Year 2000 remediation costs. The remainder of the increase was
primarily due to higher mainframe related costs, costs associated with the
implementation of
24
<PAGE>
Audit Committee recommendations relative to internal controls (see "Impact of
Recommendations from Audit Committee Inquiry" below), and other costs
associated with the Securities and Exchange Commission inquiry (see Note 2.
"Audit Committee Inquiry and Securities and Exchange Commission Inquiry").
Expense levels increased in 1997 as compared to 1996 as a result of the
expense associated with converting stock options to stock appreciation rights;
higher information systems costs, which are the result of preliminary systems
evaluations, engineering expenses and Year 2000 remediation costs; and higher
legal and professional fees primarily due to the Audit Committee inquiry.
These higher cost levels are partially offset by lower benefit related
expenses. In addition, 1996 expense levels were lower as a result of the
settlement of a lawsuit in 1996, the proceeds of which were recognized as an
offset to selling, general and administrative expenses.
Equity Income from Affiliates
Equity income from affiliates was $1.2 million in 1998 compared to $1.6
million in 1997 and $9.8 million in 1996. The lower income levels in 1998 and
1997 were primarily the result of the sale of the Company's minority equity
investment in Iron Ore Company of Canada ("IOC") early in the second quarter
of 1997.
Unusual Credit
The unusual credit in 1998 results from the settlement of a lawsuit which
sought a reduction in the assessed value of the Company's real and personal
property at Great Lakes relating to the 1991 through 1997 tax years. The
Company received tax refunds and was granted a lower assessment base that is
expected to result in future tax savings.
Net Financing Costs
Net financing costs for the last three years were as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------
1998 1997 1996
------ ------ -----
Dollars in millions
<S> <C> <C> <C>
Interest and other financial income............... $(15.8) $(19.2) $(7.1)
Interest and other financial expense.............. 26.7 33.8 43.3
------ ------ -----
Net Financing Costs............................. $ 10.9 $ 14.6 $36.2
====== ====== =====
</TABLE>
Net financing costs decreased in 1998 as compared to 1997 as a result of a
decrease in interest and other financial expense partially offset by lower
interest and other financial income. Interest expense decreased by $7.1
million primarily as a result of lower average debt balances during 1998 due
to the 1997 repayment of debt associated with the Great Lakes No. 5 coke
battery. Interest income decreased $3.4 million in 1998 as a result of lower
cash and cash equivalent balances available for investment.
The reduced cost levels in 1997 were the result of higher interest income of
$12.1 million due to higher average cash and cash equivalents, and investment
balances and lower interest costs of $9.5 million due to lower average debt
outstanding. The higher cash and cash equivalents, and investments and lower
debt balances were the result of the disposals of non-core assets, which were
completed in 1997, as well as positive cash flows from operations in 1997.
Net Gain on Disposal of Non-Core Assets and Other Related Activities
In 1998, 1997 and 1996, the Company disposed of, or made provisions for
disposing of, certain non-core assets. The effects of these transactions and
other activities relating to non-core assets are presented as a separate
component in the consolidated statements of income entitled "net gain on
disposal of non-core assets and other related activities." A discussion of
these items follows.
25
<PAGE>
During the second quarter of 1998, the Company sold two properties located
at Midwest. The Company received proceeds (net of taxes and expenses) of $3.3
million and recorded a net gain of $2.7 million related to the sales.
On April 1, 1997, the Company completed the sale of its 21.7% minority
equity interest in the IOC to North Limited, an Australian mining and metal
company ("North"). The Company received proceeds (net of taxes and expenses)
of $75.3 million from North in exchange for its interest in IOC and recorded a
$37.0 million gain. The Company continues to purchase iron ore at fair market
value from IOC pursuant to the terms of long-term supply agreements.
On June 12, 1997, the Company completed the sale of the Great Lakes No. 5
coke battery and other related assets, including coal inventories, to a
subsidiary of DTE Energy Company ("DTE"). The Company received proceeds (net
of taxes and expenses) of $234.0 million in connection with the sale and
recorded a $14.3 million loss. The Company utilized a portion of the proceeds
to prepay the remaining $154.3 million of the related party coke battery debt,
which resulted in a net of tax extraordinary loss of $5.4 million in 1997. As
part of the arrangement, the Company has agreed to operate the battery, under
an operation and maintenance agreement executed with DTE, and will purchase
the majority of the coke produced from the battery under a requirements
contract, with the price being adjusted during the term of the contract,
primarily to reflect changes in production costs.
In the second quarter of 1997, the Company also recorded a charge of $3.6
million related to the decision to cease operations of American Steel
Corporation, a wholly-owned subsidiary, which pickled and slit steel.
In 1997, the Company sold four coal properties and recorded a net gain of
$11.8 million. In conjunction with one of the property sales, the purchaser
agreed to assume the potential environmental liabilities and, as a result, the
Company eliminated the related accrual of approximately $8 million.
Additionally, during 1997, the Company received new information related to
closed coal properties' employee benefit liabilities and other expenses, and
reduced the related accrual by $19.8 million. In aggregate, the above coal
properties' transactions resulted in a gain of $39.6 million in 1997.
In September 1996, the Company sold a portion of the land that had been
received in conjunction with the settlement of a lawsuit and recorded a net
gain of $3.7 million.
Income Taxes (Credit)
During 1998, the Company recorded current taxes payable of $23.9 million. In
1997 and 1996, the Company recorded current taxes payable of $37.8 million and
$10.8 million, respectively. The current portion of the income tax represents
taxes which were expected to be due as a result of the filing of the current
period's tax returns and, for federal purposes, such amounts have generally
been determined based on alternative minimum tax payments due.
The current taxes payable represents 27.2% of pre-tax income in 1998.
Current taxes payable in 1997 and 1996 represented 16.1% and 33.6% of pre-tax
income, respectively. The current levels were less than the U.S. Statutory
Rate primarily because of the utilization of net operating loss carryforwards
and alternative minimum tax credits.
The Company recorded a deferred tax benefit of $19.6 million in the year
ended December 31, 1998 and $21.6 million in each of the years ended December
31, 1997 and 1996 due to the expectation of additional future taxable income.
An additional deferred tax benefit is expected to be recognized in 1999 as
continued realization of taxable income increases the likelihood of realizing
these deferred tax assets.
Extraordinary Item
An extraordinary loss of $5.4 million (net of a tax benefit of $1.4 million)
was reflected in 1997 income. This loss relates to early debt repayment costs
related to debt associated with the Company's Great Lakes No. 5 coke battery,
which was sold in the second quarter of 1997.
26
<PAGE>
Cumulative Effect of Accounting Change
The Company reflected in its 1996 income statement the cumulative effect of
an accounting change, which resulted from a change in the valuation date used
to measure pension and other postretirement employee benefits ("OPEBs")
obligations. The cumulative effect of this change was $11.1 million. The
valuation date to measure the obligations was changed from December 31 to
September 30 in order to provide more timely information with respect to
pension and OPEB provisions.
Other Operational and Financial Disclosure Matters
Impact of Recommendations From Audit Committee Inquiry
On January 21, 1998, the Board of Directors accepted the report and approved
the recommendation of the legal counsel to the Audit Committee for
improvements in the Company's system of internal controls, a restructuring of
its finance and accounting department, and the expansion of the role of the
internal audit function, as well as corrective measures to be taken related to
the specific causes of accounting errors (see Note 2. "Audit Committee Inquiry
and Securities and Exchange Commission Inquiry" for further discussion). The
Company is in the process of implementing these recommendations with the
involvement of the Audit Committee. In accordance with the recommendations, a
major independent accounting and consulting firm was engaged in early 1998 to
examine and report on the Company's written assertion about the effectiveness
of the internal control over financial reporting. Its report is expected to be
completed in March 1999.
Common Stock Repurchase Program
In the third quarter of 1998, the Board of Directors authorized the
repurchase of up to two million shares of its Class B Common Stock. During
1998, the Company repurchased 1,109,700 shares at a total cost of $8.4
million. The Company purchased an additional 272,500 shares through February
1, 1999 at a cost of $2.6 million.
Change in Assumptions for Pensions and Other Postretirement Employee Benefits
(OPEBs)
Consistent with the decrease in long-term interest rates in the United
States, at September 30, 1998, the Company decreased the discount rate used to
calculate the actuarial present value of its benefit obligations for pensions
and OPEBs by 75 basis points to 6.75% from the rate used at September 30,
1997. The actuarial present value of the Weirton Retirement Plan benefit
obligations continued to be measured at November 30, 1998, due to its
acquisition on November 30, 1997 (see Note 9. "Weirton Liabilities" for
further discussion) utilizing a 7.0% rate, a 50 basis point decrease from the
rate used in 1997.
The decrease in discount rate assumptions along with less than expected
investment returns resulted in increases of $88.3 million in the intangible
pension asset, $138.2 million in the minimum pension liability, and a
corresponding $49.9 million decrease to stockholders' equity. The assumption
changes, the addition of the overfunded Weirton Retirement Plan, and other
factors resulted in a decrease of $18.2 million in pension cost to $39.7
million for the year ended December 31, 1998. OPEB costs also decreased during
1998 by $1.4 million to $74.0 million. The decrease is due to the addition of
new HMOs and a favorable return on assets, partially offset by additional
costs related to the addition of the Weirton plans.
Environmental Liabilities
The Company's operations are subject to numerous laws and regulations
relating to the protection of human health and the environment. The Company
has expended, and can be expected to expend in the future, substantial amounts
for ongoing compliance with these laws and regulations, including, the Clean
Air Act, and the Resource Conservation and Recovery Act of 1976. Additionally,
the Comprehensive Environmental Response, Compensation and Liability Act of
1980 and similar state superfund statutes have imposed joint and several
liability on the Company as one of many potentially responsible parties at a
number of sites requiring
27
<PAGE>
remediation. During 1997, in connection with a settlement with Avatex, the
Company released Avatex from its obligation to indemnify the Company for
certain environmental liabilities of its former Weirton Steel Division.
With respect to those claims for which the Company has sufficient
information to reasonably estimate its future expenditures, the Company has
accrued $17.0 million at December 31, 1998. Since environmental laws are
becoming increasingly more stringent, the Company's expenditures and costs for
environmental compliance may increase in the future. As these matters progress
or the Company becomes aware of additional matters, the Company may be
required to accrue charges in excess of those previously accrued.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is required to be adopted
in years beginning after June 15, 1999. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in fair
value of derivatives will either be offset against the change in fair value of
hedged assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not yet determined what
the effect of this Statement will be on earnings and the financial position of
the Company.
The Company, as required, on December 31, 1998 adopted SFAS No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits. The
statement standardized disclosures about pensions and other post retirement
benefits in an effort to make the information more understandable.
Implementation of this disclosure standard did not affect the financial
position or results of operations of the Company. The disclosures for pensions
and OPEBs are now contained within Note 6. "Pension and Other Postretirement
Employee Benefits."
On December 31, 1998, as required, the Company also adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
Statement changes the way public companies are required to report operating
segment information in annual financial statements and in interim financial
reports to stockholders. Operating segments are determined consistent with the
way management organizes and evaluates financial information internally for
making decisions and assessing performance. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The disclosures required by the Statement are contained in Note 4.
"Segment Information."
During the first quarter of 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. Comprehensive income is defined as the change
in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. Consequently, the Company
has reported a portion of its changes in minimum pension liabilities as a
component of comprehensive income in the appropriate financial statements.
Effective January 1, 1998, the Company adopted Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use ("SOP 98-1"). SOP 98-1 provides authoritative guidance on when
internal-use software costs should be capitalized and when these costs should
be expensed as incurred. During 1998, approximately $19.2 million, mainly
relating to the development of a new order fulfillment system and new
accounting software, was capitalized in accordance with this guidance.
Labor Negotiations
In 1993, the Company and the United Steelworkers of America ("USWA")
negotiated a six year labor agreement continuing through July 1999, with a
reopener provision in 1996 for specified payroll items and
28
<PAGE>
employee benefits. Pursuant to the terms of the reopener, if the parties could
not reach a settlement, they were to submit final offers to an arbitrator who
would, after a hearing, consider the information and determine an award. On
October 30, 1996, the arbitrator handed down an award regarding the
arbitration of the reopener. The arbitrator's award is comparable to the
industry pattern for payroll and benefit items under collective bargaining
agreements between the USWA and other integrated steel producers. Pursuant to
the award, employees represented by the USWA received an immediate wage
increase of fifty cents per hour retroactive to August 1, 1996, with increases
of twenty-five cents per hour on August 1, 1997 and 1998. In addition, $500
lump sum bonuses were or will be paid to each eligible employee represented by
the USWA on May 1, 1998 and 1999. The Company has a similar labor agreement
with the International Chemical Workers Union Council of the United Food and
Commercial Workers.
The Company estimates that these items, along with certain other provisions
in the agreement, will increase employee related expenses by approximately $11
million for 1999. The Company's 1998 and 1997 labor costs increased by
approximately $16 million and $12 million, respectively, as a result of the
arbitrator's award.
The Company's ability to operate could be impacted by strike or work
stoppage if it is unable to negotiate a new agreement with its represented
employees when the existing agreement expires on July 31, 1999. The USWA's
labor agreements with certain other domestic integrated steel producers also
expire on July 31, 1999. There can be no assurances that work stoppages will
not occur in the future in connection with contract negotiations or otherwise,
or as to the financial impact of such a stoppage. A prolonged general work
stoppage would have a material adverse effect on the Company's results of
operations and financial condition. Also, the Company's profitability could be
adversely affected if increased costs associated with any future contract are
not recoverable through productivity improvements or price increases.
Year 2000 Issues
The "Year 2000" computer software problem is caused by programming practices
that were originally intended to conserve computer memory, thus providing date
fields with only two digits with the computer software logic applying the date
prefix "19." If not corrected, this error could cause computers to fail or
give erroneous results as the computer processes data before or during the
year 2000. This programming practice continued through the mid-1990's and may
affect not only mainframe, business and personal computers, but also any
device that has an embedded microprocessor, such as an elevator or fire alarm
system. All of the Company's locations and operating facilities are impacted.
In 1997, the Company established a Year 2000 Project team to coordinate and
oversee the Year 2000 remediation project. The team is supervised by an
executive steering committee, which meets regularly to monitor progress. In
addition, progress is monitored by the Board of Directors and the Audit
Committee through periodic reports from management. The project's scope
includes mainframe, business and personal computers, business software and
other information technology items, as well as non-information technology
items, such as process control software and embedded software in hardware
devices. The Company is also reviewing with its major vendors and suppliers
their efforts in becoming Year 2000 compliant. Most suppliers and vendors who
have replied thus far to the Company's inquiries have indicated that they
expect to be Year 2000 compliant on a timely basis. The Company continues to
assess and remediate its various systems, electronic commerce and business
associates, and intends to make whatever modifications are necessary to
prevent business interruption.
29
<PAGE>
Following is a table which shows the current status and expected substantial
completion dates for the major components of the Company's Year 2000 project:
<TABLE>
<CAPTION>
Estimated
Substantial
Description Completion
----------- ----------------
<S> <C>
General:
Development of a Year 2000 Project plan................. Complete
Review and report on Year 2000 Project plan by a major
independent accounting and consulting firm............. Complete
Mainframe:
Transition of data service center to Year 2000 compliant
provider............................................... Complete
Business critical applications--remediated, tested and
implemented............................................ Complete
Non-business critical applications--remediated, tested
and implemented........................................ 2nd quarter 1999
Non mainframe computer equipment:
Inventory and assessment of all non mainframe computer
equipment.............................................. Complete
Business computers at divisions--remediated, tested and
implemented............................................ 2nd quarter 1999
Process control computers and embedded devices--assessed
and remediated......................................... 2nd quarter 1999
Vendors, customers and others:
Vendor readiness evaluations prepared and mailed........ Complete
Review of responses and assessment of risk.............. Ongoing
Contingency plan:
Development and review of contingency plan.............. 2nd quarter 1999
</TABLE>
The Company's Year 2000 compliance effort is currently progressing according
to schedule. The remediation of the coding for the mission critical mainframe
based applications has been completed. These programs have been tested to
confirm that the remediation adequately corrected the problems, and they have
been returned to production. All other non-critical mainframe based
applications have been remediated and are currently being tested. When the
testing has been completed, they will be returned to operation. The mainframe
effort, overall, is progressing ahead of schedule. The inventory, assessment
and remediation of all non-mainframe hardware, business computers, process
control computers and embedded devices are proceeding according to schedule.
The Company has discovered some computer equipment that is not Year 2000
compliant and has made arrangements to replace such equipment. An inventory of
all desktop computer equipment, such as personal computers and printers, has
been completed and efforts are underway to remediate or replace the defective
components.
The Company expects to incur total costs of approximately $19.9 million to
address all of its Year 2000 issues. This total consists of: (i) approximately
$10.0 million to remediate mainframe business systems; (ii) approximately $4.7
million to remediate business computers at the divisions and other non-
mainframe desk-top equipment; (iii) approximately $1.9 million to remediate
process control computers and embedded devices; (iv) approximately $1.4
million for accelerated replacement of software which is not Year 2000
compliant; (v) approximately $1.4 million for internal employment cost of
information system employees; and (vi) approximately $0.5 million for other
related administrative costs. Of this total, the Company spent approximately
$7.5 million and $1.8 million during 1998 and 1997, respectively. These cost
estimates do not include any costs that may be incurred by the Company as a
result of the failure of any supplier or customer of the Company, or any other
party with whom the Company does business, to become Year 2000 compliant. Year
2000 costs have been incurred as operating expenses from the Company's
information technology budget. The Company has not deferred any other
information technology projects as a result of its Year 2000 efforts.
30
<PAGE>
Thus far, the Company's Year 2000 efforts have focused on (i) the assessment
and remediation of information technology and non-information technology items
and (ii) the evaluation of the Year 2000 compliance status of key suppliers,
customers and other parties with whom the Company does business. The
information obtained by the Company from these activities is being used by the
Company to determine the most reasonably likely worst case scenarios which
could result from a failure by the Company or third parties to become Year
2000 compliant. The Company has also established teams that will produce
contingency plans for handling these worst case scenarios. The Company intends
to make these determinations and create any necessary contingency plans by the
end of the second quarter of 1999.
Based upon the information currently available to it, the Company believes
that the implementation of its Year 2000 Project Plan will adequately resolve
the Company's Year 2000 issues. However, since it is not possible to
anticipate all possible future outcomes, there could be circumstances under
which the Company's business operations are disrupted as a result of Year 2000
problems. These disruptions could be caused by (i) the failure of the
Company's systems or equipment to operate as a result of Year 2000 problems,
(ii) the failure of the Company's suppliers to provide the Company with raw
materials, utilities, supplies or other products or services which are
necessary to sustain the Company's manufacturing processes or other business
operations, or (iii) the failure of the Company's customers to accept delivery
of the Company's products as a result of their Year 2000 problems. Any such
disruption to the Company's business operations could have a material adverse
effect on the financial condition and results of operations of the Company.
Statements contained herein regarding the estimated costs and time to
complete the Company's Year 2000 projects, and the potential effects of Year
2000 problems, are "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. A variety of factors could
cause the actual costs, time for completion and effects to differ from those
which are currently expected. These factors include, but are not limited to,
the following: (i) the failure of the Company to accurately identify all
software and hardware devices which are not Year 2000 compliant; (ii) the
failure of the remediation actions identified by the Company to adequately
correct the Year 2000 problems; (iii) the failure of the Company's customers
or suppliers and other third parties with whom the Company does business to
achieve Year 2000 compliance; (iv) the inability of the Company to find
sufficient outside resources to assist the Company in its Year 2000
remediation activities; and (v) increases in costs and fees charged by third
parties retained by the Company to assist in the Company's Year 2000
remediation activities.
Discussion of Liquidity and Sources of Capital
Overview
The Company's liquidity needs arise primarily from capital investments,
working capital requirements, pension funding requirements, principal and
interest payments on its indebtedness, common stock dividend payments and
stock repurchase programs. The Company has satisfied these liquidity needs
with funds provided by long-term borrowings and cash provided by operations.
Additional sources of liquidity consist of a Receivables Purchase Agreement
(the "Receivables Facility") with commitments of up to $200.0 million which
has an expiration date of September 2002, and a $100.0 million credit facility
and a $50.0 million credit facility, both of which are secured by the
Company's inventories (the "Inventory Facilities") and expire in May 2000 and
July 1999, respectively. All of the lenders under the Company's Inventory
Facilities and a majority of the lenders under the Receivables Facility are
Japanese financial institutions. At December 31, 1998, the Company had total
liquidity, which includes cash balances plus available borrowing capacity
under these facilities, of $395.3 million. In addition, the Company has the
ability to issue additional debt of approximately $290 million under its
Indenture of Mortgage and Deed of Trust securing the First Mortgage Bonds.
The Company is currently in compliance with all covenants of, and
obligations under, the Receivables Facility, the Inventory Facilities and
other debt instruments. On December 31, 1998, there were no cash borrowings
outstanding under the Receivables Facility or the Inventory Facilities, and
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<PAGE>
outstanding letters of credit under the Receivables Facility totaled $79.3
million. For 1998, the maximum availability under the Receivables Facility,
after reduction for letters of credit outstanding, varied from $76.3 million
to $120.7 million and was $107.4 million as of December 31, 1998.
At December 31, 1998, total debt as a percentage of total capitalization
decreased to 27.5% as compared to 29.0% at December 31, 1997. Cash and cash
equivalents, and investments totaled $137.9 million and $337.6 million as of
December 31, 1998 and 1997, respectively. At December 31, 1998, obligations
guaranteed by the Company approximated $19.1 million, compared to $21.7
million at December 31, 1997.
Cash Flows from Operating Activities
For 1998, cash provided from operating activities totaled $31.7 million, a
decrease of $300.5 million compared to 1997. This decrease was primarily
attributable to the $129.7 million decrease in net income as well as a higher
cash usage to fund working capital needs, primarily relating to inventories
and the timing of pension contributions.
For 1997, cash provided from operating activities totaled $332.2 million, an
increase of $173.3 million compared to 1996. This increase was primarily
attributable to the $159.6 million increase in net income as well as a lower
cash usage to fund working capital needs.
Capital Investments
Capital investments for the years ended December 31, 1998 and 1997 amounted
to $171.1 million and $151.8 million, respectively. The 1998 spending was
primarily attributable to the new hot dip galvanizing facility at Great Lakes,
the blast furnace reline at Great Lakes, construction of the new coating line
at Midwest, and new business systems. The 1997 spending was primarily related
to the 72-inch continuous galvanizing line upgrade and construction of the new
coating line, both at Midwest.
Capital investments are expected to approximate $300 million in 1999, of
which approximately $130 million was committed at December 31, 1998. Included
among the budgeted and committed capital investments is the new hot dip
galvanizing facility. Other capital investments include new business systems
and blast furnace relines at both Great Lakes and the Granite City Division.
It is expected that capital investments will be in excess of historical levels
for the next few years.
Cash Proceeds from the Sale of Non-Core Assets
During the second quarter of 1998, the Company sold certain non-core land
and property at Midwest. The Company received proceeds (net of taxes and
expenses) of $3.3 million and recorded a net gain of $2.7 million related to
the sale.
During the second quarter of 1997, the Company sold its Great Lakes No. 5
coke battery, as well as its minority equity investment in the IOC. The sale
of these two assets generated net proceeds of $309.3 million. Additionally, in
1997, certain coal properties were sold generating net proceeds of $11.3
million.
A portion of the proceeds from these sales was used in the fourth quarter of
1997 when the Company redeemed all of the outstanding Redeemable Preferred
Stock--Series B owned by Avatex. Concurrent with the stock repurchase, the
Company and Avatex settled Avatex's obligation relating to certain Weirton
liabilities as to which Avatex had agreed to indemnify the Company in prior
recapitalization programs. Avatex had pre-funded certain of these
indemnification obligations and, at the time of the pre-funding, the Company
and Avatex agreed that a settlement of the liabilities would occur no later
than in the year 2000. The redemption of the preferred stock and the related
settlement resulted in the Company paying Avatex $59.0 million in the fourth
quarter of 1997 and an additional $10.0 million in 1998. Additionally in the
fourth quarter of 1997, the Company
32
<PAGE>
recognized insurance proceeds (net of taxes and expenses) aggregating
approximately $13.6 million relating to certain environmental sites, some of
which had been indemnified by Avatex and for which the Company is now solely
responsible.
On December 29, 1997, the Company also redeemed the Preferred Stock--Series
A, which was owned by NKK U.S.A. Corporation. The Company paid NKK U.S.A.
Corporation the face value of the stock ($36.7 million) plus accrued dividends
as of the redemption date of approximately $0.6 million.
Cash Flows Utilized in Financing Activities
During 1998, the Company utilized $40.1 million for financing activities,
which included scheduled repayments of debt, as well as dividend payments on
the Company's common stock. The Company repurchased 1,109,700 shares of its
Class B Common Stock in 1998 at a cost of $8.4 million and plans to repurchase
up to an additional 890,300 shares in 1999. In addition, the Company recorded
borrowings of approximately $14.7 million related to the ProCoil joint
venture.
During 1997, the Company utilized $297.1 million for financing activities.
These included the $154.3 million prepayment of related party debt associated
with the sale of the Great Lakes No. 5 coke battery and $4.5 million of costs
associated with the prepayment of the aforementioned debt. Also included was
the $83.8 million for the redemption of the Preferred Stock--Series A and B
(net of the $13.6 million of insurance proceeds recognized by the Company).
Other areas of cash utilization for financing activities included scheduled
payments of debt, as well as dividend payments on the Company's preferred
stock.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, operations of the Company are exposed to
continuing fluctuations in commodity prices, foreign currency values, and
interest rates that can affect the cost of operating, investing, and
financing. Accordingly, the Company addresses a portion of these risks,
primarily commodity price risk, through a controlled program of risk
management that includes the use of derivative financial instruments. The
Company's objective is to reduce earnings volatility associated with these
fluctuations to allow management to focus on core business issues. The
Company's derivative activities, all of which are for purposes other than
trading, are initiated within the guidelines of a documented corporate risk-
management policy. The Company does not enter into any derivative transactions
for speculative purposes.
Interest Rate Risk
The Company's primary interest rate risk exposure results from changes in
long-term U.S. dollar interest rates. In an effort to manage interest rate
exposures, the Company predominantly enters into fixed rate debt positions. As
such, the fair value of the Company's debt positions is moderately sensitive
to changes in interest rates. A sensitivity analysis has been prepared to
estimate the Company's exposure to market risk of its fixed rate debt
positions. The fair value is calculated by valuing those positions at quoted
market interest rates. Market risk is then estimated at the potential loss in
fair value resulting from a hypothetical 10% adverse change in such rates. The
results of this analysis, which may differ from actual results, are as
follows:
<TABLE>
<CAPTION>
Fair
Value Market Risk
-------- -----------
Dollars in thousands
<S> <C> <C>
1998:
Long-term debt position, excluding capitalized lease
obligations (Average interest rate of 8.6%)........ $302,085 $6,631
</TABLE>
Commodity Price Risk
In order to reduce the uncertainty of price movements with respect to the
purchase of zinc, the Company enters into derivative financial instruments in
the form of swap contracts and zero cost collars with a major global financial
institution. These contracts typically mature within one year. At expiration,
the derivative contracts are
33
<PAGE>
settled at a net amount equal to the difference between the then current price
of zinc and the fixed contract price. While these hedging instruments are
subject to fluctuations in value, such fluctuations are generally offset by
changes in the value of the underlying exposures being hedged.
Based on the Company's overall commodity hedge exposure at December 31,
1998, a hypothetical 10 percent change in market rates applied to the fair
value of the instruments, would have no material impact on the Company's
earnings, cash flows, financial position, or fair values of commodity price
risk sensitive instruments over a one-year period.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and financial statement
schedule of the Company are submitted pursuant to the requirements of Item 8:
National Steel Corporation and Subsidiaries
Index to Financial Statements, Supplementary Data and Financial Statement
Schedule
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management's Responsibility for Financial Statements................ 35
Report of Ernst & Young LLP Independent Auditors.................... 36
Consolidated Statements of Income--Years Ended December 31, 1998,
1997 and 1996...................................................... 37
Consolidated Balance Sheets--December 31, 1998 and 1997............. 38
Consolidated Statements of Cash Flows--Years Ended December 31,
1998, 1997 and 1996................................................ 39
Consolidated Statements of Changes in Stockholders' Equity and
Redeemable Preferred Stock--Series B--Years Ended December 31,
1998, 1997 and 1996................................................ 40
Notes to Consolidated Financial Statements.......................... 41
Schedule II--Valuation and Qualifying Accounts...................... 62
</TABLE>
34
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation, integrity and fair
presentation of the consolidated financial statements and related notes. The
financial statements, presented on pages 37 to 61, have been prepared in
conformity with generally accepted accounting principles and include amounts
based upon our estimates and judgments, as required. Management also prepared
the other information included in the Form 10-K and is responsible for its
accuracy and consistency with the financial statements. The financial
statements have been audited in accordance with generally accepted auditing
standards and reported upon by our independent auditors, Ernst & Young LLP,
who were given free access to all financial records and related data,
including minutes of the meetings of the Board of Directors and committees of
the Board. We believe the representations made to the independent auditors
during the audit were valid and appropriate. Ernst & Young LLP's audit report
is presented on page 36.
National Steel Corporation maintains a system of internal accounting control
designed to provide reasonable assurance for the safeguarding of assets and
reliability of financial records. The system is subject to review through its
internal audit function, which monitors and reports on the adequacy of and
compliance with the internal control system and appropriate action is taken to
address control deficiencies and other opportunities for improving the system
as they are identified. Although no cost effective internal control system
will preclude all errors and irregularities, management believes that through
the careful selection, training and development of employees, the division of
responsibilities and the application of formal policies and procedures,
National Steel Corporation has an effective and responsive system of internal
accounting control.
The Audit Committee of the Board of Directors, which is composed solely of
non-employee directors, provides oversight to the financial reporting process
through periodic meetings. The Audit Committee is responsible for recommending
to the Board of Directors, subject to approval by the Board and ratification
by stockholders, the independent auditors to perform audit and related work
for the Company, for reviewing with the independent auditors the scope of
their audit of the Company's financial statements, for reviewing with the
Company's internal auditors the scope of the plan of audit, for meeting with
the independent auditors and the Company's internal auditors to review the
results of their audits and the Company's internal accounting control, and for
reviewing other professional services being performed for the Company by the
independent auditors. Both the independent auditors and the Company's internal
auditors have free access to the Audit Committee.
Management believes the system of internal accounting control provides
reasonable assurance that business activities are conducted in a manner
consistent with the Company's high standards of business conduct, and the
Company's financial accounting system contains the integrity and objectivity
necessary to maintain accountability for assets and to prepare National Steel
Corporation's financial statements in accordance with generally accepted
accounting principles.
/s/ Yutaka Tanaka
-------------------------------------
Yutaka Tanaka
Chairman & Chief Executive Officer
/s/ John A. Maczuzak
-------------------------------------
John A. Maczuzak
President & Chief Operating Officer
/s/ Glenn H. Gage
-------------------------------------
Glenn H. Gage
Senior Vice President & Chief
Financial Officer
35
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Board of Directors
National Steel Corporation
We have audited the accompanying consolidated balance sheets of National
Steel Corporation and subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, cash flows, and
changes in stockholders' equity and redeemable preferred stock--Series B for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company
at December 31, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 10 to the consolidated financial statements, in 1996
the Company changed the measurement date that is used in accounting for
pensions and postretirement benefits other than pensions.
/s/ Ernst & Young LLP
Indianapolis, Indiana
January 28, 1999
36
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in Thousands,
Except Per Share Amounts)
<S> <C> <C> <C>
Net Sales.................................. $2,848,044 $3,139,659 $2,954,033
Cost of products sold.................... 2,496,786 2,674,444 2,618,151
Selling, general and administrative
expense................................. 153,635 141,252 136,731
Depreciation............................. 129,201 134,546 144,413
Equity income of affiliates.............. (1,240) (1,576) (9,763)
Unusual credit........................... (26,595) -- --
---------- ---------- ----------
Income from Operations..................... 96,257 190,993 64,501
Other (income) expense
Interest and other financial income...... (15,787) (19,198) (7,103)
Interest and other financial expense..... 26,672 33,805 43,352
Net gain on disposal of non-core assets
and other related activities............ (2,685) (58,745) (3,732)
---------- ---------- ----------
Income before Income Taxes, Extraordinary
Item and Cumulative Effect of Accounting
Change.................................... 88,057 235,131 31,984
Income taxes (credit).................... 4,299 16,231 (10,840)
---------- ---------- ----------
Income before Extraordinary Item and
Cumulative Effect of Accounting Change.... 83,758 218,900 42,824
Extraordinary item....................... -- (5,397) --
Cumulative effect of accounting change... -- -- 11,100
---------- ---------- ----------
Net Income................................. 83,758 213,503 53,924
Less preferred stock dividends........... -- 10,252 10,959
---------- ---------- ----------
Net Income Applicable to Common Stock...... $ 83,758 $ 203,251 $ 42,965
========== ========== ==========
Basic Earnings Per Share:
Income before Extraordinary Item and
Cumulative Effect of Accounting Change.. $ 1.94 $ 4.82 $ .74
Extraordinary item....................... -- (.12) --
Cumulative effect of accounting change... -- -- .25
---------- ---------- ----------
Net Income Applicable to Common Stock...... $ 1.94 $ 4.70 $ .99
========== ========== ==========
Diluted Earnings Per Share:
Income before Extraordinary Item and
Cumulative Effect of Accounting Change.. $ 1.94 $ 4.76 $ .74
Extraordinary item....................... -- (.12) --
Cumulative effect of accounting change... -- -- .25
---------- ---------- ----------
Net Income Applicable to Common Stock...... $ 1.94 $ 4.64 $ .99
========== ========== ==========
Weighted average shares outstanding (in
thousands)................................ 43,202 43,288 43,288
Dividends paid per common share............ $ 0.28 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
(Dollars in
Thousands, Except Per
Share Amounts)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................ $ 137,895 $ 312,642
Investments.......................................... -- 25,000
Receivables, less allowances (1998--$16,899; 1997--
$17,644)............................................ 245,840 284,306
Inventories.......................................... 472,834 374,202
Deferred tax assets.................................. 23,306 8,597
---------- ----------
Total current assets............................... 879,875 1,004,747
Investments in affiliated companies.................... 19,449 15,709
Property, plant and equipment
Land and land improvements........................... 187,087 190,859
Buildings............................................ 310,141 301,058
Machinery and equipment.............................. 2,978,337 2,886,214
---------- ----------
Total property, plant and equipment................ 3,475,565 3,378,131
Less accumulated depreciation........................ 2,205,025 2,149,107
---------- ----------
Net property, plant and equipment...................... 1,270,540 1,229,024
Deferred tax assets.................................... 179,294 164,503
Intangible pension asset............................... 89,497 1,149
Other assets........................................... 45,320 38,327
---------- ----------
$2,483,975 $2,453,459
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable..................................... $ 242,123 $ 246,085
Salaries and wages................................... 66,368 90,604
Withheld and accrued taxes........................... 62,906 70,608
Pension and other employee benefits.................. 71,234 141,350
Other accrued liabilities............................ 44,369 50,680
Income taxes......................................... 22,580 6,507
Current portion of long-term obligations............. 37,203 31,533
---------- ----------
Total current liabilities.......................... 546,783 637,367
Long-term obligations.................................. 285,767 310,976
Long-term pension liabilities.......................... 269,099 162,234
Postretirement benefits other than pensions............ 398,074 354,604
Other long-term liabilities............................ 133,951 151,300
Commitments and contingencies
Stockholders' equity
Common Stock par value $.01:
Class A--authorized 30,000,000 shares; issued and
outstanding 22,100,000 shares in 1998 and 1997.... 221 221
Class B--authorized 65,000,000 shares; issued
21,188,240 shares in 1998 and 1997................ 212 212
Additional paid-in capital........................... 491,835 491,835
Retained earnings.................................... 417,528 345,876
Treasury stock, at cost; 1,109,700 shares in 1998.... (8,421) --
Accumulated other comprehensive income:
Minimum pension liability.......................... (51,074) (1,166)
---------- ----------
Total stockholders' equity......................... 850,301 836,978
---------- ----------
$2,483,975 $2,453,459
========== ==========
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income..................................... $ 83,758 $213,503 $ 53,924
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................. 129,201 134,546 144,413
Carrying charges related to facility sales
and plant closings.......................... 3,874 19,322 22,385
Net gain on disposal of non-core assets...... (2,685) (58,745) (3,732)
Equity income of affiliates.................. (1,240) (1,576) (9,763)
Dividends from affiliates.................... 1,800 6,808 4,375
Long-term pension liability (net of change in
intangible pension asset)................... (31,692) (79,717) 18,430
Postretirement benefits...................... 26,470 19,028 29,459
Extraordinary item........................... -- 5,397 --
Cumulative effect of accounting change....... -- -- (11,100)
Deferred income taxes........................ (19,628) (21,600) (21,600)
Changes in working capital items:
Investments.................................. 25,000 (25,000) --
Receivables.................................. 38,466 4,757 34,773
Inventories.................................. (98,632) 56,365 (27,192)
Accounts payable............................. (3,962) 942 (20,682)
Accrued liabilities.......................... (102,164) 74,166 (38,209)
Other non-current assets....................... (12,903) 23,602 2,088
Other long-term liabilities.................... (3,923) (39,592) (18,664)
-------- -------- --------
Net Cash Provided by Operating Activities........ 31,740 332,206 158,905
Cash Flows from Investing Activities
Purchases of property, plant and equipment..... (171,071) (151,773) (128,621)
Net proceeds from sale of assets............... 1,372 -- 4,118
Net proceeds from disposal of non-core assets.. 3,278 320,602 3,732
Other.......................................... -- (362) --
-------- -------- --------
Net Cash Provided by (Used in) Investing
Activities...................................... (166,421) 168,467 (120,771)
Cash Flows from Financing Activities
Redemption of Preferred Stock--Series A........ -- (36,650) --
Redemption of Preferred Stock--Series B and
related settlement with Avatex................ -- (47,148) --
Repurchase of Class B common stock............. (8,421) -- --
Prepayment of related party debt............... -- (154,328) --
Cost associated with prepayment of related
party debt.................................... -- (4,500) --
Debt repayments................................ (34,232) (35,041) (35,750)
Borrowings..................................... 14,693 3,959 6,500
Payment of released Weirton benefit
liabilities................................... -- (12,119) (15,360)
Payment of unreleased Weirton liabilities and
their release in lieu of cash dividends on
Redeemable Preferred Stock--Series B -- (7,037) (8,066)
Dividend payments on common stock.............. (12,106) -- --
Dividend payments on Preferred Stock--Series A. -- (3,998) (4,033)
Dividend payments on Redeemable Preferred
Stock--Series B............................... -- (210) --
-------- -------- --------
Net Cash Used in Financing Activities............ (40,066) (297,072) (56,709)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... (174,747) 203,601 (18,575)
Cash and cash equivalents at beginning of the
year............................................ 312,642 109,041 127,616
-------- -------- --------
Cash and cash equivalents at end of the year..... $137,895 $312,642 $109,041
======== ======== ========
Supplemental Cash Payment Information
Interest and other financing costs paid........ $ 27,653 $ 38,882 $ 44,459
Income taxes paid.............................. 17,183 45,177 16,525
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK--SERIES B
<TABLE>
<CAPTION>
Accumulated Redeemable
Common Common Preferred Additional Other Total Preferred
Stock-- Stock-- Stock-- Paid-In Retained Treasury Comprehensive Stockholders' Stock--
Class A Class B Series A Capital Earnings Stock Income Equity Series B
------- ------- --------- ---------- -------- -------- ------------- ------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996.................. $221 $212 $36,650 $465,359 $ 99,660 $ -- $ (1,767) $600,335 $65,030
Comprehensive income:
Net income............ 53,924 53,924
Other comprehensive
income:
Minimum pension
liability............ 1,262 1,262
--------
Comprehensive income.. 55,186
--------
Amortization of excess
of book value over
redemption value of
Redeemable Preferred
Stock--Series B....... 1,500 1,500 (1,500)
Cumulative dividends on
Preferred Stock--
Series A and B........ (12,459) (12,459)
--------------------------------------------------------------------------------------------
Balance at December 31,
1996.................. 221 212 36,650 465,359 142,625 -- (505) 644,562 63,530
Comprehensive income:
Net income............ 213,503 213,503
Other comprehensive
income:
Minimum pension
liability............ (661) (661)
--------
Comprehensive income.. 212,842
--------
Amortization of excess
of book value over
redemption value of
Redeemable Preferred
Stock--Series B....... 1,354 1,354 (1,354)
Cumulative dividends on
Preferred Stock--
Series A and B........ (11,606) (11,606)
Redemption of Preferred
Stock--Series A....... (36,650) (36,650)
Redemption of
Redeemable Preferred
Stock--Series B and
related settlement
with Avatex........... 26,476 26,476 (62,176)
--------------------------------------------------------------------------------------------
Balance at December 31,
1997.................. 221 212 -- 491,835 345,876 -- (1,166) 836,978 --
Comprehensive income:
Net income............ 83,758 83,758
Other comprehensive
income:
Minimum pension
liability............ (49,908) (49,908)
--------
Comprehensive income.. 33,850
--------
Dividends on common
stock................. (12,106) (12,106)
Purchase of 1,109,700
shares of Class B
common stock.......... (8,421) (8,421)
--------------------------------------------------------------------------------------------
Balance at December 31,
1998.................. $221 $212 $ -- $491,835 $417,528 $(8,421) $(51,074) $850,301 $ --
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1. Description of the Business and Significant Accounting Policies
National Steel Corporation (together with its majority owned subsidiaries,
the "Company") is a domestic manufacturer engaged in a single line of
business, the production and processing of steel. The Company targets high
value-added applications of flat rolled carbon steel for sale primarily to the
automotive, construction and container markets. The Company also sells hot and
cold rolled steel to a wide variety of other users including the pipe and tube
industry and independent steel service centers. The Company's principal
markets are located throughout the United States.
Since 1986, the Company has had cooperative labor agreements with the United
Steelworkers of America (the "USWA"), the International Chemical Workers Union
Council of the United Food and Commercial Workers and other labor
organizations, which collectively represent approximately 82% of the Company's
employees. The Company entered into a six-year agreement with these labor
organizations in 1993 (the "1993 Settlement Agreement"). Additionally, the
1993 Settlement Agreement contains a no-strike clause also effective through
July 31, 1999. Scheduled negotiations reopened in 1996, and were ultimately
resolved utilizing the arbitration provisions provided for in the 1993
Settlement Agreement without any disruption to operations. The 1993 Settlement
Agreement provided that an individual designated by the International
President of the United Steelworkers of America would be elected to the
Company's Board of Directors. In 1999, the Company will bargain with the USWA
and other labor organizations to replace the agreements expiring between July
31, 1999 and December 31, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of National Steel
Corporation and its majority-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Substantially all revenue is recognized when products are shipped to
customers.
Cash Equivalents
Cash equivalents are short-term liquid investments consisting principally of
time deposits and commercial paper at cost which approximates market.
Generally, these investments have maturities of three months or less at the
time of purchase.
Credit Risk
Concentration of credit risk related to trade receivables is limited due to
the large numbers of customers in differing industries and geographic areas
and management's credit practices.
Investments
Investments consist of a time deposit at cost which had a maturity greater
than three months at the time of purchase.
41
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Risk Management Contracts
In the normal course of business, the Company enters into certain derivative
financial instruments, primarily commodity purchase swap contracts and zero
cost collars, to manage its exposure to fluctuations in commodity prices. The
Company designates the financial instruments as hedges for specific
anticipated transactions. Gains and losses from hedges are classified in the
consolidated statement of income in cost of goods sold when the contracts are
closed. Cash flows from hedges are classified in the consolidated statement of
cash flows under the same category as the cash flows from the related
anticipated transaction. The Company does not enter into any derivative
transactions for speculative purposes. (See Note 14. Risk Management
Contracts.)
Inventories
Inventories are stated at the lower of last-in, first-out ("LIFO") cost or
market.
Based on replacement cost, inventories would have been approximately $178.2
million and $183.9 million higher than reported at December 31, 1998 and 1997,
respectively. In 1998 there were no liquidations of LIFO inventory values.
During 1997 and 1996, certain inventory quantity reductions caused
liquidations of LIFO inventory values. These liquidations did not have a
material effect on net income.
The Company's inventories as of December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
Dollars in
thousands
<S> <C> <C>
Inventories
Finished and semi-finished................................ $421,662 $358,486
Raw materials and supplies................................ 197,192 154,056
-------- --------
618,854 512,542
Less LIFO reserve......................................... 146,020 138,340
-------- --------
$472,834 $374,202
======== ========
</TABLE>
Investments in Affiliated Companies
Investments in affiliated companies (corporate joint ventures and 20.0% to
50.0% owned companies) are stated at cost plus equity in undistributed
earnings since acquisition. Undistributed deficit of affiliated companies
included in retained earnings at December 31, 1998 and 1997 amounted to $1.9
million and $1.1 million, respectively. (See Note 10. Non-Operational Income
Statement Activities.)
In May 1997, the Company completed the acquisition of an additional 12% of
the equity in ProCoil Corporation ("ProCoil") for approximately $0.4 million.
This brings the Company's total ownership to 56% as of December 31, 1997.
ProCoil's financial position and results of operations have been included in
the consolidated financial statements from the date of this acquisition.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and include certain
expenditures for leased facilities. Interest costs applicable to facilities
under construction are capitalized. Capitalized interest amounted to $3.8
million in 1998, $5.3 million in 1997 and $4.0 million in 1996. Depreciation
of capitalized interest amounted to $3.6 million in 1998, $4.5 million in 1997
and $5.5 million in 1996.
42
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation
Depreciation of production facilities and capitalized lease obligations are
generally computed by the straight-line method over their estimated useful
life or, if applicable, remaining lease term, if shorter. The following useful
lives are used for financial statement purposes:
<TABLE>
<S> <C> <C> <C>
Land improvements.............. 10 - 20 years
Buildings...................... 15 - 40 years
Machinery and equipment........ 3 - 15 years
</TABLE>
Depreciation of furnace relinings are computed on the basis of tonnage
produced in relation to estimated total production to be obtained from such
facilities.
Research and Development
Research and development costs are expensed when incurred as a component of
cost of products sold. Expenses for 1998, 1997 and 1996 were $11.0 million,
$10.9 million and $11.1 million, respectively.
Financial Instruments
Financial instruments consist of cash and cash equivalents and long-term
obligations (excluding capitalized lease obligations). The fair value of cash
and cash equivalents approximates their carrying amounts at December 31, 1998.
The carrying value of long-term obligations (excluding capitalized lease
obligations) exceeded the fair value by approximately $4.3 million at December
31, 1998. The fair value is estimated using discounted cash flows based on
current interest rates for similar issues.
Earnings per Share (Basic and Diluted)
Basic Earnings per Share ("EPS") is computed by dividing net income
available to common stockholders by the weighted average number of common
stock shares outstanding during the year. Diluted EPS is computed by dividing
net income available to common stockholders by the weighted-average number of
common stock shares outstanding during the year plus potential dilutive
instruments such as stock options. The effect of stock options on diluted EPS
is determined through the application of the treasury stock method, whereby
proceeds received by the Company based on assumed exercises are hypothetically
used to repurchase the Company's common stock at the average market price
during the period.
The calculation of the dilutive effect of stock options on the weighted
average shares is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
Shares in thousands
<S> <C> <C> <C>
Denominator for basic earnings per share--
weighted-average shares..................... 43,202 43,288 43,288
Effect of stock options...................... 69 485 6
------- ------- -------
Denominator for diluted earnings per share... 43,271 43,773 43,294
======= ======= =======
</TABLE>
Options to purchase common stock of 429,967 shares in 1998, 194,000 shares
in 1997 and 1,154,235 shares in 1996 were outstanding, but were excluded from
the computation of diluted earnings per share because the exercise prices were
greater than the average market price of the common shares during those years.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee stock options. Under
43
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
APB 25, because the exercise price of employee stock options equals or exceeds
the market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). (See Note 15. Long-Term Incentive
Plan.)
Use of Estimates
Preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and
expense during the year. Actual results could differ from those estimates.
Reclassifications
Certain amounts in prior years consolidated financial statements have been
reclassified to conform with the current year presentation.
Impact of Recently Issued Accounting Standards
During the first quarter of 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income ("SFAS 130"). Comprehensive income is defined
as the change in equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. Consequently, the Company
has reported its changes in minimum pension liabilities, as required by SFAS
130, as comprehensive income in the appropriate consolidated financial
statements presented herein.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
authoritative guidance on when internal-use software costs should be
capitalized and when these costs should be expensed as incurred. Effective
January 1, 1998, the Company adopted SOP 98-1. During 1998, the Company
capitalized $19.2 million of such costs in accordance with this guidance.
Effective December 31, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131
superseded SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 did not affect
results of operations or financial position, but did affect the disclosure for
segment information. (See Note 4. Segment Information.)
Effective December 31, 1998, the Company adopted the provisions of SFAS No.
132, Employers' Disclosures about Pensions and Other Postretirement Benefits
("SFAS 132"). SFAS 132 supersedes the disclosure requirements in SFAS No. 87,
Employers' Accounting for Pensions, and SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. The overall objective of SFAS
132 is to improve and standardize disclosures about pensions and other
postretirement benefits and to make the required information more
understandable. The adoption of SFAS 132 did not affect results of operations
or financial position, but did affect the disclosures for pensions and other
postretirement benefits. (See Note 6. Pensions and Other Postretirement
Benefits.)
44
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 1999. SFAS
133 will require the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. The Company
has not yet determined what the effect of SFAS 133 will be on earnings and the
financial position of the Company.
Note 2. Audit Committee Inquiry and Securities and Exchange Commission Inquiry
In the third quarter of 1997, the Audit Committee of the Company's Board of
Directors was informed of allegations about managed earnings, including excess
reserves and the accretion of such reserves to income over multiple periods,
as well as allegations about deficiencies in the Company's system of internal
controls. The Audit Committee engaged legal counsel who, with the assistance
of an accounting firm, inquired into these matters. The Company, based upon
the inquiry, restated its financial statements for certain prior periods. On
January 29, 1998, the Company filed a Form 10-K/A for 1996 and Forms 10-Q/A
for the first, second and third quarters of 1997 reflecting the restatements.
See these Forms for information about the restatement, including the effect of
the restatement on items previously presented in Management's Discussion and
Analysis of Results of Operations and Financial Condition.
On December 15, 1997, the Board of Directors approved the termination of the
Company's Vice-President--Finance in connection with the Audit Committee
inquiry. During January 1998, legal counsel to the Audit Committee issued its
report to the Audit Committee, and the Audit Committee approved the report and
concluded its inquiry. On January 21, 1998, the Board of Directors accepted
the report and approved the recommendations, except for the recommendation to
revise the Audit Committee Charter, which was approved on February 9, 1998.
The report found certain misapplications of generally accepted accounting
principles and accounting errors, including excess reserves, which have been
corrected in the amended filings, referred to above. The report found that the
accretion of excess reserves to income during the first, second and third
quarters of 1997, as described in the Forms 10-Q/A for those quarters, may
have had the appearance of management of earnings as the result of errors in
judgement and the misapplication of generally accepted accounting principles.
However, the report concluded that these errors do not appear to have involved
the intentional misstatement of the Company's accounts. The report also found
weaknesses in internal controls and recommended various improvements in the
Company's system of internal controls, including a comprehensive review of
such controls, a restructuring of the Company's finance and accounting
department, and expansion of the role of the internal audit functions, as well
as corrective measures to be taken related to the specific causes of the
accounting errors. The Company is in the process of implementing these
recommendations with the involvement of the Audit Committee. In accordance
with the recommendations, a major independent accounting and consulting firm
was engaged in early 1998 to examine and report on the Company's written
assertion about the effectiveness of the internal control over financial
reporting. Its report is expected to be concluded in March 1999.
The Securities and Exchange Commission (the "Commission") has authorized an
investigation pursuant to a formal order of investigation relating to the
matters described above. The Company has been cooperating with the staff of
the Commission and intends to continue to do so.
Additionally, a complaint has been filed seeking shareholder class action
status and alleging violations of the federal securities laws generally
relating to the matters described above. The Company believes that the lawsuit
is without merit and intends to defend against it vigorously.
45
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Capital Structure
At December 31, 1998, the Company's capital structure was as follows:
Class A Common Stock: At December 31, 1998, the Company had 30,000,000
shares of $.01 par value Class A Common Stock authorized, of which
22,100,000 shares were issued and outstanding and owned by NKK U.S.A.
Corporation. Each share is entitled to two votes. Dividends of $0.28
per share were paid in 1998. No cash dividends were paid on the Class A
Common Stock in 1997 or 1996. As a result of its ownership of the Class
A Common Stock, NKK U.S.A. Corporation controls approximately 68.8% of
the voting power of the Company.
Class B Common Stock: At December 31, 1998, the Company had 65,000,000
shares of $.01 par value Class B Common Stock authorized, 21,188,240
shares issued, and 20,078,540 outstanding net of 1,109,700 shares of
Treasury Stock. Dividends of $0.28 per share were paid in 1998. No cash
dividends were paid on the Class B Common Stock in 1997 or 1996. All of
the issued and outstanding shares of Class B Common Stock are publicly
traded and are entitled to one vote.
On August 26, 1998, the Board of Directors authorized the repurchase of up
to two million shares of the Class B Common Stock. As of December 31, 1998,
the Company had repurchased 1,109,700 shares of the Class B Common Stock at a
cost of $8.4 million.
In prior years, the Company had two series of preferred stock outstanding.
Both of these series of stock were redeemed in the fourth quarter of 1997.
Prior to redemption, which occurred on December 29, 1997, there were 5,000
shares of $1.00 par value Series A Preferred Stock issued and outstanding. All
of this stock was owned by NKK U.S.A Corporation. Annual dividends of $806.30
per share were cumulative and payable quarterly. Dividend payments of
approximately $4 million were paid in 1997 and 1996. This stock was redeemed
at its book value of approximately $36.7 million plus accrued dividends
through the redemption date. This stock had not been subject to mandatory
redemption provisions.
The Company also had 10,000 shares of Redeemable Preferred Stock--Series B
issued and outstanding prior to the redemption of these shares on November 24,
1997. This stock had been owned by Avatex Corporation ("Avatex"--formerly
known as FoxMeyer Health Corporation). Annual dividends of $806.30 per share
were cumulative and payable quarterly. This stock was subject to mandatory
redemption on August 5, 2000. Concurrent with the stock repurchase in 1997,
the Company and Avatex settled Avatex's obligations relating to certain
Weirton liabilities for which Avatex agreed to indemnify the Company in prior
recapitalization programs. In 1997, dividends were accrued and paid on this
stock through November 4, 1997.
The mandatory redemption price of the Redeemable Preferred Stock--Series B
was $58.3 million. The difference between this price and the book value of the
stock was being amortized to retained earnings at a rate of $1.5 million per
year.
Note 4. Segment Information
The Company has one reportable segment: Steel. The Steel segment consists of
two operating segments, the Regional Division and the Granite City Division,
that produce and sell hot and cold rolled steel to automotive, construction,
container, and pipe and tube customers as well as independent steel service
centers. The Company's operating segments are primarily organized and managed
by geographic location. A third operating segment has been combined with "All
Other" as it does not meet the quantitative thresholds for determining
reportable segments. "All Other" revenues from external customers are
attributable primarily to steel processing, warehousing and transportation
services.
46
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company evaluates performance and allocates resources based on operating
profit or loss before income taxes. The accounting policies of the Steel
segment are the same as described in Note 1 to the financial statements.
Intersegment sales and transfers are accounted for at market prices and are
eliminated in consolidation.
<TABLE>
<CAPTION>
1998 1997
--------------------------------- --------------------------------
Steel All Other Total Steel All Other Total
---------- ---------- ---------- ---------- ---------- ----------
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers.............. $2,829,122 $ 18,922 $2,848,044 $3,121,447 $ 18,212 $3,139,659
Intersegment revenues... 612,443 3,130,971 3,743,414 656,197 3,414,572 4,070,769
Depreciation expense.... 99,446 29,755 129,201 111,972 22,574 134,546
Segment income (loss)
from operations........ 128,856 (32,599) 96,257 141,292 49,701 190,993
Segment assets.......... 1,524,285 959,690 2,483,975 1,400,221 1,053,238 2,453,459
Expenditures for long-
lived assets........... 128,573 42,498 171,071 127,600 24,173 151,773
</TABLE>
Included in "All Other" intersegment revenues in 1998 and 1997,
respectively, is $2,886,938 and $3,155,874 of qualified trade receivables sold
to National Steel Funding Corporation, a wholly-owned subsidiary.
The following table sets forth the percentage of the Company's revenues from
various markets for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Automotive........................................... 29.5% 27.0% 27.6%
Construction......................................... 26.6 24.8 21.6
Containers........................................... 11.3 11.0 10.6
Pipe and Tube........................................ 5.6 7.3 6.5
Service Centers...................................... 19.5 21.3 20.2
All Other............................................ 7.5 8.6 13.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
No single customer accounted for more than 10.0% of net sales in 1998, 1997
or 1996. Export sales accounted for approximately 2.1% of revenues in 1998,
2.0% in 1997 and 0.8% in 1996. The Company has no long-lived assets that are
maintained outside of the United States.
47
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Long-Term Obligations
Long-term obligations were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
Dollars in
thousands
<S> <C> <C>
First Mortgage Bonds, 8.375% Series due August 1, 2006,
with general first liens on principal plants, properties
and certain subsidiaries................................. $ 75,000 $ 75,000
Vacuum Degassing Facility Loan, 10.336% fixed rate due in
semi-annual installments through 2000, with a first
mortgage in favor of the lenders......................... 12,431 19,753
Continuous Caster Facility Loan, 10.057% fixed rate to
2000 when the rate will be reset to a current rate. Equal
semi-annual payments due through 2007, with a first
mortgage in favor of the lenders......................... 101,204 107,873
Pickle Line Loan, 7.726% fixed rate due in equal semi-
annual installments through 2007, with a first mortgage
in favor of the lender................................... 73,689 78,788
ProCoil, various rates and due dates...................... 24,143 18,959
Capitalized lease obligation.............................. 16,619 21,026
Other..................................................... 19,884 21,110
-------- --------
Total long-term obligations............................... 322,970 342,509
Less long-term obligations due within one year............ 37,203 31,533
-------- --------
Long-term obligations..................................... $285,767 $310,976
======== ========
</TABLE>
Future minimum payments for all long-term obligations and leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Other Long-
Capitalized Operating Term
Lease Leases Obligations
----------- --------- -----------
Dollars in thousands
<S> <C> <C> <C>
1999..................................... $ 6,712 $ 62,703 $ 32,272
2000..................................... 6,712 54,392 25,008
2001..................................... 6,712 42,969 24,826
2002..................................... -- 39,616 34,300
2003..................................... -- 44,639 25,712
Thereafter............................... -- 71,224 164,233
-------- -------- --------
Total payments........................... $ 20,136 $315,543 $306,351
======== ========
Less amount representing interest ....... 3,517
Less current portion of obligation under
capitalized lease....................... 4,931
--------
Long-term obligation under capitalized
lease .................................. $ 11,688
========
Asset under capitalized lease:
Machinery and equipment.................. $ 37,000
Less accumulated depreciation............ (29,463)
--------
$ 7,537
========
</TABLE>
Operating leases include a coke battery facility which services Granite City
and expires in 2004, a continuous caster and the related ladle metallurgy
facility which services Great Lakes and expires in 2008, and an electrolytic
galvanizing facility which services Great Lakes and expires in 2001. Upon
expiration, the
48
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company has the option to extend the leases or purchase the equipment at fair
market value. The Company's remaining operating leases cover various types of
properties, primarily machinery and equipment, which have lease terms
generally for periods of 2 to 20 years, and which are expected to be renewed
or replaced by other leases in the normal course of business. Rental expense
totaled $73.1 million in 1998, $75.3 million in 1997, and $72.2 million in
1996.
Credit Arrangements
The Company's credit arrangements consist of a Receivables Purchase
Agreement (the "Receivables Purchase Agreement") with commitments of up to
$200.0 million and an expiration date of September 2002 and a $100.0 million
and a $50.0 million credit facility, both of which are secured by the
Company's inventories (the "Inventory Facilities") and expire in May 2000 and
July 1999, respectively.
The Company is currently in compliance with all covenants of, and
obligations under, the Receivables Purchase Agreement, the Inventory
Facilities and other debt instruments. On December 31, 1998, there were no
cash borrowings outstanding under the Receivables Purchase Agreement or the
Inventory Facilities, and outstanding letters of credit under the Receivables
Purchase Agreement totaled $79.3 million. During 1998, the maximum
availability under the Receivables Purchase Agreement, after reduction for
letters of credit outstanding, varied from $76.3 million to $120.7 million and
was $107.4 million as of December 31, 1998.
Various debt and certain lease agreements include restrictions on the amount
of stockholders' equity available for the payment of dividends. Under the most
restrictive of these covenants, stockholders' equity in the amount of $454.6
million was free of such limitations at December 31, 1998. In addition, any
dividend payments must be matched by a like contribution into a Voluntary
Employees' Beneficiary Association Trust ("VEBA Trust"), the amount of which
is calculated under the terms of the 1993 Settlement Agreement between the
Company and the USWA, until the asset value of the VEBA Trust exceeds $100.0
million. The asset value of the VEBA Trust at December 31, 1998 was
approximately $112.6 million. No matching dividend contribution to the VEBA
Trust was required for the year ended December 31, 1998.
49
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Pension and Other Postretirement Employee Benefits
The Company has various qualified and nonqualified pension plans and other
postretirement employee benefit ("OPEB") plans for its employees. The
following tables provide a reconciliation of the changes in the plans' benefit
obligations and fair value of assets over the periods ended September 30, 1998
and 1997, and the plans funded status at September 30 reconciled to the
amounts recognized on the balance sheet on December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Dollars in thousands
<S> <C> <C> <C> <C>
Reconciliation of benefit
obligation
Benefit obligation,
October 1 prior year..... $2,077,236 $1,465,446 $ 710,780 $ 615,539
Service cost.............. 27,260 24,080 11,207 11,256
Interest cost............. 151,911 115,070 52,341 48,623
Participant contributions. -- -- 4,879 4,868
Other contributions....... 7,257 -- -- --
Plan amendments........... -- (1,576) -- --
Actuarial loss (gain)..... 113,066 92,102 67,558 (26,047)
Assumption of Weirton..... -- 488,961 -- 101,900
Benefits paid............. (163,523) (106,847) (51,864) (45,359)
---------- ---------- ---------- ----------
Benefit obligation,
September 30............. $2,213,207 $2,077,236 $ 794,901 $ 710,780
---------- ---------- ---------- ----------
Reconciliation of fair value
of plan assets
Fair value of plan assets,
October 1 prior year..... $1,846,486 $1,181,708 $ 82,668 $ 48,287
Actual return on plan
assets................... 17,142 216,665 9,610 18,380
Company contributions..... 122,776 79,941 51,985 56,492
Participant contributions. -- -- 4,879 4,868
Other contributions....... 7,257 -- -- --
Assumption of Weirton..... -- 475,019 -- --
Benefits paid............. (163,523) (106,847) (51,864) (45,360)
---------- ---------- ---------- ----------
Fair value of plan assets,
September 30............. $1,830,138 $1,846,486 $ 97,278 $ 82,667
---------- ---------- ---------- ----------
Funded Status
Funded status, September
30....................... $ (383,069) $ (230,750) $ (697,623) $ (628,113)
Unrecognized actuarial
(gain) loss.............. 124,714 (130,288) (95,085) (169,871)
Unamortized prior service
cost..................... 75,382 86,206 -- --
Unrecognized net
transition obligation.... 26,575 35,347 373,230 400,515
Fourth quarter
contributions............ 13,036 9,649 11,404 15,865
---------- ---------- ---------- ----------
Net amount recognized,
December 31.............. $ (143,362) $ (229,836) $ (408,074) $ (381,604)
========== ========== ========== ==========
</TABLE>
In connection with the 1993 Settlement Agreement between the Company and the
United Steelworkers of America ("USWA"), the Company began prefunding the OPEB
obligation with respect to USWA represented employees beginning in 1994.
Pursuant to the terms of the 1993 Settlement Agreement, a VEBA Trust was
established. Under the terms of the agreement, the Company agreed to
contribute a minimum of $10.0 million annually and, under certain
circumstances, additional amounts calculated as set forth in the 1993
Settlement Agreement. In 1998, there was no contribution made to the VEBA
Trust due to a special agreement with the USWA. In 1997, the Company
contributed $16.0 million to the VEBA Trust.
50
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other contributions reflect reimbursements from the Weirton Steel
Corporation ("Weirton"), the Company's former Weirton Steel Division, for
retired Weirton employees whose pension benefits are paid by the Company but
are partially the responsibility of Weirton. An offsetting amount is reflected
in the benefits paid.
The following table provides the amounts recognized in the consolidated
balance sheet as of December 31 of both years:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Dollars in thousands
<S> <C> <C> <C> <C>
Prepaid benefit cost............ $ 20,561 $ 8,961 $ N/A $ N/A
Accrued benefit liability....... (163,923) (238,797) (408,074) (381,604)
Additional minimum liability.... (140,571) (2,315) N/A N/A
Intangible asset................ 89,497 1,149 N/A N/A
Accumulated other comprehensive
income......................... 51,074 1,166 N/A N/A
--------- --------- --------- ---------
Recognized amount............... $(143,362) $(229,836) $(408,074) $(381,604)
========= ========= ========= =========
</TABLE>
The projected benefit obligation, accumulated benefit obligation ("ABO"),
and fair value of plan assets for pension plans with an ABO in excess of plan
assets were $1,747.0 million, $1,613.8 million and $1,331.6 million,
respectively, as of December 31, 1998 and $1,490.2 million, $1,372.7 million
and $1,253.8 million, respectively, as of December 31, 1997.
The following table provides the components of net periodic benefit cost for
the plans for fiscal years 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
------------------------------ -------------------------
1998 1997 1996 1998 1997 1996
--------- --------- -------- ------- ------- -------
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C>
Service cost............ $ 27,260 $ 24,081 $ 26,010 $11,207 $11,256 $12,546
Interest cost........... 151,911 115,071 111,454 52,341 48,623 47,812
Expected return on
assets................. (159,323) (101,146) (96,247) (8,295) (5,114) (3,422)
Prior service cost
amortization........... 10,824 11,196 11,196 -- -- --
Actuarial (gain)/loss
amortization........... 246 (34) 286 (8,544) (6,631) (1,465)
Transition amount
amortization........... 8,772 8,769 9,474 27,285 27,285 27,759
--------- --------- -------- ------- ------- -------
Net periodic benefit
cost................... $ 39,690 $ 57,937 $ 62,173 $73,994 $75,419 $83,230
========= ========= ======== ======= ======= =======
</TABLE>
The assumptions used in the measuring of the Company's benefit obligations
and costs are shown in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Weighted-average assumptions, September 30
Discount rate......................................... 6.75% 7.50% 8.00%
Expected return on plan assets--Pension............... 9.75% 9.75% 9.25%
Expected return on plan assets--Retiree Welfare....... 9.75% 9.25% 9.25%
Rate of compensation increase......................... 4.20% 4.70% 4.70%
</TABLE>
51
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company generally uses a September 30 measurement date. As discussed in
Note 9. Weirton Liabilities, the Company assumed the pension and
postretirement benefit plans of Weirton on November 30, 1997. As a result, the
plan assets, benefit obligation and cost for the Weirton plans included in the
1998 disclosures are based on a November 30 measurement date. The discount
rate used to measure the benefit obligation for the Weirton plans at November
30, 1998 is 7.0%. All other assumptions are the same as those disclosed above.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects on 1998
service and interest cost and the accumulated postretirement benefit
obligation at September 30, 1998:
<TABLE>
<CAPTION>
1% 1%
Increase Decrease
---------- ----------
Dollars in thousands
<S> <C> <C>
Effect on total of service and interest cost
components of net periodic postretirement health
care benefit cost................................ $ 7,475 $ (6,669)
Effect on the health care component of the
accumulated postretirement benefit obligation.... 73,864 (68,916)
</TABLE>
The Company has assumed a 6% health-care cost trend rate at September 30,
1998, reducing 0.3% for 3 years, reaching an ultimate trend rate of 5.0% in
2002.
Note 7. Other Long-Term Liabilities
Other long-term liabilities at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
Dollars in
thousands
<S> <C> <C> <C>
Deferred gain on sale leasebacks .................. $ 14,268 $ 18,618
Insurance and employee benefits (excluding pensions
and OPEBs)........................................ 84,474 94,861
Plant closing...................................... 15,314 13,720
Other.............................................. 19,895 24,101
-------- --------
Total Other Long-Term Liabilities.................. $133,951 $151,300
======== ========
</TABLE>
52
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8. Income Taxes
Deferred income taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
Dollars in
thousands
<S> <C> <C>
Deferred tax assets
Accrued liabilities ............................... $ 82,600 $127,300
Employee benefits ................................. 222,100 176,300
Net operating loss ("NOL") carryforwards........... 600 17,400
Leases ............................................ 7,100 10,000
Federal tax credits................................ 85,100 66,200
Other.............................................. 32,900 33,400
--------- --------
Total deferred tax assets............................ 430,400 430,600
Valuation allowance................................ (32,900) (52,500)
--------- --------
Deferred tax assets net of valuation allowance..... 397,500 378,100
Deferred tax liabilities
Book basis of property in excess of tax basis...... (168,200) (174,300)
Excess tax LIFO over book.......................... (14,800) (21,800)
Other.............................................. (11,900) (8,900)
--------- --------
Total deferred tax liabilities....................... (194,900) (205,000)
--------- --------
Net deferred tax assets after valuation allowance.... $ 202,600 $173,100
========= ========
</TABLE>
In 1998 and 1997, the Company determined that it was more likely than not
that approximately $525 million and $450 million, respectively, of future
taxable income would be generated to justify the net deferred tax assets after
the valuation allowance. Accordingly, the Company recognized additional
deferred tax assets of $29.5 million in 1998 and $21.6 million in both of 1997
and 1996.
Significant components of income taxes (credit) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
Dollars in thousands
<S> <C> <C> <C>
Current taxes payable:
Federal tax............................... $ 21,653 $ 35,536 $ 10,426
State and foreign......................... 2,274 2,295 334
Deferred tax credit......................... (19,628) (21,600) (21,600)
-------- -------- --------
Income taxes (credit)....................... $ 4,299 $ 16,231 $(10,840)
======== ======== ========
</TABLE>
53
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of income tax computed at the federal statutory tax rates
to the recorded income taxes (credit) is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
Dollars in thousands
<S> <C> <C> <C>
Tax at federal statutory rates............. $ 30,800 $ 82,300 $ 11,200
Benefit of operating loss carryforward..... (28,600) (41,400) (9,900)
Temporary differences for which benefit was
recognized (net).......................... (6,400) (39,300) (27,300)
Depletion.................................. (2,100) (5,200) (1,900)
Dividend exclusion......................... (600) (2,000) (1,200)
Alternative minimum tax.................... 21,653 35,536 10,426
Other...................................... (10,454) (13,705) 7,834
-------- -------- --------
Income taxes (credit)...................... $ 4,299 $ 16,231 $(10,840)
======== ======== ========
</TABLE>
At December 31, 1998, the Company has utilized all federal NOL
carryforwards, but has unused alternative minimum tax credit and other tax
credit carryforwards of approximately $85.1 million which may be applied to
offset its future regular federal income tax liabilities. These tax credits
may be carried forward indefinitely.
Note 9. Weirton Liabilities
In 1984, NKK purchased a 50% equity interest in the Company from Avatex. As
a part of these transactions, Avatex agreed to indemnify the Company, based on
agreed-upon assumptions, for certain ongoing employee benefit liabilities
related to the Company's former Weirton Steel Division ("Weirton"), which had
been divested through an Employee Stock Ownership Plan arrangement in 1984. In
1990, NKK purchased an additional 20% equity interest in the Company from
Avatex. As a part of the 1990 transaction, Avatex contributed $146.6 million
to the Company for employee benefit related liabilities and agreed that
dividends from the Redeemable Preferred Stock--Series B would be primarily
used to fund pension obligations of Weirton. Under this arrangement, it was
agreed that the Company would release Avatex from its indemnification
obligation at the time of the scheduled redemption of the Redeemable Preferred
Stock--Series B or at an earlier date if agreed to by the parties. The
Redeemable Preferred Stock--Series B was scheduled to be redeemed in the year
2000. Avatex also agreed in 1984 to indemnify the Company against certain
environmental liabilities related to Weirton and the Company's subsidiary, The
Hanna Furnace Corporation ("Environmental Liabilities"). In 1994, Avatex
prepaid $10.0 million to the Company with respect to these Environmental
Liabilities. In 1995, the Company redeemed one half of the outstanding
Redeemable Preferred Stock--Series B for approximately $67 million, with the
proceeds going to partially fund the Weirton pension obligations.
During the fourth quarter of 1997, the Company redeemed all remaining
Redeemable Preferred Stock --Series B held by Avatex, which had a book value
including accrued dividends of $62.6 million. In addition, the Company
finalized a settlement with Avatex regarding certain employee benefit
liabilities associated with Weirton, as well as the Environmental Liabilities.
As a result of the redemption and settlement, in 1997, the Company made a
payment of $59.0 million to Avatex and paid an additional $10.0 million,
without interest, in 1998. In connection with the settlement, Avatex released
any claims to amounts received, or to be received, with respect to settlements
reached in a lawsuit brought by the Company and Avatex against certain former
insurers of the Company, wherein recovery was sought for past and future
environmental claims, which included the Environmental Liabilities. During the
fourth quarter of 1997, the Company recognized insurance proceeds (net of
taxes and expenses) aggregating approximately $13.6 million related to the
settlement of such lawsuit. The Company also retained the $9.2 million
remaining balance of the Environmental Liabilities prepayment made by Avatex
in 1994.
54
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under its settlement with Avatex, the Company has recorded liabilities for
the Weirton pension obligation, certain other Weirton employee benefit
liabilities and the Environmental Liabilities, and has relieved Avatex from
any future indemnity obligation with regard to all such liabilities.
Also, as a result of the redemption of the Company's Redeemable Preferred
Stock--Series B, NKK U.S.A. Corporation, a subsidiary of NKK Corporation, no
longer has any obligation to Avatex relating to a "put" agreement entered into
in 1990 at the time this preferred stock was issued.
The redemption of Redeemable Preferred Stock--Series B and the related
transactions described above, which are the resolution of the 1990
recapitalization plan, were reflected as a capital transaction resulting in an
increase in additional paid-in capital of approximately $26.5 million in 1997.
Note 10. Non-Operational Income Statement Activities
A number of non-operational activities are reflected in the consolidated
statement of income in each of the three years ended December 31, 1998. A
discussion of these items follows.
Unusual Credit
During the third quarter of 1998, the Company recorded an unusual credit of
$26.6 million resulting from the settlement of a lawsuit seeking a reduction
in the assessed value of the Company's real and personal property at Great
Lakes relating to the 1991 through 1997 tax years. The Company received tax
refunds and was granted a lower assessment base that is expected to result in
future tax savings.
Net Gain on the Disposal of Non-Core Assets and Other Related Activities
In 1998, 1997 and 1996, the Company disposed, or made provisions for
disposing of, certain non-core assets. The effects of these transactions and
other activities relating to non-core assets are presented as a separate
component in the consolidated statements of income. A discussion of these
items follows.
During the second quarter of 1998, the Company sold two properties located
at Midwest. The Company received proceeds (net of taxes and expenses) of $3.3
million and recorded a net gain of $2.7 million related to the sales.
On April 1, 1997, the Company completed the sale of its 21.7% minority
equity interest in the Iron Ore Company of Canada ("IOC") to North Limited, an
Australian mining and metal company ("North"). The Company received proceeds
(net of taxes and expenses) of $75.3 million from North in exchange for its
interest in IOC and recorded a $37.0 million gain. The Company will continue
to purchase iron ore at fair market value from IOC pursuant to the terms of
long-term supply agreements.
On June 12, 1997, the Company completed the sale of the Great Lakes No. 5
coke battery and other related assets, including coal inventories, to a
subsidiary of DTE Energy Company ("DTE"). The Company received proceeds (net
of taxes and expenses) of $234.0 million in connection with the sale and
recorded a total loss on the transaction of $14.3 million. The Company
utilized a portion of the proceeds to prepay the remaining $154.3 million of
the related party coke battery debt, resulting in an extraordinary loss of
$5.4 million (net of a tax benefit of $1.4 million). As part of the
arrangement, the Company has agreed to operate the battery under an operation
and maintenance agreement executed with DTE, and will purchase the majority of
the coke produced from the battery under a requirements contract, with the
price being adjusted during the term of the contract, primarily to reflect
changes in production costs.
55
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the second quarter of 1997, the Company also recorded a charge of $3.6
million for exit costs related to the decision to cease operations of American
Steel Corporation, a wholly-owned subsidiary which pickled and slit steel.
In 1997, the Company sold four non-core coal properties and recorded a net
gain of $11.8 million. In conjunction with one of the property sales, the
purchaser agreed to assume the potential environmental liabilities and as a
result, the Company eliminated the related accrual of approximately $8.0
million. Additionally, during 1997, the Company received new information
related to closed coal properties employee benefit liabilities and other
expenses and reduced the related accrual by $19.8 million. In aggregate the
above coal properties' transactions resulted in a gain of $39.6 million in
1997.
In September 1996, the Company sold a portion of land that had previously
been received in conjunction with the settlement of a lawsuit and recorded a
net gain of $3.7 million.
Extraordinary Item
An extraordinary loss of $5.4 million (net of a tax benefit of $1.4 million)
was reflected in 1997 income. This loss relates to early debt repayment costs
related to debt associated with the Great Lakes No. 5 coke battery, which was
sold in the second quarter of 1997.
Cumulative Effect of Accounting Change
The Company reflected in its 1996 consolidated statement of income the
cumulative effect of an accounting change, which resulted from a change in the
valuation date used to measure pension and OPEB liabilities. The cumulative
effect of this change was $11.1 million. The valuation date to measure the
liabilities was changed from December 31 to September 30 and was made in order
to provide more timely information with respect to pension and OPEB
provisions.
Note 11. Related Party Transactions
Summarized below are transactions between the Company and NKK (the Company's
principal stockholder), and other affiliates accounted for using the equity
method.
NKK Transactions
On October 23, 1998, the Company entered into a Turnkey Engineering and
Construction Contract with NKK Steel Engineering, Inc. ("NKK SE"), a
subsidiary of NKK. The Agreement was unanimously approved by all directors of
the Company who were not then, and never have been, employees of NKK. Pursuant
to this agreement, NKK SE will design, engineer, construct and install a
continuous galvanizing facility at Great Lakes. The purchase price payable by
the Company to NKK SE for the facility is approximately $139.7 million. During
1998, $15.2 million was paid to NKK SE relating to the above mentioned
contract and $6.6 million is included in accounts payable, net of a $1.6
million retention, at December 31, 1998.
Effective May 1, 1995, the Company entered into an Agreement for the
Transfer of Employees ("Agreement") which supercedes a prior arrangement with
NKK. The Agreement was unanimously approved by all directors of the Company
who were not then, and never have been, employees of NKK. Pursuant to the
terms of this Agreement, technical and business advice is provided through NKK
employees who are transferred to the employ of the Company. The Agreement
further provides that the term can be extended from year to year after
expiration of the initial term, if approved by NKK and a majority of the
directors of the Company who were not then, and never have been, employees of
NKK. The Agreement has been extended through calendar
56
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
year 1999 in accordance with this provision. Pursuant to the terms of the
Agreement, the Company is obligated to reimburse NKK for the costs and
expenses incurred by NKK in connection with the transfer of these employees,
subject to an agreed upon cap. The cap was $11.7 million during the initial
term and $7 million during each of 1999, 1998 and 1997. The Company incurred
expenditures of approximately $6.0 million, $6.6 million and $6.4 million
under this Agreement during 1998, 1997 and 1996, respectively. In addition,
the Company utilized various other engineering services provided by NKK and
incurred expenditures of approximately $0.9 million, $1.3 million and $0.3
million for these services during 1998, 1997 and 1996, respectively.
In 1998, cash dividends of $0.28 per share, or approximately $6.2 million,
were paid on 22,100,000 shares of Class A Common Stock owned by NKK. In 1997
and 1996, cash dividends of approximately $4.0 million were paid on the
Preferred Stock--Series A. On December 29, 1997, all shares of Preferred
Stock--Series A were redeemed. (See Note 3. Capital Structure.)
The Company prepaid related party debt of $154.3 million in June of 1997.
(See Note 10. Non-Operational Income Statement Activity.)
During 1997, the Company purchased approximately $4.3 million of finished
coated steel produced by NKK, with such purchase made from trading companies
in arms length transactions.
Affiliate Transactions
The Company is contractually required to purchase its proportionate share of
raw material production or services from certain affiliated companies. Such
purchases of raw materials and services aggregated $34.3 million in 1998,
$38.3 million in 1997 and $11.4 million in 1996. Additional expenses were
incurred in connection with the operation of a joint venture agreement. (See
Note 13. Other Commitments and Contingencies.) Accounts payable at December
31, 1998 and 1997 included amounts with affiliated companies accounted for by
the equity method of $3.8 million and $5.3 million, respectively. Accounts
receivable at December 31, 1998 and 1997 included amounts with affiliated
companies of $5.5 million and $1.2 million, respectively.
The Company sold various prime and non-prime steel products to an affiliated
company, under a supply agreement that approximates market price. Sales
totaled approximately $12.6 million in 1998 and $13.1 million in 1997.
Note 12. Environmental Liabilities
The Company's operations are subject to numerous laws and regulations
relating to the protection of human health and the environment. Because these
environmental laws and regulations are quite stringent and are generally
becoming more stringent, the Company has expended, and can be expected to
expend in the future, substantial amounts for compliance with these laws and
regulations. Due to the possibility of future changes in circumstances or
regulatory requirements, the amount and timing of future environmental
expenditures could vary substantially from those currently anticipated.
It is the Company's policy to expense or capitalize, as appropriate,
environmental expenditures that relate to current operating sites.
Environmental expenditures that relate to past operations and which do not
contribute to future or current revenue generation are expensed. With respect
to costs for environmental assessments or remediation activities, or penalties
or fines that may be imposed for noncompliance with such laws and regulations,
such costs are accrued when it is probable that liability for such costs will
be incurred and the amount of such costs can be reasonably estimated. The
Company has accrued an aggregate liability for such costs of approximately
$3.8 million and $4.4 million as of December 31, 1998 and 1997, respectively.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state statutes generally impose joint
and several liability on present and former
57
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 CERCLA and other environmental cleanup proceedings. At some of these
sites, the Company does not have sufficient information regarding the nature
and extent of the contamination, the wastes contributed by other PRPs, or the
required remediation activity to estimate its potential liability. With
respect to those sites for which the Company has sufficient information to
estimate its potential liability, the Company has accrued an aggregate
liability of approximately $11.2 million and $12.3 million as of December 31,
1998 and 1997, respectively.
The Company has also recorded reclamation and other costs to restore its
shutdown coal locations to their original and natural state, as required by
various federal and state mining statutes. The Company has recorded an
aggregate liability of approximately $2.0 million at both December 31, 1998
and 1997 relating to these properties.
Since the Company has been conducting steel manufacturing and related
operations at numerous locations for over sixty years, the Company potentially
may be required to remediate or reclaim any contamination that may be present
at these sites. The Company does not have sufficient information to estimate
its potential liability in connection with any potential future remediation at
such sites. Accordingly, the Company has not accrued for such potential
liabilities.
As these matters progress or the Company becomes aware of additional
matters, the Company may be required to accrue charges in excess of those
previously accrued. Although the outcome of any of the matters described, to
the extent they exceed any applicable accruals or insurance coverages, could
have a material adverse effect on the Company's results of operations and
liquidity for the applicable period, the Company has no reason to believe that
such outcomes, whether considered individually or in the aggregate, will have
a material adverse effect on the Company's financial condition.
Note 13. Other Commitments and Contingencies
In September 1990, the Company entered into a joint venture agreement to
build a 400,000 ton per year continuous galvanizing line to serve North
American automakers. This joint venture, DNN Galvanizing Limited Partnership,
which was completed in 1993, coats steel products for the Company and an
unrelated third party. The Company is a 10% equity owner of the facility, an
unrelated third party is a 50% owner, and a subsidiary of NKK owns the
remaining 40%. The Company is committed to utilize and pay a tolling fee in
connection with 50% of the available line-time of the facility. The agreement
extends for 20 years after the start of production, which commenced in January
1993.
The Company has a 50% interest in a joint venture with an unrelated third
party, which commenced production in May 1994. The joint venture, Double G
Coatings Company, L.P. ("Double G"), constructed a 270,000 ton per year
coating facility near Jackson, Mississippi which produces galvanized and
Galvalume(R) steel sheet for the construction market. The Company is committed
to utilize and pay a tolling fee in connection with 50% of the available line-
time at the facility through May 10, 2004. Double G provided a first mortgage
on its property, plant and equipment and the Company has separately guaranteed
$19.1 million of Double G's debt as of December 31, 1998.
The Company has agreed to purchase its proportionate share of the limestone
production from an affiliated company, which will approximate $2 million per
year. These agreements contain pricing provisions that are expected to
approximate market price at the time of purchase.
The Company has entered into certain commitments with suppliers which are of
a customary nature within the steel industry. Commitments have been entered
into relating to future expected requirements for such
58
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
commodities as coal, coke, iron ore pellets, natural and industrial gas,
electricity and certain transportation and other services. Commitments have
also been made relating to the supply of pulverized coal and coke briquettes.
Certain commitments contain provisions which require that the Company "take or
pay" for specified quantities without regard to actual usage for periods of up
to 13 years. In 1999 and 2000 the Company has commitments with "take or pay"
or other similar commitment provisions for approximately $264.5 million and
$259.4 million, respectively. The Company believes that production
requirements will be such that consumption of the products or services
purchased under these commitments will occur in the normal production process.
The Company also believes that pricing mechanisms in the contracts are such
that the products or services will approximate the market price at the time of
purchase.
The Company is involved in various routine legal proceedings which are
incidental to the conduct of its business. Management believes that the
Company is not party to any pending legal proceeding which, if decided
adversely to the Company, would individually or in the aggregate, have a
material adverse effect on the Company.
Note 14. Risk Management Contracts
In the normal course of business, operations of the Company are exposed to
continuing fluctuations in commodity prices, foreign currency values, and
interest rates that can affect the cost of operating, investing, and
financing. Accordingly, the Company addresses a portion of these risks,
primarily commodity price risk, through a controlled program of risk
management that includes the use of derivative financial instruments. The
Company's objective is to reduce earnings volatility associated with these
fluctuations to allow management to focus on core business issues. The
Company's derivative activities, all of which are for purposes other than
trading, are executed within the guidelines of a documented corporate risk
management policy. The Company does not enter into any derivative transactions
for speculative purposes.
The amounts of derivatives summarized in the following paragraphs indicate
the extent of the Company's involvement in such agreements but do not
represent its exposure to market risk through the use of derivatives.
Commodity Risk Management
In order to reduce the uncertainty of price movements with respect to the
purchase of zinc, the Company enters into derivative financial instruments in
the form of swap contracts and zero cost collars with a major global financial
institution. These contracts typically mature within one year. While these
hedging instruments are subject to fluctuations in value, such fluctuations
are generally offset by changes in the value of the underlying exposures being
hedged. The Company had contracts to hedge future zinc requirements (up to 50%
of annual requirements) in the amounts of $18.5 million and $40.3 million at
December 31, 1998 and 1997, respectively. The fair value of these contracts
approximated their contract value at December 31, 1998. The fair value at
December 31, 1997 was $35.0 million.
The estimated fair value of derivative financial instruments used to hedge
the Company's risks will fluctuate over time. The fair value of commodity
purchase swap contracts and zero cost collars are calculated using pricing
models used widely in financial markets.
Note 15. Long-Term Incentive Plan
The Long-Term Incentive Plan, established in 1993, has authorized the
granting of options for up to 3,400,000 shares of Class B Common Stock to
certain executive officers and other key employees of the Company. The Non-
Employee Directors Stock Option Plan, also established in 1993, has authorized
the grant of options for up to 100,000 shares of Class B Common Stock to
certain non-employee directors. The exercise price
59
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the options equals the fair market value of the Common Stock on the date of
the grant. All options granted have ten year terms. During 1998, the stock
option plans were amended to reflect a change in the vesting schedule of all
outstanding and future stock option grants. Pursuant to this change, options
generally vest and become fully exercisable ratably over three years of
continued employment. Prior to the amendment, options generally vested and
became fully exercisable at the end of three years of continued employment.
However, in the event that termination of employment is by reason of
retirement, permanent disability or death, the option must be exercised in
whole or in part within 24 months of such occurrences. There were 2,737,226
and 2,794,360 options available for granting under the stock option plans as
of December 31, 1998 and 1997, respectively.
The Company cancelled 563,167 and 653,265 options during 1998 and 1997,
respectively, and replaced them with Stock Appreciation Rights ("SARs"). In
accordance with APB 25, the Company recorded $1.9 million and $1.5 million of
compensation expense in 1998 and 1997, respectively. In addition, during
October of 1998 the Company cancelled 241,968 SARs and converted them back to
options.
As permitted by SFAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value at the date of grant consistent with
the provisions of APB 25. Accordingly, no compensation expense has been
recognized for the stock option plans. Had compensation cost for the option
plans been determined based on the fair value at the grant date for awards in
1998, 1997, and 1996 consistent with the provisions of SFAS 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
Dollars in thousands,
except per share amounts
<S> <C> <C> <C>
Net income--pro forma.......................... $ 83,594 $213,503 $52,659
Basic earnings per share--pro forma............ 1.93 4.70 .96
Diluted earnings per share--pro forma.......... 1.93 4.64 .96
</TABLE>
As a result of the aforementioned replacement of stock options with SARs, a
recovery of prior years' pro forma expense for those options would be required
in 1998. The recovery would offset compensation costs to be recorded in 1998.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998: dividend yield of 2.7% expected
volatility 48.9%; risk-free interest rate of 4.7%; and expected term of 6.8
years.
A reconciliation of the Company's stock option activity and related
information follows:
<TABLE>
<CAPTION>
Number Of Exercise Price
Options (Weighted Average)
--------- ------------------
<S> <C> <C>
Balance outstanding at January 1, 1996...... 967,916 $14.38
Granted..................................... 314,000 12.96
Forfeited................................... (122,181) 13.75
--------- ------
Balance outstanding at December 31, 1996.... 1,159,735 14.03
Granted..................................... 304,500 9.37
Forfeited................................... (132,470) 12.99
Cancelled and replaced with SARs............ (653,265) 14.14
--------- ------
Balance outstanding at December 31, 1997.... 678,500 12.10
Granted..................................... 429,500 12.88
Forfeited................................... (51,167) 11.83
Cancelled and replaced with SARs............ (563,167) 12.61
SARs cancelled and converted to options..... 241,968 12.51
--------- ------
Balance outstanding at December 31, 1998.... 735,634 $12.31
========= ======
</TABLE>
60
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Life Average Exercisable at Average
Exercise Prices 12/31/98 (in years) Exercise Price 12/31/98 Exercise Price
--------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$6 1/2 to $10........... 305,167 8.8 $ 9.11 32,000 $ 9.37
$10 to $15.............. 326,467 8.2 14.02 86,134 13.51
$15 to $19.............. 104,000 7.7 16.38 52,500 15.25
------- --- ------ ------- ------
Total................. 735,634 8.4 $12.31 170,634 $13.27
======= === ====== ======= ======
</TABLE>
There were no exercisable stock options as of December 31, 1997, and 457,401
exercisable stock options with a weighted average exercise price of $14.00 as
of December 31, 1996.
Note 16. Quarterly Results of Operations (Unaudited)
Following are the unaudited quarterly results of operations for the years
1998 and 1997.
<TABLE>
<CAPTION>
1998
-------------------------------------------
March 31 June 30 September 30 December 31
Three Months Ended -------- -------- ------------ -----------
Dollars in thousands, except per share
amounts
<S> <C> <C> <C> <C>
Net sales....................... $708,429 $747,846 $706,361 $685,408
Gross margin.................... 39,922 59,982 58,778 63,375
Unusual credit.................. -- -- (26,621) --
Net income...................... 5,948 26,459 32,503 18,848
Basic and diluted earnings per
share:
Net Income applicable to
common stock................. $ 0.14 $ 0.61 $ 0.75 $ 0.44
<CAPTION>
1997
-------------------------------------------
March 31 June 30 September 30 December 31
Three Months Ended -------- -------- ------------ -----------
Dollars in thousands, except per share
amounts
<S> <C> <C> <C> <C>
Net sales....................... $757,618 $824,869 $788,663 $768,509
Gross margin.................... 69,263 87,834 103,747 69,825
Net gain on disposal of non-core
assets and other related
activities..................... -- (25,385) (28,804) (4,556)
Income before extraordinary
item........................... 26,665 64,925 78,561 48,749
Extraordinary item.............. -- (5,397) -- --
Net income...................... 26,665 59,528 78,561 48,749
Basic earnings per share:
Income before extraordinary
item......................... $ 0.55 $ 1.43 $ 1.76 $ 1.08
Extraordinary item............ -- (.12) -- --
-------- -------- -------- --------
Net income applicable to
common stock............... $ 0.55 $ 1.31 $ 1.76 $ 1.08
======== ======== ======== ========
Diluted earnings per share:
Income before extraordinary
item......................... $ 0.55 $ 1.42 $ 1.72 $ 1.06
Extraordinary item............ -- (.12) -- --
-------- -------- -------- --------
Net income applicable to
common stock............... $ 0.55 $ 1.30 $ 1.72 $ 1.06
======== ======== ======== ========
</TABLE>
61
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------- ------------ --------------------------------- ------------ --------------
Additions
---------------------------------
Balance at Charged to Other
Beginning of Charged to Costs Accounts-- Deductions-- Balance at End
Description Period and Expense Describe Describe of Period
- ---------------------------- ------------ ---------------- ---------------- ------------ --------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Reserves Deducted From
Assets
Allowances and discounts
on trade notes and
accounts receivable...... $17,644 $13,913(1) $ -- $14,658(2) $16,899
Year Ended December 31, 1997
Reserves Deducted From
Assets
Allowances and discounts
on trade notes and
accounts receivable...... $19,320 $29,363(1) $ -- $31,039(2) $17,644
Year Ended December 31, 1996
Reserves Deducted From
Assets
Allowances and discounts
on trade notes and
accounts receivable...... $19,986 $21,560(1) $ -- $22,226(2) $19,320
</TABLE>
- --------
NOTE 1--Provision for doubtful accounts of $1,274, $963 and $748 for 1998,
1997 and 1996, respectively and other charges consisting primarily of
claims for pricing adjustments and discounts allowed.
NOTE 2--Doubtful accounts charged off, net of recoveries, claims and discounts
allowed and reclassification to other assets.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference from the
section captioned "Executive Officers" in Part I of this report and from the
sections captioned "Information Concerning Nominees for Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement for the 1999 Annual Meeting of Stockholders. With the
exception of the information specifically incorporated by reference, the
Company's Proxy Statement is not to be deemed filed as part of this report for
purposes of this Item.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the
sections captioned "Executive Compensation", "Summary Compensation Table",
"Stock Option/SAR Tables", "Option/SAR Grants in 1998", "Aggregated Option/SAR
Exercises in 1998 and December 31, 1998 Option/SAR Values", "Pension Plans",
"Pension Plan Table", "Employment Contracts" and "Compensation of Directors"
in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders.
With the exception of the information specifically incorporated by reference,
the Company's Proxy Statement is not to be deemed filed as part of this report
for purposes of this Item.
62
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from the
sections captioned "Security Ownership of Directors and Management" and
"Additional Information Relating to Voting Securities" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders. With the exception of
the information specifically incorporated by reference, the Company's Proxy
Statement is not to be deemed filed as part of this report for purposes of
this Item.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the
section captioned "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for the 1999 Annual Meeting of Stockholders. With
the exception of the information specifically incorporated by reference, the
Company's Proxy Statement is not to be deemed filed as part of this report for
purposes of this Item.
PART IV
Items 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Documents filed as part of this Report:
The following is a list of the financial statements, schedule and exhibits
included in this Report or incorporated herein by reference.
(1) Financial Statements
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity and Redeemable
Preferred Stock--Series B for the years ended December 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements (Including Quarterly
Financial Data)
(2) Consolidated Financial Statement Schedule
The following consolidated financial statement schedule of National
Steel Corporation and Subsidiaries is filed as a part of this Report:
Schedule II--Valuation and Qualifying Accounts and Reserves, years
ended December 31, 1998, 1997 and 1996
Schedules not included have been omitted because they are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
Separate financial statements of subsidiaries not consolidated and 50
percent or less owned persons accounted for by the equity method have
been omitted because considered in the aggregate as a single subsidiary
they do not constitute a significant subsidiary.
(3) Exhibits
See the attached Exhibit Index. Items 10-T through 10-HH are management
contracts or compensatory plans or arrangements.
63
<PAGE>
(b) Reports on Form 8-K:
During the quarter ended December 31, 1998, the Company filed the following
reports on Form 8-K:
(i) The Company filed a Form 8-K dated October 15, 1998, reporting on Item
5, Other Events and Item 7, Financial Statements and Exhibits.
(ii) The Company filed a Form 8-K dated October 22, 1998, reporting on Item
5, Other Events and Item 7, Financial Statements and Exhibits.
(iii) The Company filed a Form 8-K dated October 27, 1998, reporting on
Item 5, Other Events and Item 7, Financial Statements and Exhibits.
(iv) The Company filed a Form 8-K dated December 17, 1998, reporting on
Item 5, Other Events and Item 7, Financial Statements and Exhibits.
(v) The Company filed a Form 8-K dated December 29, 1998, reporting on Item
5, Other Events and Item 7, Financial Statements and Exhibits.
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Mishawaka, State of Indiana, on February 16, 1999.
National Steel Corporation
/s/ John A. Maczuzak
By: _________________________________
John A. Maczuzak
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated on February 16, 1999.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ Yutaka Tanaka Director; Chairman of the Board and Chief
___________________________________________ Executive Officer
Yutaka Tanaka
/s/ Charles A. Bowsher Director
___________________________________________
Charles A. Bowsher
/s/ Edsel D. Dunford Director
___________________________________________
Edsel D. Dunford
/s/ Mitsuoki Hino Director
___________________________________________
Mitsuoki Hino
/s/ Frank J. Lucchino Director
___________________________________________
Frank J. Lucchino
/s/ Bruce K. MacLaury Director
___________________________________________
Bruce K. MacLaury
/s/ Mineo Shimura Director
___________________________________________
Mineo Shimura
/s/ Hisashi Tanaka Director
___________________________________________
Hisashi Tanaka
/s/ Sotaro Wakabayashi Director
___________________________________________
Sotaro Wakabayashi
/s/ Glenn H. Gage Senior Vice President and Chief Financial
___________________________________________ Officer
Glenn H. Gage
/s/ Kirk A. Sobecki Corporate Controller
___________________________________________
Kirk A. Sobecki
</TABLE>
65
<PAGE>
EXHIBIT INDEX
Except for those exhibits which are incorporated by reference, as indicated
below, all exhibits are being filed along with this Form 10-K.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S> <C>
2-A Assets Purchase Agreement between Weirton Steel Corporation
and the Company, dated as of April 29, 1983, together with
collateral agreements incident to such Assets Purchase
Agreement, filed as Exhibit 2-A to the annual report of the
Company on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
2-B Stock Purchase Agreement by and among NKK Corporation,
National Intergroup, Inc. and the Company, dated August 22,
1984, together with certain collateral agreements incident to
such Stock Purchase Agreement and certain schedules to such
agreements, filed as Exhibit 2-B to the annual report of the
Company on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
2-C Stock Purchase and Recapitalization Agreement by and among
National Intergroup, Inc., NII Capital Corporation, NKK
Corporation, NKK U.S.A. Corporation and the Company, dated as
of June 26, 1990, filed as Exhibit 2-C to the annual report of
the Company on Form 10-K for the year ended December 31, 1995,
is incorporated herein by reference.
2-D Amendment to Stock Purchase and Recapitalization Agreement by
and among, National Intergroup, Inc., NII Capital Corporation,
NKK Corporation, NKK U.S.A. Corporation and the Company, dated
July 31, 1991 filed as Exhibit 2-D to the annual report of the
Company on Form 10-K for the year ended December 31, 1997 is
incorporated herein by reference.
2-E Stock Purchase Agreement dated as of January 31, 1997 among
the Company, North Limited, NS Holdings Corporation, Bethlehem
Steel Corporation and Bethlehem Steel International
Corporation filed as Exhibit 2-A to the quarterly report of
the Company on Form 10-Q for the quarter ended June 30, 1997,
is incorporated herein by reference.
2-F Asset Purchase Agreement dated as of June 6, 1997 between EES
Coke Battery Company, Inc. and the Company, filed as Exhibit
2.1 to the Report on Form 8-K of the Company dated June 12,
1997, is incorporated herein by reference.
2-G Coal Inventory Purchase Agreement dated as of June 6, 1997
between DTE Coal Services, Inc. and the Company, filed as
Exhibit 2.2 to the Report on Form 8-K of the Company dated
June 12, 1997, is incorporated herein by reference.
3-A The Sixth Restated Certificate of Incorporation of the
Company, filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-57952, is
incorporated herein by reference.
3-B Form of Amended and Restated By-laws of the Company filed as
Exhibit 3-B to the annual report of the Company on Form 10-K
for the year ended December 31, 1996, is incorporated herein
by reference.
4-A NSC Stock Transfer Agreement between National Intergroup,
Inc., the Company, NKK Corporation and NII Capital Corporation
dated December 24, 1985, filed as Exhibit 4-A to the annual
report of the Company on Form 10-K for the year ended December
31, 1995, is incorporated herein by reference.
4-B The Company is a party to certain long-term debt agreements
where the amount involved does not exceed 10% of the Company's
total assets. The Company agrees to furnish a copy of any such
agreement to the Commission upon request.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S> <C>
10-A Amended and Restated Lease Agreement between the Company and
Wilmington Trust Company, dated as of December 20, 1985,
relating to the Electrolytic Galvanizing Line, filed as
Exhibit 10-A to the annual report of the Company on Form 10-K
for the year ended December 31, 1995, is incorporated herein
by reference.
10-B Lease Agreement between The Connecticut National Bank as Owner
Trustee and Lessor and National Acquisition Corporation as
Lessee dated as of September 1, 1987 for the Ladle Metallurgy
and Caster Facility located at Ecorse, Michigan, filed as
Exhibit 10-B to the annual report of the Company on Form 10-K
for the year ended December 31, 1995, is incorporated herein
by reference.
10-C Lease Supplement No. 1 dated as of September 1, 1987 between
The Connecticut National Bank as Owner Trustee and National
Acquisition Corporation as the Lessee for the Ladle Metallurgy
and Caster Facility located at Ecorse, Michigan, filed as
Exhibit 10-C to the annual report of the Company on Form 10-K
for the year ended December 31, 1995, is incorporated herein
by reference.
10-D Lease Supplement No. 2 dated as of November 18, 1987 between
The Connecticut National Bank as Owner Trustee and National
Acquisition Corporation as Lessee for the Ladle Metallurgy and
Caster Facility located at Ecorse, Michigan, filed as Exhibit
10-D to the annual report of the Company on Form 10-K for the
year ended December 31, 1995, is incorporated herein by
reference.
10-E Purchase Agreement dated as of March 25, 1988 relating to the
Stinson Motor Vessel among Skar-Ore Steamship Corporation,
Wilmington Trust Company, General Foods Credit Investors No. 1
Corporation, Stinson, Inc. and the Company, and Time Charter
between Stinson, Inc. and the Company, filed as Exhibit 10-E
to the annual report of the Company on Form 10-K for the year
ended December 31, 1995, is incorporated herein by reference.
10-F Purchase and Sale Agreement, dated as of May 16, 1994 between
the Company and National Steel Funding Corporation, filed as
Exhibit 10-A to Amendment No. 1 to the quarterly report of the
Company on Form 10-Q/A for the quarter ended June 30, 1994, is
incorporated herein by reference.
10-G Form of Indemnification Agreement filed as Exhibit 10-R to the
Annual Report of the Company on Form 10-K for the year ended
December 31, 1996 is incorporated herein by reference.
10-H Shareholders' Agreement, dated as of September 18, 1990, among
DNN Galvanizing Corporation, 904153 Ontario Inc., National
Ontario Corporation and Galvatek America Corporation, filed as
Exhibit 10.27 to the Company's Registration Statement on Form
S-1, Registration No. 33-57952, is incorporated herein by
reference.
10-I Partnership Agreement, dated as of September 18, 1990, among
Dofasco, Inc., National Ontario II, Limited, Galvatek Ontario
Corporation and DNN Galvanizing Corporation, filed as Exhibit
10.28 to the Company's Registration Statement on Form S-1,
Registration No. 33-57952, is incorporated herein by
reference.
10-J Amendment No. 1 to the Partnership Agreement, dated as of
September 18, 1990, among Dofasco, Inc., National Ontario II,
Limited, Galvatek Ontario Corporation and DNN Galvanizing
Corporation, filed as Exhibit 10.29 to the Company's
Registration Statement on Form S-1, Registration No.
33-57952, is incorporated herein by reference.
10-K Agreement, dated as of May 19, 1993, among the Company and NKK
Capital of America, Inc., filed as Exhibit 10-FF to the annual
report of the Company on Form 10-K for the year ended December
31, 1993, is incorporated herein by reference.
10-L Receivables Purchase Agreement, dated as of May 16, 1994,
among the Company, National Steel Funding Corporation and
certain financial institutions named therein, filed as Exhibit
10-A to Amendment No. 2 to the quarterly report of the Company
on Form 10-Q/A for the quarter ended June 30, 1994, is
incorporated herein by reference.
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S> <C>
10-M Amendment Number One to the Receivables Purchase Agreement,
dated as of May 31, 1995, among the Company, National Steel
Funding Corporation and certain financial institutions named
therein, filed as Exhibit 10-A to the quarterly report of the
Company on Form 10-Q for the quarter ended June 30, 1995, is
incorporated herein by reference.
10-N Amendment No. 2 and Consent to the Receivables Purchase
Agreement, dated as of July 18, 1996, among the Company,
National Steel Funding Corporation and certain financial
institutions named therein, filed as Exhibit 10-A to the
quarterly report of the Company on Form 10-Q for the quarter
ended September 30, 1996, is incorporated herein by reference.
10-O Agreement for the Transfer of Employees by and between NKK
Corporation and the Company, dated as of May 1, 1995, filed as
Exhibit 10-CC to the annual report of the Company on Form 10-K
for the year ended December 31, 1995, is incorporated herein
by reference.
10-P Amendment No. 1 to Agreement for the Transfer of Employees by
and between the Company and NKK Corporation filed as Exhibit
10-NN to the annual report of the Company on Form 10-K for the
year ended December 31, 1996, is incorporated herein by
reference.
10-Q Amendment No. 2 to Agreement for the Transfer of Employees by
and between the Company and NKK Corporation filed as Exhibit
10-Q to the annual report on Form 10-K for the year ended
December 31, 1997 is incorporated herein by reference.
10-R Amendment No. 3 to Agreement for the Transfer of Employees by
and between the Company and NKK Corporation.
10-S Agreement dated as of November 25, 1997 among the Company,
Avatex Corporation, NKK Corporation and NKK U.S.A. Corporation
filed as Exhibit 10-R to the Annual Report of the Company on
Form 10-K for the year ended December 31, 1997 is incorporated
herein by reference.
10-T 1993 National Steel Corporation Long-Term Incentive Plan,
filed as Exhibit 10.1 to the Company's Registration Statement
on Form S-1, Registration No. 33-57952, is incorporated herein
by reference.
10-U 1993 National Steel Corporation Non-Employee Directors' Stock
Option Plan, filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1, Registration No. 33-57952,
is incorporated herein by reference.
10-V Amendment Number One to the 1993 National Steel Corporation
Non-Employee Directors' Stock Option Plan, filed as Exhibit
10-A to the quarterly report of the Company on Form 10-Q for
the quarter ended June 30, 1997, is incorporated herein by
reference.
10-W Amendment Number Two to the 1993 National Steel Corporation
Non-Employee Directors' Stock Option Plan filed as Exhibit 10-
V to the Annual Report of the Company on Form 10-K for the
year ended December 31, 1997 is incorporated herein by
reference.
10-X National Steel Corporation Management Incentive Compensation
Plan dated January 30, 1989, filed as Exhibit 10.3 to the
Company's Registration Statement on Form S-1, Registration No.
33-57952, is incorporated herein by reference.
10-Y Employment contract dated April 30, 1996 between the Company
and David L. Peterson, filed as Exhibit 10-D to the quarterly
report of the Company on Form 10-Q for the quarter ended June
30, 1996, is incorporated herein by reference.
10-Z Supplement to Employment contract dated July 30, 1996 between
the Company and David L. Peterson, filed as Exhibit 10-C to
the quarterly report of the Company on Form 10-Q for the
quarter ended September 30, 1996, is incorporated herein by
reference.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S> <C>
10-AA Amendment dated August 1, 1998 to Employment Contract between
the Company and David L. Peterson, filed as Exhibit 10-D to
the quarterly report of the Company for the quarter ended
September 30, 1998 is incorporated herein by reference.
10-BB Amended and Restated Employment Agreement dated as of February
1, 1998 between the Company and Robert G. Pheanis filed as
Exhibit 10-CC to the Annual Report of the Company on Form 10-K
for the year ended December 31, 1997 is incorporated herein by
reference.
10-CC Employment contract dated May 1, 1996 between the Company and
John A. Maczuzak, filed as Exhibit 10-G to the quarterly
report of the Company on Form 10-Q for the quarter ended June
30, 1996, is incorporated herein by reference.
10-DD Employment Contract dated as of August 1, 1998 between the
Company and Glenn H. Gage, filed as Exhibit 10-A to the
quarterly report of the Company on Form 10-Q for the quarter
ended September 30, 1998 is incorporated herein by reference.
10-EE Employment Contract dated as of August 1, 1998 between the
Company and John F. Kaloski, filed as Exhibit 10-B to the
quarterly report of the Company on Form 10-Q for the quarter
ended September 30, 1998 is incorporated herein by reference.
10-FF Agreement dated January 28, 1999 between the Company and John
F. Kaloski.
10-GG Employment Contract dated as of September 1, 1998 between the
Company and Yutaka Tanaka, filed as Exhibit 10-C to the
quarterly report of the Company on Form 10-Q for the quarter
ended September 30, 1998 is incorporated herein by reference.
10-HH Employment contract dated December 11, 1996 between the
Company and Osamu Sawaragi filed as Exhibit 10-MM to the
annual report of the Company on Form 10-K for the year ended
December 31, 1996, is incorporated herein by reference.
10-II No. 1 Continuous Galvanizing Line Turnkey Engineering and
Construction Contract dated October 23, 1998 between the
Company and NKK Steel Engineering, Inc.
21 List of Subsidiaries of the Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
</TABLE>
69
<PAGE>
EXHIBIT 10-R
AMENDMENT NO. 3 TO THE
----------------------
AGREEMENT FOR THE TRANSFER OF EMPLOYEES
---------------------------------------
THIS AGREEMENT, by and between NKK CORPORATION, a Japanese corporation, having
its main office at 1-1-2, Marunouchi, Chiyoda-ku, Tokyo, Japan (herein called
"NKK") and NATIONAL STEEL CORPORATION, a Delaware corporation having its
principal office at 4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440, U.S.A.
(herein called "NSC"), is made effective December 16, 1998.
WITNESSETH:
WHEREAS, NKK and NSC entered into an Agreement for the Transfer of Employees
dated as of May 1, 1995 (the "Agreement"), pursuant to which certain employees
have been transferred from NKK to NSC for the purpose of providing technical
assistance, consulting services and business assistance to NSC; and
WHEREAS, NKK and NSC desire to extend the term of the Agreement for an
additional year, through 1999.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Capitalized terms as used herein and not defined herein shall have the same
meaning as set forth in the Agreement.
2. In accordance with Paragraph 15 of the Agreement, the term of the Agreement
is hereby extended for an additional Contract Year, from January 1, 1999
through December 31, 1999 (the "1999 Contract Year").
3. The Reimbursable Expenses Cap for the 1999 Contract Year shall be Seven
Million Dollars ($7,000,000).
4. Each party represents and warrants to the other that it has the requisite
power and authority to extend the Agreement, including, without limitation,
that all necessary corporate proceedings have been duly taken as required
under Paragraph 15 of the Agreement.
5. Except as amended hereby, all of the terms of the Agreement shall remain in
full force and effect.
NATIONAL STEEL CORPORATION NKK CORPORATION
By:______________________________ By:______________________________
Title:___________________________ Title:___________________________
Date:____________________________ Date:____________________________
<PAGE>
EXHIBIT 10-FF
CONFIDENTIAL
- ------------
January 28, 1999
Mr. John F. Kaloski
297 W. Joliet Road
Valparaiso, Indiana 46385
Re: Supplemental Retirement Benefit
-------------------------------
Dear John:
This confirms the commitment by the Board of Directors of National Steel
Corporation to provide you with certain supplemental retirement benefits to
replace those you forfeited from USX when you agreed to become Senior Vice
President of Regional Operations for National Steel. Specifically, if you remain
employed by National Steel until you reach age 60 or thereafter, National Steel
will pay you a single sum in the amount of $442,000, within 30 days after
termination of your employment, plus simple interest at the rate of 3% per annum
for each full year of your continued employment with National Steel after your
60th birthday. In addition, if you die while actively employed by National
Steel, whether or not you have reached age 60 as of the time of your death,
National Steel will pay to your surviving spouse or other designated beneficiary
a single sum in the amount of $221,000, within 30 days after your death,
discounted at the rate of 3% per annum for each full year by which your death
precedes your 60th birthday, or increased by simple interest at the rate of 3%
per annum for each full year of your continued employment with National Steel
after your 60th birthday, as the case may be. If for any reason (other than your
death or incapacitation while actively employed by National Steel) you fail to
remain employed by National Steel until your 60th birthday, including without
limitation your quitting, resigning, being terminated, or otherwise unwilling to
continue your employment with National Steel, neither you nor your surviving
spouse or beneficiary shall be entitled to receive any of the above-described
supplemental retirement benefits. In interpreting and implementing this letter
agreement, the parties agree to act in good faith.
This letter agreement is the entire agreement as to the subject matter hereof,
and can only be amended in writing.
Very truly yours,
/s/ Leon L. Judd
Leon L. Judd
Vice President - Human Resources
ACCEPTED:
/s/ John F. Kaloski
- ------------------------
John F. Kaloski
<PAGE>
EXHIBIT 10-II
NO. 1 CONTINUOUS
GALVANIZING LINE
TURNKEY ENGINEERING AND
CONSTRUCTION CONTRACT
BY AND BETWEEN
NATIONAL STEEL CORPORATION,
GREAT LAKES DIVISION
AND
NKK STEEL ENGINEERING, INC.
DATED
OCTOBER 23, 1998
<PAGE>
NO. 1 CONTINUOUS GALVANIZING LINE
TURNKEY ENGINEERING AND CONSTRUCTION CONTRACT
Made this 23rd day of October, 1998, by and between NATIONAL STEEL
CORPORATION, Great Lakes Division, a Delaware corporation with its office at
4100 Edison Lakes Parkway, Mishawaka, Indiana 46545 ("NATIONAL"), and NKK STEEL
ENGINEERING, INC., a Delaware corporation with its office at 910 Sheraton Drive,
Suite 400, Mars, PA 16046-9414 ("CONTRACTOR").
RECITALS
--------
A. NATIONAL desires to retain CONTRACTOR to provide the engineering,
design, construction, installation, supply, supervision, execution and start-up
of a complete and operable continuous galvanizing facility on an all-inclusive
"turnkey" basis, as more specifically described in the CONTRACT DOCUMENTS (as
that term is defined in Section 1.9).
B. CONTRACTOR is willing to perform such work, pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
1. DEFINITION OF TERMS:
-------------------
The following terms when used herein or in other CONTRACT DOCUMENTS shall
have the following meanings unless the context clearly requires another meaning.
1.1 "AFFILIATE" shall mean any PERSON directly or indirectly
controlling, controlled by or under common control with any other PERSON.
1.2 "AGREEMENT" shall mean this No. 1 Continuous Galvanizing Line Turnkey
Engineering and Construction Contract, together with Exhibits A through V
hereof, and any amendments hereto made pursuant to the terms hereof.
1.3 "AN APPROVED EQUAL" or a similar expression as used in the
SPECIFICATIONS or other CONTRACT DOCUMENTS is intended to give the CONTRACTOR
the optional use of materials of other manufacturers than those specifically
mentioned, but it shall be understood that such substitutions can be made only
after the written consent of NATIONAL has been obtained.
<PAGE>
1.4 "AS SOLD SPECIFICATION" shall mean Contract Specification NKK-SE Job
Number 425 IC-0140-P60-01 Rev. 2, together with the following documents which
clarify and/or amend the foregoing: (i) minutes of meetings held October 5-8 to
clarify such specifications; (ii) letter from Jim Gancarz to Yasuo Ise dated
October 9, 1998; (iii) letter from Yasuo Ise to Jim Gancarz dated October 12,
1998; (iv) letter from Robert Gallagher to CONTRACTOR dated October 19, 1998.
1.5 "CONFIDENTIAL INFORMATION" shall have the meaning set forth in Section
51 (CONFIDENTIALITY) hereof.
1.6 "CONSTRUCTION EQUIPMENT" shall mean all plants, facilities, equipment,
machinery, tools, apparatus, appliances or things of every kind required for the
construction, completion and maintenance of the WORK and which are to be
provided by the CONTRACTOR, but does not include EQUIPMENT, MATERIALS or other
things forming part of the PLANT.
1.7 "COST AUDIT" shall have the meaning set forth in Section 46 hereof.
1.8 "CONTRACT" shall mean the PURCHASE ORDER, the AGREEMENT and all other
CONTRACT DOCUMENTS.
1.9 "CONTRACT DOCUMENTS" shall mean the CONTRACT, all applicable DRAWINGS
and SPECIFICATIONS, the T&M AGREEMENT, and any other writings which are
incorporated herein.
1.10 "CONTRACT PRICE" shall have the meaning set forth in Section 5
(CONTRACT PRICE) below. The CONTRACT PRICE shall have four (4) components: (i)
the CONTRACT PRICE - CONSTRUCTION COMPONENT - CIVIL AND BUILDING, (ii) the
CONTRACT PRICE - CONSTRUCTION COMPONENT - EQUIPMENT INSTALLATION, (iii) the
CONTRACT PRICE - EQUIPMENT COMPONENT, and (iv) the CONTRACT PRICE -
COMMISSIONING COMPONENT. The four components are more specifically described in
Exhibit C (CONTRACT PRICE BREAKDOWN).
1.11 "CONTRACTOR" shall mean NKK Steel Engineering, Inc., a Delaware
corporation with its office at 910 Sheraton Drive, Suite 400, Mars, PA 16046-
9414.
1.12 "CONTRACTOR AUTHORIZED PERSONNEL" shall have the meaning set forth in
Section 25 (SAFETY RULES) hereof.
1.13 "COST" when used to identify CONTRACTOR's expenditures as chargeable
to NATIONAL under the CONTRACT shall mean the net expenditure paid by the
CONTRACTOR, recognizing offsets for any related credits or reductions, such as
trade, chain and cash discounts, refunds, premium dividends or returns, final
rate adjustments, reductions to recognize an approximated annualizing effect in
the case of payroll taxes and like items
<PAGE>
involving annual dollar maximums, and other offsets implicit in the term "cost"
as used in normal business transactions wherein it is not specifically defined.
1.14 "DEEMED WARRANTY PERIOD" shall have the meaning set forth in Section
34.2 (WARRANTY AGAINST DEFECTIVE WORK) hereof.
1.15 "DRAWINGS" shall mean all engineering, equipment or other drawings of
every type, including, without limitation, preliminary design drawings, drawings
included within or referred to in the SPECIFICATIONS, and all amendments and
addenda thereto, and detailed construction drawings identified by the parties as
being applicable to the CONTRACT.
1.16 "ENVIRONMENTAL REQUIREMENTS" shall mean all GOVERNMENTAL REQUIREMENTS
prohibiting, regulating or otherwise relating to environmental pollution and
environmental control of any kind, including, but not limited to, oil pollution,
air pollution, water pollution, land pollution, groundwater pollution, noise
pollution, solid waste management and toxic substance control. Such requirements
include, but are not limited to, GOVERNMENTAL REQUIREMENTS under the Federal
Water Pollution Control Act; the Federal Clear Air Act; the Federal Resource
Conservation & Recovery Act; the Federal Noise Control Act; the Federal Safe
Drinking Water Act; the Federal Toxic Substances Control Act; the Comprehensive
Environmental Response, Compensation and Liability Act; and the Federal
Emergency Planning and Community Right to Know Act of 1986 (Title III of
Superfund Amendments and Reauthorization Act of 1986); and any amendments
thereto, and the state and local counterparts of all of such statutes.
1.17 "EQUIPMENT" or "MATERIALS" shall mean equipment, machinery, apparatus,
materials, articles and all other things to be provided and incorporated in the
PLANT by the CONTRACTOR under the CONTRACT (including, but not limited to, the
spare parts to be supplied by the CONTRACTOR under the CONTRACT), but does not
include the CONSTRUCTION EQUIPMENT.
1.18 "EXTRA WORK" shall have the meaning set forth in Exhibit B (EXTRA WORK
PROCEDURES) attached hereto and made a part hereof.
1.19 "FAILURE OF NATIONAL HOT RUN TEST CONDITIONS" shall have the meaning
set forth in Section 15.1(iii) hereof.
1.20 "FAILURE OF NATIONAL PERFORMANCE TEST CONDITIONS" shall have the
meaning set forth in Section 15.1(v) hereof.
1.21 "FORCE MAJEURE" shall mean any event beyond the reasonable control of
NATIONAL or CONTRACTOR, as the case may be, including, but not limited to: Acts
of God; wars; riots; fires; explosions; breakdowns or accidents (but as to
fires, explosions, breakdowns or accidents, only to the extent caused by
circumstances that are themselves FORCE MAJEURE); strikes; lockouts or other
labor difficulties; lack or shortages of labor, materials, utilities, energy
<PAGE>
sources or transportation facilities (but only to the extent that such lack or
shortage is caused by circumstances that are themselves FORCE MAJEURE).
1.22 "GOODS" shall have the meaning given to it by Section 2-105 of the
Uniform Commercial Code, as enacted in the State of Michigan.
1.23 "GOVERNMENTAL REQUIREMENTS" shall mean all applicable federal, state
and local statutes, laws, ordinances, codes, rules, regulations, standards,
orders or other governmental requirements of any kind, and any present or future
amendments thereto.
1.24 "GREAT LAKES SPECIFICATION" shall mean NATIONAL's Specification GL-
2816 dated February 16, 1998, as supplemented by addenda dated March 17, 1998,
March 19, 1998 and March 26, 1998.
1.25 "HOT RUN COMMENCEMENT" shall have the meaning set forth in Section 6.4
(LIQUIDATED DAMAGES FOR DELAY) hereof.
1.26 "HOT RUN COMMENCEMENT DEADLINE" shall have the meaning set forth in
Section 6.4 (LIQUIDATED DAMAGES FOR DELAY) hereof.
1.27 "INCORPORATED PATENT" shall have the meaning set forth in Section 21.2
(NATIONAL WARRANTY AGAINST INFRINGEMENT) hereof.
1.28 "L/C" shall mean the irrevocable letter of credit described in Section
35.5 (RETAINAGE) hereof.
1.29 "LOSSES" shall have the meaning set forth in Section 30.1
(INDEMNIFICATION BY CONTRACTOR) hereof.
1.30 "NATIONAL" shall mean National Steel Corporation, Great Lakes
Division, a Delaware corporation with its office at 4100 Edison Lakes Parkway,
Mishawaka, Indiana 46545.
1.31 "NATIONAL'S FAULT" shall have the meaning set forth in Section 30.1
(INDEMNIFICATION BY CONTRACTOR) hereof.
1.32 "OCCUPATIONAL SAFETY AND HEALTH REQUIREMENTS" shall have the meaning
set forth in Section 26 (OCCUPATIONAL SAFETY AND HEALTH) hereof.
1.33 "PERSON" shall mean an individual, partnership, firm, corporation or
other legal entity.
1.34 "PLANT" shall mean the continuous galvanizing line facility which is
described in the CONTRACT DOCUMENTS and which is to be constructed on the SITE
by the CONTRACTOR pursuant to the CONTRACT.
<PAGE>
1.35 "PROGRESS EVALUATION PROCEDURE" shall mean the document attached
hereto as Exhibit T to be used to report and track progress of construction
items; provided, however, the parties acknowledge and agree that Exhibit T is
preliminary and will be finalized and approved by NATIONAL prior to construction
invoicing.
1.36 "PROJECT" shall mean the parameters of the WORK to be performed on the
SITE as set forth in the CONTRACT DOCUMENTS.
1.37 "PURCHASE ORDER" shall mean the purchase order issued by NATIONAL for
the performance of the WORK and any and all amendments and supplements thereto;
provided, however, that any preprinted standard terms and conditions contained
in or on the reverse side of such PURCHASE ORDER shall not be given effect, it
being understood, however, that typewritten (whether manually or by computer) or
handwritten provisions of the PURCHASE ORDER shall be considered a part of the
CONTRACT.
1.38 "RECORDS" shall have the meaning set forth in Section 46 (COST AUDIT)
hereof.
1.39 "RIGHT-TO-KNOW REQUIREMENTS" shall have the meaning set forth in
Section 27 (HAZARDOUS SUBSTANCES AND RIGHT-TO-KNOW) hereof.
1.40 "SAFETY RULES" shall have the meaning set forth in Section 25 (SAFETY
RULES) hereof.
1.41 "SCOPE OF WORK" shall mean the scope of work to be performed under the
CONTRACT as described in the SPECIFICATIONS and other CONTRACT DOCUMENTS.
1.42 "SITE" shall mean any and all locations at NATIONAL's Great Lakes
facilities located in Ecorse and River Rouge, Michigan, where the WORK, or any
part thereof, is to be performed.
1.43 "SPECIFICATIONS" shall mean (i) the GREAT LAKES SPECIFICATION, (ii)
the AS SOLD SPECIFICATION, (iii) any Great Lakes Division Standard
Specifications included in the GREAT LAKES SPECIFICATION, (iv) any other
specifications related to the PROJECT agreed to by the parties, and (v) any
subsequent addenda or amendments to the specifications referred to in clauses
(i) - (iv) which are agreed to by the parties.
1.44 "SUBCONTRACT" shall mean any contract, express or implied, under which
any SUBCONTRACTOR performs WORK.
1.45 "SUBCONTRACTOR" shall mean any PERSON having a contract, express or
implied, with the CONTRACTOR or with any SUBCONTRACTOR of any tier for any
portion of the WORK, including any PERSON who erects, constructs, alters or
repairs any part of the WORK, or furnishes labor, skill or superintendence in
connection therewith, or supplies or hauls materials, fixtures, machinery or
equipment therefor.
<PAGE>
1.46 "SUBSTANTIAL COMPLETION DEADLINE" shall have the meaning set forth in
Section 6.1 (SUBSTANTIAL COMPLETION DATE) hereof.
1.47 "T&M AGREEMENT" shall mean NATIONAL's Time and Materials Agreement,
Form NSX-T&M/5, dated July 1, 1982, included as a part of Exhibit B (EXTRA WORK
PROCEDURES), attached hereto and made a part hereof.
1.48 "TECHNICAL DATA" shall have the meaning set forth in Section 21
(PATENT RIGHTS AND INDEMNIFICATION; OWNERSHIP OF DRAWINGS) hereof.
1.49 "TOXIC SUBSTANCE CONTROL REQUIREMENTS" shall have the meaning set
forth in Section 28 (TOXIC SUBSTANCE CONTROL) hereof.
1.50 "WORK" shall mean and shall include, unless otherwise specified, all
supervision, labor and other services of any kind, materials, structural
accessories, machinery, equipment, tools, facilities, other property of any
kind, transportation, disposal, commissioning, training and other requirements
for the performance of the CONTRACT.
2. CONTRACTUAL RELATIONSHIP:
CONTRACTOR is an independent contractor and not an agent, servant, or
representative of NATIONAL. CONTRACTOR shall have no authority to act for,
legally bind or make representations on behalf of, NATIONAL. CONTRACTOR shall
indemnify, defend and hold harmless NATIONAL from and against all liability,
claims, damages and expenses arising out of or in connection with any
unauthorized act, representation or misrepresentation by CONTRACTOR, its agents
or employees.
3. CONFLICT OF INTEREST:
3.1 Absence of Improper Payment. CONTRACTOR represents that it has not
directly or indirectly offered or given to any of NATIONAL's employees or
representatives any gifts, favors or other form of consideration (except that of
nominal value) in connection with the negotiation, award and/or performance of
the CONTRACT. CONTRACTOR agrees that all of its officers, directors and
employees will comply and will use its best efforts to ensure that its
SUBCONTRACTORS will comply with the requirements and the intent of Exhibit A
(NATIONAL STEEL CORPORATION CODE OF ETHICAL BUSINESS CONDUCT) attached hereto
and made a part hereof. CONTRACTOR agrees that any request or solicitation of
gifts or any other item of value by anyone representing NATIONAL is to be
reported to the Director - Corporate Audit, at the following address or
telephone number: 4100 Edison Lakes Parkway, Mishawaka, Indiana 46545-3440;
(219) 273-7416.
3.2 Absence of Family Relationships. CONTRACTOR also represents that no
direct family relationship exists between any PERSON in CONTRACTOR's
organization and NATIONAL's organization which has affected or may affect the
award or performance of the
<PAGE>
CONTRACT, except as disclosed in accordance with the following sentence.
CONTRACTOR agrees to report to NATIONAL the existence of any such relationship
and to disqualify any of its employees from acting on CONTRACTOR's behalf if any
question of preferential treatment regarding the award or performance of the
CONTRACT might reasonably be attached to such family relationship. This
provision shall be included in all SUBCONTRACTS in accordance with Section 4
(SUBCONTRACTS) hereof.
4. SUBCONTRACTS:
4.1 Approval of SUBCONTRACTS by NATIONAL. As a condition of the award
of the CONTRACT, CONTRACTOR shall give written notice to NATIONAL of all WORK to
be subcontracted and of the identity of all proposed SUBCONTRACTORS. Such
notice shall be given within such time as shall allow NATIONAL a reasonable time
to consider and agree upon each portion of the WORK to be subcontracted and the
proposed SUBCONTRACTORS. If NATIONAL disapproves of the employment of a
proposed SUBCONTRACTOR, it immediately shall notify the CONTRACTOR and
CONTRACTOR shall not employ said SUBCONTRACTOR; provided, however, that the
approval of NATIONAL shall not be required for any SUBCONTRACTORS listed on
Exhibit S (APPROVED SUBCONTRACTORS) who are performing WORK of the type listed
next to their respective names on said Exhibit S.
4.2 Inclusion of Provisions in SUBCONTRACTS. CONTRACTOR shall include
in all SUBCONTRACTS all provisions of the CONTRACT which in any way may be
applicable to performance of the SUBCONTRACT including, without limitation, this
provision and all other provisions intended for the protection of NATIONAL. To
the extent applicable, the term "SUBCONTRACTOR" shall be substituted for the
term "CONTRACTOR" and the term "CONTRACTOR" shall be substituted for the term
"NATIONAL" in all provisions of the CONTRACT DOCUMENTS utilized in drawing up
SUBCONTRACTS as provided above. NATIONAL shall have the right to require
CONTRACTOR to terminate the employment of any SUBCONTRACTOR employed by
CONTRACTOR in the event such SUBCONTRACTOR fails to perform its work in
accordance with the requirements of the CONTRACT or otherwise for cause, and
NATIONAL has notified CONTRACTOR of such failure or other cause of termination
and the SUBCONTRACTOR has failed to cure such failure or other cause within
thirty (30) days of CONTRACTOR's receipt of such notice; provided, however, that
the giving of notice and the provision of a cure period shall not be required if
NATIONAL reasonably determines that the SITE or its interests at the SITE would
be materially and adversely affected by the continuation of such failure or
other cause.
4.3 CONTRACTOR Not Relieved. CONTRACTOR shall not be relieved of any
responsibility or obligation under the CONTRACT by subcontracting any portion of
the WORK.
4.4 SUBCONTRACTORS Have No Rights Against NATIONAL. This CONTRACT is
between NATIONAL and CONTRACTOR and creates no relationship, rights or
liabilities, express or implied, including, without limitation, third-party
beneficiary rights or liabilities, between NATIONAL and any SUBCONTRACTOR or any
other PERSON. Any written or oral communications between NATIONAL and
SUBCONTRACTORS to facilitate performance of
<PAGE>
the CONTRACT, or for any other reason, shall not be evidence of any such
relationship, rights or liabilities.
5. CONTRACT PRICE:
5.1 Amount of CONTRACT PRICE. The total amount due CONTRACTOR for full
and complete performance by CONTRACTOR of all the WORK, compliance with all the
terms and conditions of this CONTRACT, and for CONTRACTOR's payment of all its
obligations incurred in or applicable to performance of the WORK shall be One
Hundred Thirty Eight Million Six Hundred Thousand Dollars ($138,600,000). (Said
amount as increased or decreased by agreement of the parties or by Extra Work
Authorizations is hereinafter referred to as the "CONTRACT PRICE"). The
CONTRACT PRICE is a firm, all-inclusive, fixed "lump sum" price (subject,
however, to increases or decreases pursuant to agreed upon change orders or
Extra Work Authorizations), with no escalation, and includes all of CONTRACTOR's
COSTS (including premium time and overtime, if any, to be paid by CONTRACTOR),
overhead and profit as well as all applicable sales, use and other taxes;
provided, however, that CONTRACTOR shall not be responsible for any income,
franchise, capital stock or other similar taxes imposed upon NATIONAL or based
upon the income of NATIONAL. The CONTRACT PRICE shall be paid in the manner
specified in, and be subject to the provisions of, Section 35 (COMPENSATION AND
PAYMENTS) below.
5.2 CONTRACT PRICE Breakdown. The CONTRACT PRICE is broken down among its
component parts as set forth in Exhibit C (CONTRACT PRICE BREAKDOWN) attached
hereto.
6. TIME OF PERFORMANCE:
6.1 SUBSTANTIAL COMPLETION DEADLINE. CONTRACTOR shall substantially
complete the WORK no later than twenty-two (22) months and one (1) week from the
date of this CONTRACT (the "SUBSTANTIAL COMPLETION DEADLINE"). Substantial
completion of the WORK shall be defined as the time that NATIONAL issues (or is
deemed to have issued) the Certificate of Substantial Completion pursuant to
Section 15 (ACCEPTANCE OF THE WORK) hereof. Notwithstanding the attainment of
substantial completion of the WORK, CONTRACTOR shall be obligated to prosecute
the remainder of the WORK and the fulfillment of its remaining obligations
hereunder with due diligence.
6.2 Schedule Control and Construction Management. CONTRACTOR shall
provide the following minimum schedule control and construction management
functions as part of this CONTRACT, together with any additional such functions
set forth in the SPECIFICATIONS:
(i) Master Engineering Schedule: CONTRACTOR shall furnish a preliminary
Master Engineering Schedule in Primavera or equivalent format for the entire
PROJECT within thirty (30) days after the date of this CONTRACT, and shall
furnish a final Master Summary Schedule within sixty (60) days after the date of
this CONTRACT. This Master Summary Schedule shall show as a minimum the line
items contained in Exhibit C (CONTRACT PRICE
<PAGE>
BREAKDOWN). Upon mutual agreement and approval of this Master Summary Schedule
by NATIONAL and CONTRACTOR, it, in combination with the General Construction
Schedule described in subsection (ii) below, shall be used to control the WORK.
(ii) General Construction Schedule: CONTRACTOR shall furnish a
preliminary General Construction Schedule in Primavera or equivalent format
within thirty (30) days after the date of this CONTRACT and a final General
Construction Schedule within one hundred twenty (120) days after the date of
this CONTRACT. Both the preliminary and final General Construction Schedule
shall comply with all applicable requirements with respect thereto set forth in
the SPECIFICATIONS, and be subject to NATIONAL's review and approval, which
approval shall not be unreasonably withheld or denied. The General Construction
Schedule shall be in sufficient detail to identify all construction activities
and the critical paths of construction, all SUBCONTRACTORS and the activities
each will perform, all engineering, all procurement and construction equipment
requirements and the timetables therefor. The General Construction Schedule
shall agree with and support the Master Engineering Schedule described in
subparagraph (i) above. NATIONAL and CONTRACTOR shall work in good faith to
resolve any disputes concerning the General Construction Schedule such that
neither CONTRACTOR's schedule for performing and completing the WORK nor
NATIONAL's production activities are interfered with in an unreasonable manner.
If the performance of the General Construction Schedule is dependent upon a
review, approval, interface or other response by NATIONAL, these activities and
the timetables therefor will be identified in the General Construction Schedule.
(iii) Construction Controls: CONTRACTOR shall furnish a resource curve
showing the estimated man-days for construction activities distributed over the
General Construction Schedule time scale. The estimated days shall state the
shift basis and work week to be used. In addition, CONTRACTOR shall furnish a
tabulation of the estimated man-days by craft by week that were used to develop
the resource curve. These documents shall be furnished to NATIONAL at the same
time as the General Construction Schedule is furnished to NATIONAL, and shall be
subject to NATIONAL's review and approval. CONTRACTOR shall maintain records on
a daily basis and shall furnish NATIONAL a report on a weekly basis of actual
construction man-days by craft. CONTRACTOR shall furnish NATIONAL a report on a
daily basis when available manpower is not sufficient to meet the schedule for
performance of the WORK. CONTRACTOR shall hold weekly progress meetings with
NATIONAL during the construction period. The frequency of these meetings shall
be increased upon the request of NATIONAL.
CONTRACTOR shall update the General Construction Schedule in a formal
manner monthly but informally on a weekly or more frequent basis. If such update
results in a change in critical paths in meeting any scheduled dates or in any
other significant matter, the CONTRACTOR shall immediately notify NATIONAL in
writing of such changes and its detailed plans for maintaining the overall
schedules, including a revised resource curve if required, and obtain NATIONAL's
approval thereof.
<PAGE>
CONTRACTOR shall produce weekly WORK assignment schedules from the General
Construction Schedule by craft for each week, which schedules shall be furnished
to NATIONAL on a weekly basis prior to the week covered by such schedules. When
WORK is conducted on a more than one turn per day basis, CONTRACTOR shall
provide an overlap of supervision and a coordination meeting at each change.
(iv) Construction Management: CONTRACTOR shall provide all necessary
labor, tools, equipment, material and supervision to provide all necessary
construction management services. Construction management shall include, but not
be limited to, the performance of the activities set forth in the SPECIFICATIONS
and the performance of the following activities:
(A) Provide a monthly project management report which shall
include the following:
(1) status of engineering, drawings, procurement, manufacturing,
installation and testing;
(2) milestone status;
(3) list of activities completed in prior month and a list to be
completed in the next month;
(4) major issues to be resolved;
(5) Master Engineering Schedule and General Construction Schedule
update and status;
(6) updated monthly manning resource curve;
(7) Extra Work Authorization status and log; and
(8) "punch list" and warranty review, as applicable.
In the event that CONTRACTOR falls behind schedule in the performance of the
WORK, CONTRACTOR will furnish NATIONAL with such additional and more frequent
reports as NATIONAL may reasonably request.
(B) Provide field survey parties to establish control points
for layout of the WORK and to verify the accuracy of the WORK.
(C) Provide necessary and applicable field inspection services
and tests to verify the quantity, quality and fitness of the WORK and to assure
compliance with the SPECIFICATIONS and other CONTRACT DOCUMENTS.
<PAGE>
(D) Provide evidence, immediately upon request of NATIONAL,
that the WORK is progressing in accordance with the foregoing schedules, by
means of a physical inspection and tour of the PROJECT, accompanied by a
representative of NATIONAL, and by any other reasonable means.
(v) Minutes of Meetings: CONTRACTOR is responsible for taking and
distributing to the parties minutes of all meetings of the parties. Such minutes
shall be prepared and distributed within five (5) business days after each such
meeting occurring prior to on-SITE construction activities and within three (3)
business days after each such meeting occurring thereafter.
(vi) Incorporation of Schedules by Reference: The Master Engineering
Schedule, General Construction Schedule and resource curve provided under this
Section 6.2, after approval by NATIONAL, together with such other scheduling
documents as are required under the SPECIFICATIONS, shall become a part of and
be incorporated in the CONTRACT.
6.3 Time of Essence. Time is of the essence of the CONTRACT and all
schedules and deadlines herein. All actions taken by the parties hereto
(including, without limitation, all submissions, reviews and approvals) shall be
taken to the end that the performance of the CONTRACT shall be prosecuted with
due diligence. Notwithstanding the foregoing, if CONTRACTOR fails to adhere to
any schedule or to meet any deadline set forth in the Milestone of Equipment
Component and Milestone of Commissioning Component of Exhibit Q (Payment
Milestone Schedule) and NATIONAL's No. 1 CGL Overall Schedule as set forth in
the AS SOLD SPECIFICATIONS, then NATIONAL shall notify CONTRACTOR of such
failure and provide to CONTRACTOR an amount of time to cure such failure as
NATIONAL reasonably determines after discussing such failure and time to cure
with CONTRACTOR. Nothing in this Section 6.3 shall be construed to alter
CONTRACTOR's obligations to meet deadlines or to adhere to schedules pursuant to
Section 6.4 (LIQUIDATED DAMAGES FOR DELAY), Article 15 (ACCEPTANCE OF THE WORK)
and Article 34 (RESPONSIBILITY FOR AND GUARANTEE OF WORK) hereof.
6.4 Liquidated Damages for Delay. In the event that the HOT RUN
COMMENCEMENT (as defined below) has not occurred within eighteen (18) months of
the date of this CONTRACT (the "HOT RUN COMMENCEMENT DEADLINE"), CONTRACTOR
agrees to pay to NATIONAL, for each and every calendar day of such delay
following the HOT RUN COMMENCEMENT DEADLINE, an amount calculated in accordance
with the following formula, which sum is hereby, in view of the difficulty of
calculating the precise amount of damages which will be suffered by NATIONAL as
a result of such delay, agreed upon by NATIONAL and CONTRACTOR as a reasonable
estimate of the damages NATIONAL will suffer as a result of such delay, and not
as a penalty.
NUMBER OF DAYS LATE LIQUIDATED DAMAGES PER DAY
0-7 0
<PAGE>
for each day after
the 7th day $90,000/day
For the purposes of this CONTRACT, the HOT RUN COMMENCEMENT shall occur on the
date upon which the last of all of the following events have occurred, in
accordance with the SPECIFICATIONS: (i) the Cold Run Test Completion Certificate
has been issued by CONTRACTOR and cosigned by NATIONAL, and (ii) the PLANT has
commenced hot running, meaning (A) the PLANT reasonably heats sheet product, (B)
the PLANT applies zinc to such product, (C) such zinc reasonably adheres to the
heated product, and (D) a minimum of one (1) wrap of zinc-coated product has
been re-coiled at the tension reel.
Such liquidated damages hereunder shall accrue in the manner set forth above,
but actual payment of such liquidated damages due for the period up to and
including the SUBSTANTIAL COMPLETION DEADLINE shall be deferred until the
SUBSTANTIAL COMPLETION DEADLINE, at which time the entire accrued amount shall
be due and payable. The assessment of liquidated damages hereunder does not
discharge CONTRACTOR from its duty to complete the WORK, to satisfy the
performance warranties and to otherwise fulfill all of the requirements of this
CONTRACT. The CONTRACTOR's maximum total liability for liquidated damages
pursuant to this Section 6.4 shall be three percent (3%) of the CONTRACT PRICE.
7. SCOPE OF WORK:
7.1 "Turnkey" PROJECT. CONTRACTOR acknowledges and agrees that the WORK
is to be performed on an all-inclusive "turnkey" basis and that CONTRACTOR is
responsible for the engineering, design, construction, installation, supply,
supervision, inspection and start-up and commissioning of the PLANT in
accordance with the CONTRACT DOCUMENTS, except for those items specifically
delineated in the SPECIFICATIONS as "Work by Owner".
7.2 Performance According to SPECIFICATIONS. CONTRACTOR shall perform
the WORK as specified by and in accordance with the SPECIFICATIONS and in
accordance with the other requirements of the CONTRACT.
7.3 All Items to be Provided by CONTRACTOR. CONTRACTOR shall supply and
furnish at the SITE all items, including labor, materials, and equipment,
necessary for the complete and satisfactory performance of the CONTRACT, except
such items as NATIONAL furnishes in accordance with the SPECIFICATIONS or
specifically agrees in writing to furnish to or for the use of CONTRACTOR.
7.4 Demolition Component of the WORK. Subject to the provisions of
Section 19 (REMOVAL OF DEBRIS AND WASTE MATERIAL) hereof, CONTRACTOR
acknowledges and agrees that it shall be responsible for the demolition and off-
site removal of any structures or facilities located at or on the SITE which
interfere with the proper performance of the WORK, and that all of such
activities are encompassed within the CONTRACT PRICE.
<PAGE>
Such demolition (and the transportation and disposal of any demolition waste or
debris) shall be performed in full compliance with all applicable GOVERNMENTAL
REQUIREMENTS. All disposal material shall be listed on a written report setting
forth the description of such material, its weight and method of disposal, which
report shall be provided to NATIONAL. Title to all such materials to be disposed
of shall remain with NATIONAL.
7.5 Omission of Minor Details. The omission from the WORK plans,
SPECIFICATIONS, DRAWINGS or other CONTRACT DOCUMENTS of minor details, being
minor both in terms of price of materials and labor cost, which ordinarily form
a part of first-class WORK of the type that is the subject matter of this
CONTRACT shall not be a cause for extra work claims, but rather shall be
included by the CONTRACTOR within the WORK, as if such details had been
specifically mentioned in the CONTRACT DOCUMENTS.
7.6 Change in GOVERNMENTAL REQUIREMENTS. CONTRACTOR acknowledges that
the SCOPE OF WORK includes compliance with all GOVERNMENTAL REQUIREMENTS in
effect as of the date hereof. In the event that there is a change in such
GOVERNMENTAL REQUIREMENTS after the date hereof (which shall be deemed to
include a binding and enforceable change in the interpretation of any
GOVERNMENTAL REQUIREMENTS currently in effect by the governmental agency charged
with the interpretation thereof, or by a court of law, but shall not be deemed
to include any change in GOVERNMENTAL REQUIREMENTS for which there is a
published notice of proposed change (e.g., a proposed regulation published in
the Federal Register) publicly available as of September 4, 1998) applicable to
the WORK hereunder, the SCOPE OF WORK hereunder shall be deemed modified in a
manner so as to cause the WORK to comply with such changed GOVERNMENTAL
REQUIREMENTS. To the extent that compliance with such change in GOVERNMENTAL
REQUIREMENTS impacts the CONTRACT Schedule or the direct COST to CONTRACTOR of
performing the WORK, CONTRACTOR shall be entitled to an adjustment in the
CONTRACT Schedule and/or the CONTRACT PRICE in accordance with the provisions of
Section 11 (CHANGES) hereof; provided, however, that CONTRACTOR shall not be
entitled to an adjustment in the CONTRACT PRICE (i) if the change in
GOVERNMENTAL REQUIREMENTS does not directly impact the PLANT or the EQUIPMENT
(i.e., the change must directly relate to the PLANT or the EQUIPMENT, as opposed
to CONTRACTOR'S general costs of doing business or performing work) (e.g., a
change in OSHA requirements that mandates the inclusion of additional safety
equipment as part of the PLANT or EQUIPMENT would entitle CONTRACTOR to request
an adjustment in the CONTRACT PRICE with respect to the extra COST thereof; a
change in OSHA requirements that mandates that CONTRACTOR's employees wear
special safety equipment (for example, respirators) would not serve as the basis
for an adjustment to the CONTRACT PRICE); and (ii) unless the aggregate impact
of all changes in GOVERNMENTAL REQUIREMENTS applicable to the WORK exceeds
$25,000 (the first $25,000 being a "deductible").
8. SITE, FACILITIES AND UTILITIES:
8.1 SITE Inspection. CONTRACTOR shall be deemed to have examined the
SITE and to have secured full knowledge of (i) all conditions under which the
WORK is to be
<PAGE>
executed and completed, including, but not limited to, soil conditions, (ii)
available roadway, rail and other approaches to the SITE, (iii) the space
available for WORK areas, storage and temporary buildings including offices, and
(iv) the availability of roads, gates, docking facilities, unloading facilities
and utilities, as applicable.
8.2 Location of WORK. The CONTRACTOR shall be responsible for locating
the WORK in accordance with property lines and elevations established in the
CONTRACT DOCUMENTS, and for accuracy of building lines and levels. Before
commencing the WORK, the CONTRACTOR shall verify grades, lines, levels and
dimensions indicated and report errors or inconsistencies to NATIONAL. The
CONTRACTOR shall not proceed until all errors and inconsistencies, if any, are
corrected. Should the CONTRACTOR proceed before all such errors and
inconsistencies are corrected, then, after the CONTRACT DOCUMENTS have been
modified to eliminate such errors and inconsistencies, the CONTRACTOR shall be
obligated, at the CONTRACTOR's own expense, to repair or remove and replace any
portion of the WORK that does not conform to such modified CONTRACT DOCUMENTS.
8.3 NATIONAL Information. CONTRACTOR agrees that NATIONAL cannot
guarantee the accuracy and completeness of information (including, but not
limited to, drawings, maps, surveys, reports, historical land usage and
operations, results of previous SITE investigations and surface or subsurface
conditions affecting the SITE) supplied by NATIONAL to CONTRACTOR, and
CONTRACTOR acknowledges that, unless otherwise agreed by the parties, if
CONTRACTOR has relied upon such information or data in the preparation of its
proposal and/or in the performance of this CONTRACT without further verification
by CONTRACTOR as to its accuracy or completeness, CONTRACTOR is doing so at its
own risk. (i) Notwithstanding anything to the contrary in the immediately
preceding sentence, following the discovery of an inaccuracy in such information
supplied by NATIONAL as to underground utility lines and other underground
utility facilities (unless CONTRACTOR knew or in the exercise of reasonable
judgment should have known about such inaccuracies), and (ii) where NATIONAL and
CONTRACTOR so agree following the discovery of any other inaccuracy in such
information, CONTRACTOR shall be entitled to an equitable adjustment in the
CONTRACT PRICE and/or time of performance, if applicable, to compensate
CONTRACTOR for any direct costs or delays it incurs as a result of any
inaccurate information supplied by NATIONAL. To the extent that CONTRACTOR
reasonably believes that it needs additional information from NATIONAL in order
to properly perform the WORK, it shall request such information in writing and
NATIONAL shall supply such information if it is in NATIONAL's possession or
control or can be obtained or created without undue delay or expense.
Notwithstanding anything to the contrary contained in this Section 8.3, unless
CONTRACTOR knows otherwise or in the exercise of reasonable judgment should know
otherwise, CONTRACTOR shall be entitled to rely on any NATIONAL drawings
provided to CONTRACTOR which depict the location of underground utility lines
and other underground facilities. CONTRACTOR shall be responsible for any
damage to such underground lines or underground facilities disclosed on
NATIONAL'S drawings, or of which it knows or of which it should have known as
described in the immediately preceding sentence, caused by it or any
SUBCONTRACTOR during the course of the WORK.
<PAGE>
8.4 Use of SITE by Others. The SITE and approach facilities are to be
used by CONTRACTOR with due regard for the requirements of NATIONAL and others
permitted by NATIONAL to use same. If it becomes necessary to move the
materials or facilities of CONTRACTOR, it shall be done upon request of NATIONAL
at the expense of CONTRACTOR unless the request involves a movement from a
previously approved area. NATIONAL may install and operate equipment and
machinery or otherwise use and occupy the SITE during the progress of the WORK,
provided that NATIONAL does not unreasonably interfere with the prosecution of
the WORK under conditions originally contemplated.
8.5 Temporary Items to be Provided by CONTRACTOR. Unless otherwise
specified or agreed in writing, CONTRACTOR shall provide all temporary
buildings, sanitary facilities and offices and shall arrange for temporary
connections and lines for water, electricity, telephones, gas, compressed air,
steam, heat and other similar services and utilities required for performance of
the WORK. All such temporary services and utilities shall be secured by the
CONTRACTOR from public utility companies and other sources at the expense of the
CONTRACTOR, unless NATIONAL elects to furnish any such service or utility from
its own facilities, free of charge, in which case the COST thereof shall be
eliminated from the CONTRACT PRICE. CONTRACTOR shall make necessary connections
to NATIONAL's lines at CONTRACTOR'S expense.
8.6 Utility Failure. NATIONAL shall not be liable for damages and
losses suffered by the CONTRACTOR or any SUBCONTRACTORS through the failure or
interruption of any utilities and services furnished by NATIONAL; provided,
however, that nothing set forth in this Section 8.6 shall prejudice CONTRACTOR's
right to seek a CONTRACT PRICE adjustment or a schedule extension pursuant to
Section 16.5 (DELAYS CAUSED BY NATIONAL) hereof. NATIONAL shall attempt to
restore such utility or service at the earliest possible time.
8.7 Permanent Utilities. Whenever, during the course of the WORK,
consumption of these utilities shall commence through connections and
installations which are a permanent part of the WORK, such utilities, including
steam, power and fuel for firing, testing and operating installed equipment and
heating buildings, shall be furnished or arranged for by NATIONAL, at its
expense.
8.8 Removal of Temporary Items. Upon completion of the WORK, CONTRACTOR
shall remove all temporary lines and shall, to NATIONAL's satisfaction, suitably
plug off and terminate all temporary connections and shall leave the permanent
lines in good and safe working condition. All temporary construction
facilities, equipment, signs and other property of CONTRACTOR shall be removed
by CONTRACTOR promptly upon completion of the WORK.
8.9 Use of Local Roadways. To the extent that CONTRACTOR is making use
of public roadways in connection with the WORK, CONTRACTOR shall ensure that its
vehicles and the transportation activities conducted thereby comply fully with
all applicable GOVERNMENTAL REQUIREMENTS, are not creating a nuisance to local
residents and do not otherwise interfere with local traffic.
<PAGE>
9. APPROVAL OF DRAWINGS AND TECHNICAL DOCUMENTS:
9.1 Approval by NATIONAL. CONTRACTOR shall submit to NATIONAL for
approval all DRAWINGS (including, without limitation, all equipment drawings) as
well as any other documents subject to review and approval by NATIONAL in
accordance with the SPECIFICATIONS. Meetings for the review of such DRAWINGS
and other documents shall be held at such times at NATIONAL's premises as are
mutually convenient and agreeable to the parties. NATIONAL shall proceed with
due diligence to review DRAWINGS submitted by CONTRACTOR. Unless otherwise set
forth in the SPECIFICATIONS, NATIONAL shall review all such DRAWINGS and other
documents and inform CONTRACTOR whether or not the same are approved within five
(5) business days after receipt thereof unless NATIONAL notifies CONTRACTOR that
NATIONAL requires a longer period for review, in which event NATIONAL and
CONTRACTOR shall discuss and mutually agree upon the need for and duration of
such longer period. The request by NATIONAL for a longer period of time in
which to review DRAWINGS shall not serve as grounds for a schedule extension (or
an increase in the CONTRACT PRICE). NATIONAL shall be deemed to have approved
the DRAWINGS if NATIONAL fails to comment or request an extension for the review
of the DRAWINGS within such five (5) business days or mutually agreed upon
longer period. CONTRACTOR shall have the right to proceed with the WORK related
to the DRAWINGS after the approval or deemed approval of the DRAWINGS by
NATIONAL. NATIONAL's approval shall be limited to determining that CONTRACTOR's
DRAWINGS and other documents conform to the basic concept of the PROJECT and the
CONTRACT DOCUMENTS and shall not be considered as being approval by NATIONAL of
any specific design, dimension, calculation or any detail necessary for the
PROJECT to be in compliance with the SPECIFICATIONS or other CONTRACT DOCUMENTS.
In the event NATIONAL should inform CONTRACTOR that any of the DRAWINGS and
other documents are not approved, NATIONAL will circle the unapproved portion(s)
thereof and provide an explanation of the reasons for such disapproval, if
requested by CONTRACTOR, whereupon CONTRACTOR shall correct the same.
9.2 Submission In Sequence. In order for NATIONAL to timely review and
approve the DRAWINGS and documents as set forth in this Section 9, CONTRACTOR
shall submit such DRAWINGS and other documents in a properly sequenced manner,
and CONTRACTOR shall not submit an unreasonably large number of such DRAWINGS
and other documents at any one time.
9.3 "As Built" Specification. As a condition to the issuance of the
Certificate of Final Completion referred to in Section 15 (ACCEPTANCE OF THE
WORK) hereof, CONTRACTOR shall deliver to NATIONAL "as built" specifications
which conform in all respects to the requirements set forth in the
SPECIFICATIONS and elsewhere in the CONTRACT DOCUMENTS.
9.4 Sealing of Drawings. In the event that the WORK necessitates the
sealing of DRAWINGS or other documents by a duly licensed engineer or other
professional or employee, CONTRACTOR shall be responsible for making such
arrangements as are necessary to seal such DRAWINGS and documents at no
additional cost to NATIONAL.
<PAGE>
10. CONTRACT DOCUMENTS AND PRIORITIES AND CONFLICTS:
The WORK shall be performed in accordance with all the requirements of the
CONTRACT. In the event of any conflict or discrepancy among the CONTRACT
DOCUMENTS, the following order of priority shall apply:
(i) this AGREEMENT;
(ii) the AS SOLD SPECIFICATION; and
(iii) the GREAT LAKES SPECIFICATION.
11. CHANGES:
11.1 Changes by NATIONAL. NATIONAL reserves the right, by written
notice to CONTRACTOR, to correct any errors in any CONTRACT DOCUMENT and to make
any changes in the DRAWINGS and SPECIFICATIONS and in the WORK. CONTRACTOR
shall proceed with the WORK as changed immediately after receipt of said notice.
If any such change causes an increase or decrease in the COST of performing the
WORK or the time of performance and written notice of such increase or decrease
is given by CONTRACTOR to NATIONAL, or by NATIONAL to CONTRACTOR, an equitable
adjustment in the CONTRACT PRICE and/or the time of performance shall be made by
NATIONAL in accordance with Exhibit B (EXTRA WORK PROCEDURES). Unless otherwise
agreed by the parties and subject to the other provisions of the CONTRACT,
NATIONAL shall not contract with third parties for the performance of material
portions of the SCOPE OF WORK as set forth in the CONTRACT DOCUMENTS.
11.2 No Compensation without EXTRA WORK Authorization. CONTRACTOR shall
not be entitled to any compensation in addition to that specified in the
CONTRACT for the performance of any EXTRA WORK, unless prior to the performance
of such EXTRA WORK CONTRACTOR shall have received from NATIONAL a specific
written authorization to perform such EXTRA WORK in accordance with Exhibit B
(EXTRA WORK PROCEDURES).
11.3 Delays. CONTRACTOR will be permitted a reasonable extension of time
to complete the PROJECT due to changes in the SCOPE OF WORK by NATIONAL or
corrections of the errors of NATIONAL. There shall be no adjustment of the time
of performance or of the CONTRACT PRICE in the event of a delay caused by the
need to correct an error of CONTRACTOR. CONTRACTOR shall advise NATIONAL in
advance of the extent of any such delay prior to proceeding with any such
changes and modifications.
11.4 CONTRACTOR's Markup on EXTRA WORK. The parties agree that
CONTRACTOR's markup on EXTRA WORK shall be fixed at ten percent (10%).
12. CONTRACTOR'S PERSONNEL:
<PAGE>
12.1 Designation of Field Superintendent. CONTRACTOR shall designate a
competent field superintendent(s) acceptable to NATIONAL who, on behalf of
CONTRACTOR, shall have complete direct charge of all WORK in the field.
CONTRACTOR shall advise NATIONAL in writing of the name, address and telephone
number (day and night) of such individuals and of any changes thereto. One of
said individuals shall be at the SITE or, if reasonably acceptable to NATIONAL,
off-SITE but available to representatives of NATIONAL at all reasonable times.
12.2 Continuity of CONTRACTOR Personnel. The parties acknowledge that
in order to expedite the WORK and to maintain the quality of the WORK, it is
desirable to maintain the continuity of the CONTRACTOR personnel working on the
PROJECT. Accordingly, the PERSONS initially selected by CONTRACTOR to perform
the WORK shall continue to perform their duties on the PROJECT for the term of
the CONTRACT unless (i) NATIONAL has requested the removal of such PERSON with
respect to the performance of WORK, (ii) such PERSON has quit, retired, been
terminated, become incapacitated or is otherwise unable to perform his duties,
(iii) such PERSON is reasonably determined by CONTRACTOR to be not performing
his duties in a satisfactory manner, or (iv) such PERSON can be substituted for
without interruption or delay in the performance of the WORK and such PERSON is
not one of CONTRACTOR's key personnel as reasonably determined by CONTRACTOR.
CONTRACTOR shall provide notice to NATIONAL as soon as practicable in advance of
any change of the key personnel identified pursuant to the provisions of this
Section 12, or otherwise.
12.3 Attendance at Meetings. CONTRACTOR's field superintendent and such
other persons reasonably designated by NATIONAL shall be available and shall
attend such meetings as are called by NATIONAL at no additional expense to
NATIONAL.
13. WORK QUALITY, STANDARDS; INSPECTION AND REJECTION:
13.1 WORK Quality and Inspection. All WORK to be furnished or performed
under this CONTRACT shall conform to the standards applicable to such WORK in
the business or industry in which CONTRACTOR is engaged and shall incorporate
the best professional practices. All materials and workmanship furnished or
performed by CONTRACTOR shall be subject to final inspection, tests and
acceptance by NATIONAL upon completion of the WORK, whether or not previously
paid for by NATIONAL. At any and all proper times during manufacture or
performance of the WORK, all materials and workmanship furnished or performed by
the CONTRACTOR shall be subject to inspection, tests and approval by inspectors
of NATIONAL at any and all places where such manufacture or performance shall be
carried on; provided, however, that failure of such inspectors to make
inspection or tests or to discover defective workmanship or material shall not
prejudice any rights of NATIONAL, including the right to final inspection and
test. If facilities of NATIONAL are not available, and unless otherwise
contemplated by the CONTRACT DOCUMENTS, CONTRACTOR shall furnish, at NATIONAL's
expense, such facilities as may be necessary for the making of such inspection
and test.
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13.2 Quality Control Plan. No later than thirty (30) days after the
execution of this CONTRACT, CONTRACTOR shall submit its Quality
Assurance/Quality Control Plan to NATIONAL for approval. CONTRACTOR's Plan
shall require and demonstrate compliance with the requirements of the CONTRACT
prior to final acceptance and payment. CONTRACTOR shall comply fully with all
requirements of its Quality Assurance/Quality Control Plan.
Any condition threatening to adversely affect quality assurance and control
of the PROJECT and its performance hereunder shall be immediately brought to the
attention of NATIONAL. Additionally, CONTRACTOR will immediately notify
NATIONAL if it becomes aware of any pending or threatened governmental or third
party action relating to (i) the WORK performed hereunder, (ii) the status of
any of NATIONAL's permits or licenses related to the SITE or the WORK, or (iii)
a violation or alleged violation of GOVERNMENTAL REQUIREMENTS.
13.3 Non-Conforming WORK. If upon any such inspection or test, any
MATERIAL, EQUIPMENT or WORK shall be found to be defective or not to conform to
CONTRACT requirements, then the applicable MATERIAL, EQUIPMENT or WORK shall be
promptly rejected and the CONTRACTOR shall be notified thereof. Such notice by
NATIONAL's authorized representatives will be in writing. CONTRACTOR, at its
own expense, shall promptly correct such WORK which does not conform to CONTRACT
requirements by making the same conform thereto and shall promptly replace any
MATERIAL or EQUIPMENT which does not conform to CONTRACT requirements and any
MATERIAL or EQUIPMENT which may have been consequently damaged as a result of
said nonconformity, unless such defect or nonconformity is caused by NATIONAL,
in which case such correction or replacement shall be at the expense of
NATIONAL. If CONTRACTOR shall fail to replace or correct any such MATERIAL,
EQUIPMENT or WORK promptly, NATIONAL, at its option, may replace or correct the
same and all costs and expenses of NATIONAL in connection therewith shall be
borne by CONTRACTOR and may be deducted from any amounts due CONTRACTOR
hereunder.
13.4 Industry Standards. Unless otherwise stated, all EQUIPMENT,
MATERIAL and other WORK designed and/or furnished hereunder will comply with
industry standards which, including but not limited to those listed below and
elsewhere in the CONTRACT DOCUMENTS, may be applicable thereto:
Standards of the American Institute of Electrical Engineers,
Standards of the American Society of Testing and Materials (ASTM
Standards),
Standards of the American Society of Mechanical Engineers,
Standards of the American National Standards Institute,
Standards of the American Institute of Steel Construction,
<PAGE>
Standards of the Institute of Electrical and Electronic
Engineers,
Standards of the American Concrete Institute,
Standards issued under the Occupational Safety and Health Act,
and any other similar standards which may be applicable.
In case of conflict between any applicable standards, NATIONAL shall
determine which standards shall govern; provided, however, in no event shall
CONTRACTOR be excused from compliance with the Occupational Safety and Health
Act and Standards, as provided in Section 25 (SAFETY RULES) below.
14. REMOVAL OF UNFIT WORK:
14.1 Rejected WORK. Without prejudice to NATIONAL's other rights and
legal remedies, CONTRACTOR shall without delay take down all completed or
partially completed WORK and remove from the premises all MATERIALS or EQUIPMENT
(worked or unworked) properly rejected by NATIONAL for failure to comply with
DRAWINGS, SPECIFICATIONS or any other requirements of the CONTRACT, or condemned
by a duly authorized public official for failure to conform to GOVERNMENTAL
REQUIREMENTS. It is understood, however, that NATIONAL may elect to permit WORK
to remain and MATERIALS or EQUIPMENT to be used after agreement by CONTRACTOR to
an equitable reduction in the CONTRACT PRICE.
14.2 Replacement of WORK. MATERIALS, EQUIPMENT and WORK so rejected or
condemned shall be replaced and re-executed in accordance with the CONTRACT
without delay, and the cost thereof, together with the cost of making good other
WORK damaged by removal of unfit portions, shall be borne by the CONTRACTOR. No
extension of time will be allowed for such correcting of faulty MATERIALS,
EQUIPMENT or WORK unless the same is due to the fault of NATIONAL.
15. ACCEPTANCE OF THE WORK:
15.1 Testing and Acceptance Procedures. Acceptance of the WORK shall be
subject to the staged procedure set forth below:
(i) Promptly upon completion of all design, engineering,
manufacturing, mechanical and structural construction and installation of the
PLANT, such that the PLANT is functionally completed, and the start-up,
commissioning and testing process is ready to begin, CONTRACTOR shall deliver to
NATIONAL two (2) copies of the Installation Completion Certificate, certifying
such completion, in the form attached hereto as Exhibit D (INSTALLATION
COMPLETION CERTIFICATE). NATIONAL shall then have ten (10) calendar days after
its receipt of the Installation Completion Certificate to inspect and review
<PAGE>
CONTRACTOR's WORK. During review and inspection by NATIONAL, CONTRACTOR may
proceed with commissioning work. If NATIONAL agrees that the criteria for
installation completion (as set forth in the SPECIFICATIONS and elsewhere in the
CONTRACT DOCUMENTS) have been satisfied, NATIONAL shall countersign the
Installation Completion Certificate within such ten (10) calendar day period and
deliver a signed original to CONTRACTOR. In the event that NATIONAL does not
agree that the criteria for issuance of the Installation Completion Certificate
have been fulfilled, NATIONAL shall provide CONTRACTOR with a list of those
deficiencies and/or defects in the WORK which prevent NATIONAL's sign-off on the
Installation Completion Certificate within such ten (10) calendar day period.
CONTRACTOR shall promptly correct such deficiencies and/or defects and, upon the
completion of such corrective action, will reissue the Installation Completion
Certificate to NATIONAL, in which event the procedures set forth above shall
once again apply. If NATIONAL fails to either countersign and deliver the
Installation Completion Certificate or to deliver its list of deficiencies and
defects within the aforementioned ten (10) calendar day period, the Installation
Completion Certificate shall be deemed to have been countersigned by NATIONAL as
of the expiration of the ten (10) calendar day period.
(ii) Upon delivery by NATIONAL of the executed Installation Completion
Certificate, the commissioning process shall promptly begin. The commissioning
process shall consist of a No Load Test, a Cold Run Test, a Hot Run Test and a
Performance Test, the criteria, timing, deadlines and procedures for which are
set forth in the SPECIFICATIONS and elsewhere in the CONTRACT DOCUMENTS. The
satisfactory completion of the No Load Test will be evidenced by the delivery by
CONTRACTOR and countersignature by NATIONAL of a No Load Test Completion
Certificate in the form attached hereto as Exhibit E (NO LOAD TEST COMPLETION
CERTIFICATE). The satisfactory completion of the Cold Run Test shall be
evidenced by the delivery by CONTRACTOR and countersignature by NATIONAL of a
Cold Run Test Completion Certificate in the form attached hereto as Exhibit F
(COLD RUN TEST COMPLETION CERTIFICATE). The satisfactory completion of the Hot
Run Test shall be evidenced by the delivery by CONTRACTOR and the
countersignature or deemed approval, as applicable, of the Provisional
Acceptance Certificate in the form attached hereto as Exhibit G. (PROVISIONAL
ACCEPTANCE CERTIFICATE) Subject to the provisions of Section 15.1 (iii) hereof,
the procedures for the issuance of the aforementioned Certificates shall be the
same as those set forth with respect to the Installation Completion Certificate
in subsection (i) above. During the commissioning process, NATIONAL shall
supply the coils specified in the SPECIFICATIONS for the performance of the Cold
Run, Hot Run and Performance Tests, as well as operating and maintenance
personnel and materials as delineated in the SPECIFICATIONS.
(iii) Subject to the other provisions of the CONTRACT, if CONTRACTOR
is ready, willing and able to perform its responsibilities with respect to the
Hot Run Test and the Installation Completion, No Load Test and Cold Run Test
Certificates have been issued (or deemed issued, if applicable) by and at the
times specified in the SPECIFICATIONS and elsewhere in the CONTRACT DOCUMENTS
and NATIONAL fails to perform its obligations with respect to such Hot Run Test
(as provided in the CONTRACT DOCUMENTS), and as a result, the Hot Run Test is
prevented from being completed prior to that date which is eight (8)
<PAGE>
months from the date on which CONTRACTOR first notifies NATIONAL that CONTRACTOR
is ready, willing and able to perform its responsibilities with respect to the
Hot Run Test (such failure on the part of NATIONAL being hereinafter referred to
as a "FAILURE OF NATIONAL HOT RUN TEST CONDITIONS,") then (A) the Hot Run Test
shall be deemed to have been performed successfully, and the Provisional
Acceptance Certificate shall be deemed to have been issued by NATIONAL, (B) any
milestones for payment scheduled during such eight (8) month period shall be
deemed to have been met by CONTRACTOR, and (C) NATIONAL shall make such payments
to CONTRACTOR as are associated with such milestones. No such acceptance and
issuance of the Provisional Acceptance Certificate shall be deemed to have
occurred pursuant to the provisions of this Section 15.1(iii) unless (X)
CONTRACTOR shall have given to NATIONAL timely notice(s) that a FAILURE OF
NATIONAL HOT RUN TEST CONDITIONS is preventing CONTRACTOR from performing the
Hot Run Test, which notice shall set forth in detail the specific basis for
CONTRACTOR's belief that the delay is being caused by a FAILURE OF NATIONAL HOT
RUN TEST CONDITIONS, and (Y) no act or omission of CONTRACTOR or any
SUBCONTRACTOR prevents the performance of such Hot Run Test. CONTRACTOR shall
provide the aforementioned notice(s) within thirty (30) days after the beginning
of such delay by NATIONAL. No such acceptance and issuance of the Provisional
Acceptance Certificate shall be deemed to have occurred and no such milestone
payments shall be required to be made if there is a dispute between NATIONAL and
CONTRACTOR with regard to either CONTRACTOR's assertion that the delay is caused
by a FAILURE OF NATIONAL HOT RUN TEST CONDITIONS or with respect to the quality
of the WORK or the conformity of the WORK to the CONTRACT DOCUMENTS; provided,
however, that in the event of any such dispute, if it is ultimately determined
that there was a FAILURE OF NATIONAL HOT RUN TEST CONDITIONS, the issuance of
the Provisional Acceptance Certificate shall be deemed to have occurred
retroactive to the time that such Certificate should have been issued but for
the FAILURE OF NATIONAL HOT RUN TEST CONDITIONS.
(iv) After delivery or deemed delivery, as applicable, by NATIONAL of
the Provisional Acceptance Certificate, Performance Tests as set forth in the
SPECIFICATIONS and other CONTRACT DOCUMENTS shall be performed within the time
periods specified therein. Upon satisfactory completion or deemed completion, as
applicable, of such performance tests (as determined by subsection (v) below),
CONTRACTOR shall issue to NATIONAL a Certificate of Substantial Completion in
the form attached hereto as Exhibit H (CERTIFICATE OF SUBSTANTIAL COMPLETION),
together with a comprehensive list of "punch list" items to be completed or
corrected prior to final completion of the WORK by CONTRACTOR and final
acceptance by NATIONAL. Subject to the provisions of Section 15.1(v) hereof,
procedures for the issuance of the Certificate of Substantial Completion shall
be the same as those set forth with respect to the Installation Completion
Certificate in subsection (i) above.
(v) Subject to the other provisions of the CONTRACT, if CONTRACTOR is
ready, willing and able to perform its responsibilities with respect to the
Performance Tests and the Installation Completion, No Load Test, Cold Run Test
and Provisional Acceptance Certificates have been issued (or deemed issued, if
applicable) by and at the times specified in the SPECIFICATIONS and elsewhere in
the CONTRACT DOCUMENTS and NATIONAL
<PAGE>
fails to perform its obligations with respect to such Performance Tests (as
provided in the CONTRACT DOCUMENTS) and, as a result, the Performance Tests are
prevented from being completed prior to that date which is four and one half (4
1/2) months from the date on which CONTRACTOR first notifies NATIONAL that
CONTRACTOR is ready, willing and able to perform its responsibilities with
respect to the Performance Tests (such failure on the part of NATIONAL being
hereinafter referred to as a "FAILURE OF NATIONAL PERFORMANCE TEST CONDITIONS,")
then (A) the Performance Tests shall be deemed to have been performed
successfully and the Certificate of Substantial Completion shall be deemed to
have been issued by NATIONAL, (B) any milestones for payment scheduled during
such period shall be deemed to have been met by CONTRACTOR, and (C) NATIONAL
shall make such payments to CONTRACTOR as are associated with such milestones.
No such acceptance and issuance of the Certificate of Substantial Completion
shall be deemed to have occurred pursuant to the provisions of this Section
15.1(v) unless (X) CONTRACTOR shall have given to NATIONAL timely notice(s) that
a FAILURE OF NATIONAL PERFORMANCE TEST CONDITIONS is preventing CONTRACTOR from
performing the Performance Tests, which notice shall set forth in detail the
specific basis for CONTRACTOR's belief that the delay is being caused by a
FAILURE OF NATIONAL PERFORMANCE TEST CONDITIONS, and (Y) no act or omission of
CONTRACTOR or any SUBCONTRACTOR prevents the performance of such Performance
Tests. CONTRACTOR shall provide the aforementioned notice(s) within thirty (30)
days after the beginning of such delay by NATIONAL. No such acceptance and
issuance of the Certificate of Substantial Completion shall be deemed to have
occurred and no such milestone payments shall be required to be made if there is
a dispute between NATIONAL and CONTRACTOR with regard to either CONTRACTOR's
assertion that the delay is caused by a FAILURE OF NATIONAL PERFORMANCE TEST
CONDITIONS, or with respect to the quality of the performance of the WORK or the
conformity of the WORK to the CONTRACT DOCUMENTS; provided, however, that in the
event of any such dispute, if it is ultimately determined that there was a
FAILURE OF NATIONAL PERFORMANCE TEST CONDITIONS, the issuance of the Certificate
of Substantial Completion shall be deemed to have occurred retroactive to the
time that such Certificate should have been issued but for the FAILURE OF
NATIONAL PERFORMANCE TEST CONDITIONS.
(vi) Notwithstanding any completion or deemed completion of the
Performance Tests or issuance or deemed issuance of the Certificate of
Substantial Completion, CONTRACTOR agrees that it shall diligently proceed to
complete all remaining portions of the WORK, including, without limitation, all
"punch list" items. The following criteria must also be satisfied prior to the
issuance of the Final Completion Certificate (which Final Completion Certificate
shall be in the form of Exhibit I (FINAL COMPLETION CERTIFICATE) attached hereto
and made a part hereof) and satisfaction must be so certified by CONTRACTOR at
the time it submits the Final Completion Certificate to NATIONAL: (A) completion
of all "punch list" items with respect to the WORK; (B) delivery of all lien
waivers and releases required in accordance with Section 20 (LIENS AND CLAIMS)
hereunder; (C) delivery of "as built" specifications and other drawings required
by the CONTRACT DOCUMENTS, and (D) fulfillment of all other requirements of the
CONTRACT that are required to be fulfilled at or prior to the completion of the
WORK. Upon satisfaction of the conditions set forth in this
<PAGE>
subsection (vi), NATIONAL shall countersign the Final Completion Certificate and
release the hold back portion of the CONTRACT PRICE.
16. FORCE MAJEURE; EXTENSION OF TIME - CONTRACTOR'S WAIVER OF DAMAGES FOR
DELAY:
16.1 FORCE MAJEURE.
(i) If either party is prevented, hindered or delayed from performing
any of its obligations under the CONTRACT by an event of FORCE MAJEURE, then the
party affected by such FORCE MAJEURE shall be excused from the performance of
its obligations under the CONTRACT for so long as such event of FORCE MAJEURE
continues and to the extent that such party's performance is prevented, hindered
or delayed, including such time as is necessary to recommence performance.
(ii) The party or parties affected by the event of FORCE MAJEURE shall
use reasonable efforts to mitigate the effect thereof upon its or their
performance of the CONTRACT and to fulfill its or their obligations under the
CONTRACT.
(iii) No delay or non-performance by either party hereto caused by the
occurrence of any event of FORCE MAJEURE shall constitute a default or breach of
the CONTRACT, if and to the extent that such delay or non-performance is caused
by the occurrence of an event of FORCE MAJEURE.
16.2 Notice of Delay. The party affected by an event of FORCE MAJEURE
shall give the other party prompt written notice of such event and of the cause
and anticipated extent thereof. The affected party shall also promptly give the
other party written notice of the cessation and actual extent of such delay. If
CONTRACTOR is affected by an event of FORCE MAJEURE, NATIONAL shall reasonably
determine which portion of the delay, if any, was excusable hereunder and shall
grant CONTRACTOR a written extension of time equal thereto.
16.3 Failure to Notify. To the extent that the failure of CONTRACTOR to
give either or both such written notices to NATIONAL prejudices NATIONAL, such
failure(s) shall be sufficient reason for denial of an extension of time by
NATIONAL; provided, however, that if CONTRACTOR can cure or remove such
prejudice to NATIONAL's reasonable satisfaction, then such denial of an
extension shall be rescinded.
16.4 Sole Remedy. The extension of time provided hereunder shall be the
sole remedy of CONTRACTOR for any delay caused by an event of FORCE MAJEURE, and
CONTRACTOR expressly waives any and all claims for damages or other rights which
it may have against NATIONAL in the event of any delay caused by an event of
FORCE MAJEURE.
16.5 Delays Caused by NATIONAL. If, due to the fault of NATIONAL,
CONTRACTOR is delayed from performing the WORK other than as a result of an
event of FORCE MAJEURE, then CONTRACTOR shall be entitled to recover from
NATIONAL, as
<PAGE>
CONTRACTOR'S sole remedy (other than an extension of the CONTRACT Schedule, if
applicable), CONTRACTOR's additional reasonable direct COSTS incurred as a
result of such delay caused by NATIONAL'S fault.
16.6 Make-Up of Lost Time. In the event of any delay hereunder,
CONTRACTOR shall use reasonable efforts to modify its scheduling and performance
of the WORK (without charge to NATIONAL, except as provided in Section 16.5
(DELAYS CAUSED BY NATIONAL) hereof) so as to make up for lost time.
16.7 Extension of Time Without Prejudice. Grant of an extension of time
by NATIONAL shall not prejudice any of NATIONAL's other rights under the
CONTRACT or for breach thereof.
16.8 Delays Greater Than 120 Days. If performance of the WORK is
delayed by an event of FORCE MAJEURE for a continuous period of one hundred and
twenty (120) days, the parties shall engage in good faith discussions to
determine what, if any, changes to the CONTRACT are appropriate; provided,
however, that, to the extent not prevented from doing so by such event of FORCE
MAJEURE, and (subject to the provisions of Section 17.4 (NO WORK STOPPAGE DUE TO
DISPUTES) below) payments to CONTRACTOR are paid when due hereunder, CONTRACTOR
shall continue with performance of the WORK while such discussions are ongoing,
and even if the results of such discussions are not satisfactory to CONTRACTOR.
17. PERFORMANCE OF WORK:
17.1 Notification of Conduct of WORK. CONTRACTOR, before entering the
SITE to undertake the WORK, must notify NATIONAL of its intention to do so and
at the same time inform NATIONAL of the starting date for the WORK, the areas in
which the WORK will be performed, approximate number and types of personnel to
perform the WORK and the schedule, length and number of turns to be worked.
17.2 Coordination with Other Work. NATIONAL represents that it and other
contractors may be working at the SITE during the performance of the CONTRACT.
NATIONAL reserves the right to direct CONTRACTOR to schedule the order of
performance of the WORK in such manner as not unreasonably to interfere with the
performance of other work by NATIONAL and other contractors; provided, however,
that such scheduling shall not, in the reasonable judgment of CONTRACTOR, impede
or delay its performance of the CONTRACT in any material way.
17.3 Inadequate Performance of WORK. If at any time during the progress
of the WORK, CONTRACTOR's actual progress reasonably appears to NATIONAL, in
light of all the requirements of the CONTRACT (including, without limitation,
any schedules applicable to the WORK), to be materially inadequate due to
conditions within CONTRACTOR's control, NATIONAL may notify CONTRACTOR of such
imminent or actual noncompliance with the CONTRACT. CONTRACTOR shall thereupon
take such steps as may be reasonably necessary
<PAGE>
to improve its progress, and NATIONAL may require an increase in the labor
force, the number of shifts, the amount of resources and/or any other like or
unlike steps or measures as reasonably directed by NATIONAL. Neither such notice
by NATIONAL nor NATIONAL's failure to issue such notice shall (i) relieve
CONTRACTOR from its obligation to achieve the quality of WORK and rate of
progress required by the CONTRACT (including, without limitation, any schedules
applicable to the WORK), or (ii) constitute a waiver of any of NATIONAL's rights
under the CONTRACT.
17.4 No Work Stoppage Due to Disputes. In case of any dispute between
the parties hereto arising out of the CONTRACT, including, without limitation,
disputes regarding EXTRA WORK, or changes or delays in the WORK, the parties
shall negotiate in good faith to reach an agreement but in no case, except
pursuant to NATIONAL's prior written consent, shall any WORK be halted pending
such agreement, whether or not the dispute can be resolved to CONTRACTOR's
satisfaction, and CONTRACTOR shall be bound by the terms and conditions of the
CONTRACT to prosecute the WORK without delay to its successful completion. Any
such disputes shall be resolved in accordance with Section 52 (DISPUTE
RESOLUTION) hereof.
18. EQUIPMENT LOSS, THEFT AND DISAPPEARANCE:
18.1 Responsibility. CONTRACTOR shall be responsible for any loss, theft
or disappearance of or damage to (i) any EQUIPMENT and MATERIALS and (ii) any
tools, equipment and any other materials furnished to CONTRACTOR by NATIONAL, or
any SUBCONTRACTOR, however such loss, theft, disappearance or damage may have
occurred. CONTRACTOR shall pick up, secure and otherwise protect all such
EQUIPMENT and MATERIALS at all times. CONTRACTOR agrees that it shall make no
claim against NATIONAL for any loss, theft, disappearance or damage and
CONTRACTOR shall defend, indemnify and hold harmless NATIONAL from any claim
made relating thereto by any SUBCONTRACTOR or third party.
18.2 Security. CONTRACTOR shall be responsible for SITE security
beginning at the time CONTRACTOR first enters the SITE through the final
completion of the WORK and the issuance of the Certificate of Final Completion.
19. REMOVAL OF DEBRIS AND WASTE MATERIAL:
19.1 Removal of Debris and Waste; Scrap Metal. During the time period
set forth in Section 18.2 (SECURITY) hereof, CONTRACTOR shall remove all debris
and waste material and keep and leave the SITE in a safe and sanitary condition
satisfactory to NATIONAL; provided, however, that unless NATIONAL otherwise
states in writing, all scrap metal of any kind shall remain the property of
NATIONAL and shall be removed and relocated by CONTRACTOR as NATIONAL shall
direct.
19.2 Failure to Maintain SITE. In the event NATIONAL reasonably
determines that CONTRACTOR has failed to maintain the SITE in a safe and
sanitary condition during the times
<PAGE>
and in the manner provided herein, NATIONAL may take all necessary steps to do
so, including, but not limited to, the employment of another contractor, and
charge CONTRACTOR for the cost and expense thereof, which charge may be offset
against any amounts due CONTRACTOR from NATIONAL under the CONTRACT.
20. LIENS AND CLAIMS:
20.1 Full Conditional Waiver of Liens. CONTRACTOR agrees to execute and
tender to NATIONAL, prior to commencement of WORK hereunder, a Full Conditional
Waiver of Lien in the form attached hereto as Exhibit J, waiving all mechanic's
liens, materialmen's liens, construction liens or other type liens against any
of the property or improvements of NATIONAL, which waiver is to be conditioned
solely upon actual payment of the CONTRACT PRICE. CONTRACTOR also agrees to
obtain from all SUBCONTRACTORS or materials suppliers of any tier prior to
commencement of WORK, a Full Conditional Waiver of Lien.
20.2 Prevention and Removal of Liens. If a lien or claim of any kind is
established or is attempted to be established upon or against the SITE, the WORK
or the property upon which the WORK is situated or any buildings or improvements
thereon and such lien relates to the performance of work or services, or the
furnishing of materials, equipment or supplies, by CONTRACTOR, any of its
SUBCONTRACTORS (whether direct or of any lower tier) or any suppliers of
materials or equipment with respect to the WORK, CONTRACTOR, with or without
notice from NATIONAL, shall immediately prevent the establishment thereof or
have said lien or other claim removed by the posting of a bond or provision of
other security or by any other lawful means. If after demand of NATIONAL,
CONTRACTOR fails to remove any lien it is required to remove under this Section
20, NATIONAL shall have the right to do so on behalf of CONTRACTOR and at the
expense of CONTRACTOR, and CONTRACTOR shall promptly reimburse NATIONAL for any
sums expended by NATIONAL for this purpose, or, at NATIONAL's option, such sums
may be deducted from the CONTRACT PRICE. Nothing contained herein is intended
to prevent CONTRACTOR from filing a lien in the event that NATIONAL fails to pay
any undisputed amounts to CONTRACTOR when such payments are due.
20.3 Submission of Partial or Full Unconditional Waivers of Liens. As a
condition precedent to NATIONAL's making any payment of the CONTRACT PRICE,
CONTRACTOR shall submit Partial or Full Unconditional Waivers of Liens, executed
by the CONTRACTOR and all SUBCONTRACTORS performing the WORK, in the forms
attached hereto as Exhibits K and L, respectively, together with a Sworn
Statement, in the form attached hereto as Exhibit M, unconditionally waiving
through the date of the payment, all mechanic's liens, materialmen's liens,
construction liens or other type liens against any of the property or
improvements of NATIONAL. In each instance in the CONTRACT wherein CONTRACTOR
is to obtain from a SUBCONTRACTOR a Partial Unconditional Waiver of Liens and
such SUBCONTRACTOR has completed all of its WORK under its SUBCONTRACT, then
CONTRACTOR shall instead obtain from such SUBCONTRACTOR a Full Unconditional
Waiver of Liens in lieu of a Partial Unconditional Waiver of Liens. Such
waivers must be submitted covering all such claims as a condition to final
payment. CONTRACTOR shall, in the event any SUBCONTRACTOR
<PAGE>
refuses to furnish a Full Unconditional Waiver of Liens, furnish a bond or other
security satisfactory to NATIONAL to protect and indemnify NATIONAL and
NATIONAL's property against any and all liens which may at any time be filed or
asserted by such SUBCONTRACTOR, even though the SUBCONTRACTOR has not yet
asserted a claim or lien against NATIONAL or NATIONAL's property, and if
CONTRACTOR refuses or fails to do so NATIONAL may do so in accordance with the
provisions of Section 20.2 above. Making any payment of the CONTRACT PRICE
without requiring strict compliance with any of the provisions of this Section
20 shall not be construed as a waiver by NATIONAL of the right to insist upon
such compliance as a condition of later payments.
20.4 Indemnification. CONTRACTOR shall indemnify, defend and hold
harmless NATIONAL from and against all LOSSES (as defined in Section 30 hereof)
arising from or related to the failure of CONTRACTOR to satisfy its obligations
pursuant to this Section 20.
20.5 Waivers. Upon completion of the WORK and payment to CONTRACTOR of
all CONTRACT PRICE components then due, CONTRACTOR shall furnish to NATIONAL
Full Unconditional Waivers of Liens from itself and all SUBCONTRACTORS.
20.6 SUBCONTRACTOR's Notice. CONTRACTOR shall require in each of its
SUBCONTRACTS that the SUBCONTRACTOR give notice to NATIONAL in the event that
the SUBCONTRACTOR claims payment to it by CONTRACTOR is more than thirty (30)
days overdue. Notice shall be given to:
Great Lakes Division
National Steel Corporation
No. 1 Quality Drive
Ecorse, Michigan 48229
ATTENTION: Ken Basar
The SUBCONTRACTS shall also provide that timely compliance with this provision
shall be a condition precedent to the filing of any action by the SUBCONTRACTOR
against the CONTRACTOR.
21. PATENT RIGHTS AND INDEMNIFICATION; OWNERSHIP OF DRAWINGS:
21.1 CONTRACTOR Warranty Against Infringement. CONTRACTOR warrants that
(i) use of the WORK or any part thereof for the purposes for which such WORK was
designed, (ii) sale of the WORK or any part thereof by NATIONAL, and (iii)
performance by CONTRACTOR under the CONTRACT, will not infringe any patent,
copyright or other intellectual property right, nor will any of the foregoing
violate any agreement between CONTRACTOR and any third party with respect
thereto, and CONTRACTOR will, at its expense, defend NATIONAL and hold NATIONAL,
its affiliated corporations, successors and assigns, free and harmless in
respect to any claim, action or suit, or for any claim arising out of such
action or suit, for infringement of any patent, copyright or other intellectual
property right or violation of any third party agreement, based on the use of
such WORK or any part thereof for
<PAGE>
the purposes for which it was designed or the sale of such WORK or any part
thereof by NATIONAL, or for actively inducing infringement or for contributory
infringement arising out of the performance of any act by CONTRACTOR under the
CONTRACT; provided, however, that NATIONAL may be represented in any such action
or suit by attorneys of its own selection at its expense. In the event that an
injunction shall be obtained against the use of any such WORK or part thereof by
NATIONAL, CONTRACTOR, in addition to its above obligations, shall, at the option
of NATIONAL and at CONTRACTOR's expense, procure for NATIONAL the right to
continue using said WORK, modify said WORK to become non-infringing or replace
said WORK with non-infringing WORK satisfactory to NATIONAL. If CONTRACTOR
cannot perform in accordance with the immediately preceding sentence, NATIONAL
shall have the right to require CONTRACTOR to take back the infringing portion
of the WORK and reimburse NATIONAL for the portion of the CONTRACT PRICE
applicable thereto and all other expenditures of NATIONAL incurred in connection
therewith. Such remedy shall be in addition to such other remedies as are
available to NATIONAL at law, in equity or hereunder.
21.2 NATIONAL Warranty Against Infringement. NATIONAL warrants that the
incorporation into the WORK at the direction of NATIONAL of the design set forth
in any United States patent owned by NATIONAL (the "INCORPORATED PATENT") shall
not result in an infringement of any other United States patent held by a third
party or violate any agreement between NATIONAL and any third party with regard
to the INCORPORATED PATENT, and NATIONAL will, at its expense, defend CONTRACTOR
and hold CONTRACTOR free and harmless in respect to any claim, action or suit,
or for any claim arising out of such action or suit, for infringement of such
other United States patent or violation of a third party agreement as a result
of the incorporation of the INCORPORATED PATENT into the WORK at the direction
of NATIONAL; provided, however, that CONTRACTOR may be represented in any such
action or suit by attorneys of its own selection at its expense.
21.3 Ownership of DRAWINGS and Other TECHNICAL DATA. CONTRACTOR agrees
that NATIONAL shall be the owner of all drawings, plans, documents, writings,
computer software and data, and all other sources of technical information in
any form, tangible or intangible (herein called "TECHNICAL DATA") relating to
the subject matter of this CONTRACT which was transferred, provided or exhibited
to NATIONAL, its employees or agents, in the course of performance of this
CONTRACT and which is necessary or useful in the operation of the facilities,
equipment, apparatus and/or processes which are the subject matter of this
CONTRACT; provided, however, that CONTRACTOR shall have the unqualified free
right to possess and shall be permitted to make use of TECHNICAL DATA developed
by it (as opposed to TECHNICAL DATA supplied or developed by NATIONAL) in
connection with the WORK. Any exceptions to the above-described ownership
rights of NATIONAL must be agreed to in writing by NATIONAL and made an exhibit
to this CONTRACT and must provide for the unqualified free right of NATIONAL to
possess and use the TECHNICAL DATA in all of its operations.
22. RIGHT TO USE COMPUTER SOFTWARE AND INDEMNIFICATION:
<PAGE>
22.1 License to Use Software. CONTRACTOR agrees, represents and warrants
that if any equipment or other GOODS covered by the CONTRACT include computer
software or require the use of computer software to enable NATIONAL to use the
GOODS, NATIONAL shall have the unrestricted, irrevocable, perpetual, paid-up
right and license to use such computer software solely in connection with the
GOODS so long as the GOODS are in use. If requested in writing by CONTRACTOR,
NATIONAL will protect any such computer software from disclosure to third
parties to the same extent it protects its own confidential information, but the
failure by NATIONAL to do so shall not cause the revocation of, or otherwise
affect, NATIONAL's right to use such computer software. CONTRACTOR agrees to
indemnify and defend NATIONAL from and against any claims of third parties
relating to NATIONAL's rights under this Section 22.
22.2 Year 2000 Warranty; System Compatibility. CONTRACTOR represents and
warrants that each item of hardware, software and firmware delivered to or
developed for NATIONAL pursuant to this CONTRACT will process correctly any data
(including, but not limited to, calculating, comparing and sequencing) from,
into and between the years 1999 and 2000, including, but not limited to, leap
year calculations and any other calculations associated with the change of the
year 1999 to 2000 and/or the change of the twentieth (20th) century to the
twenty-first (21st) century. CONTRACTOR further represents and warrants that
any hardware, software and firmware delivered to or developed for NATIONAL
hereunder also shall perform as an integrated system, including, but not limited
to, interfacing with NATIONAL's existing computer systems. If any item(s) of
hardware, software or firmware (either individually, collectively or in
conjunction with NATIONAL's pre-existing systems, if applicable) delivered to or
developed for NATIONAL hereunder fails to perform as warranted herein,
CONTRACTOR shall, at NATIONAL's option, repair or replace such item(s) at
CONTRACTOR's sole cost and expense, within thirty (30) days.
23. PLANT PROTECTION REGULATIONS:
CONTRACTOR shall be responsible for compliance by itself, its SUBCONTRACTORS and
the employees of both, with all plant protection rules and regulations of
NATIONAL. CONTRACTOR, before entering NATIONAL's premises to undertake the
WORK, must notify NATIONAL of its intention to do so and at the same time inform
NATIONAL of the starting date for the WORK, the nature of the WORK to be
performed, the areas in which the WORK will be performed, duration of the WORK,
approximate number and types of personnel to perform the WORK, the schedule,
length and number of turns to be worked and such other information as may be
necessary to enable the CONTRACTOR to be advised of and to comply with all plant
protection rules and regulations.
24. SUBSTANCE ABUSE:
CONTRACTOR, in accordance with Great Lakes Specification #G-6, "Substance Abuse
Policy for Contractors", Exhibit N hereto, and any revisions thereto, shall
institute, implement and enforce a substance abuse screening program for all
employees involved with the performance of the WORK on NATIONAL's premises, and
guarantees to NATIONAL that all employees, hired
<PAGE>
and existing, performing the WORK on NATIONAL's premises have successfully
passed the substance abuse screening test and, further, CONTRACTOR will use its
best efforts to insure that such employees are not under the influence of any
drugs or other such substance while performing any WORK on NATIONAL's premises.
25. SAFETY RULES:
25.1 Safety Rules. This Section 25 applies to all employees, agents,
SUBCONTRACTORS, consultants and invitees of CONTRACTOR and the employees of any
of them (herein called "CONTRACTOR AUTHORIZED PERSONNEL") and to all rules and
regulations pertaining to the safety of PERSONS or property while on any
premises of NATIONAL, regardless of by whom said rules and regulations have been
issued (herein called "SAFETY RULES"). CONTRACTOR agrees that while any
CONTRACTOR AUTHORIZED PERSONNEL are on premises of NATIONAL, they will conform
to all SAFETY RULES. CONTRACTOR acknowledges that it has received those SAFETY
RULES issued by NATIONAL. CONTRACTOR will see to it that all CONTRACTOR
AUTHORIZED PERSONNEL will be instructed with respect to all SAFETY RULES and
will be advised to report any infractions thereof to CONTRACTOR without fear of
recrimination. CONTRACTOR will be held responsible for immediately correcting
any such infractions and for any and all consequences thereof. CONTRACTOR
agrees to defend and indemnify NATIONAL from and against any claims and
liability for personal injury or death of any CONTRACTOR AUTHORIZED PERSONNEL
occurring while they are present on NATIONAL's premises and arising out of or in
any way in connection with (i) the actual or alleged insufficiency of any SAFETY
RULES, or (ii) any act or omission related in any way to the enforcement or
observance of any SAFETY RULES or the failure to enforce or observe any SAFETY
RULES, whether or not such claims or liability may be based in whole or in part
upon any breach of duty or negligence of NATIONAL, its employees or agents.
25.2 Safety Meetings. Prior to the commencement of any WORK on the SITE
by CONTRACTOR, and prior to commencement of any WORK on the SITE by each
SUBCONTRACTOR, a meeting shall be held with a NATIONAL engineer, the NATIONAL
Safety Representative and the Safety Representative of CONTRACTOR and of each
SUBCONTRACTOR for the purpose and with the effect of a thorough review and
mutual understanding of all SAFETY RULES.
25.3 Health & Safety Plan. CONTRACTOR shall conduct all operations
under the CONTRACT in a manner so as to avoid risk of bodily harm to persons or
damage to property and in full compliance with all GOVERNMENTAL REQUIREMENTS.
Further, CONTRACTOR shall continuously inspect its WORK, materials and equipment
to identify any unsafe conditions and shall promptly take action to correct any
condition which presents such a risk.
CONTRACTOR represents and warrants that it is fully qualified and
knowledgeable with respect to all health and safety requirements relating to the
WORK and that as an independent contractor, CONTRACTOR shall be solely
responsible for compliance with those requirements.
<PAGE>
Upon demand by NATIONAL, CONTRACTOR shall submit in writing to NATIONAL for
review its SITE-specific Health & Safety Plan. CONTRACTOR shall comply fully
with the terms of such Plan.
CONTRACTOR shall provide and maintain its own safety equipment in
accordance with its Health & Safety Plan (if applicable) and all other
applicable legal and health and safety requirements. The CONTRACTOR is also
responsible for providing CONTRACTOR AUTHORIZED PERSONNEL with adequate
information and training in conformance with GOVERNMENTAL REQUIREMENTS.
CONTRACTOR shall ensure that all CONTRACTOR AUTHORIZED PERSONNEL comply with all
applicable requirements.
Should CONTRACTOR fail to comply with its Health & Safety Plan, or with
other applicable requirements as referenced above, such action or inaction shall
be considered a material breach of the CONTRACT. Should CONTRACTOR upon notice
thereof neglect or refuse to take appropriate corrective action, NATIONAL shall
have the right, but not the duty, to stop the CONTRACTOR's WORK or any portion
thereof, and/or correct the condition and backcharge all incident costs to
CONTRACTOR's account.
CONTRACTOR shall be responsible for all fines or penalties assessed due to
its failure to comply with the Health & Safety Plan and applicable GOVERNMENTAL
REQUIREMENTS, including any fines or penalties assessed against NATIONAL.
CONTRACTOR agrees, to the fullest extent permitted by law, to indemnify and hold
NATIONAL harmless from any losses, liabilities, costs and expenses resulting
from CONTRACTOR's failure to comply with the Health & Safety Plan and all
applicable health and safety GOVERNMENTAL REQUIREMENTS.
Nothing in this Section shall be interpreted as enlarging the legal duty of
NATIONAL to CONTRACTOR or to CONTRACTOR AUTHORIZED PERSONNEL or third parties or
as altering the independent contractor status of CONTRACTOR.
26. OCCUPATIONAL SAFETY AND HEALTH:
CONTRACTOR agrees on behalf of itself, its employees, agents, materialmen and
SUBCONTRACTORS to comply with, and to perform the WORK in compliance with,
GOVERNMENTAL REQUIREMENTS relating to the occupational safety and health of
CONTRACTOR's employees, as well as any other PERSONS present at locations where
WORK is to be performed, specifically including the federal Occupational Safety
and Health Act of 1970 and any rules, regulations, standards, or orders issued
thereunder (herein collectively called "OCCUPATIONAL SAFETY AND HEALTH
REQUIREMENTS"). CONTRACTOR represents that all GOODS sold, used or furnished in
connection with the performance of the CONTRACT will comply with all
OCCUPATIONAL SAFETY AND HEALTH REQUIREMENTS, and CONTRACTOR agrees upon request
to furnish to NATIONAL any and all information regarding the ingredients of such
GOODS. CONTRACTOR further agrees to indemnify, defend and hold harmless
NATIONAL from and against any claims, losses, damages,
<PAGE>
fines, penalties, costs and expenses suffered or incurred by NATIONAL as a
result of any violation of or non-compliance with any OCCUPATIONAL SAFETY AND
HEALTH REQUIREMENTS to the extent caused or contributed to by CONTRACTOR, its
agents, materialmen or SUBCONTRACTORS, or the employees of any of them.
27. HAZARDOUS SUBSTANCES AND RIGHT-TO-KNOW:
CONTRACTOR agrees on behalf of itself, its employees, agents, materialmen and
SUBCONTRACTORS, to comply with, and to perform the WORK in compliance with,
GOVERNMENTAL REQUIREMENTS relating to the right of employees and other PERSONS
and entities to be notified of the presence of hazardous chemicals or
substances, specifically including the federal Hazard Communication Standard,
adapted pursuant to the Occupational Safety and Health Act of 1970, the federal
Right-to-Know provisions of the Superfund Amendments and Reauthorization Act of
1986 ("SARA"), Title III, Emergency Planning and Community Right-to-Know Act of
1986, and any rules, regulations, standards or orders issued thereunder and any
similar state or local Right-to-Know Acts or other GOVERNMENTAL REQUIREMENTS
relating to the presence of, exposure to or release of hazardous chemicals or
substances (herein collectively called "RIGHT-TO-KNOW REQUIREMENTS").
CONTRACTOR agrees to provide NATIONAL with any and all information necessary for
NATIONAL to comply with any RIGHT-TO-KNOW REQUIREMENTS. CONTRACTOR represents
that all GOODS sold, used or furnished in connection with the performance of the
CONTRACT will comply with all RIGHT-TO-KNOW REQUIREMENTS. In addition to
providing NATIONAL with information as required by RIGHT-TO-KNOW REQUIREMENTS
with respect to such GOODS, CONTRACTOR agrees upon request to furnish to
NATIONAL any and all information regarding the ingredients of such GOODS.
CONTRACTOR further agrees to indemnify, defend and hold harmless NATIONAL from
and against any claims, losses, damages, fines, penalties, costs and expenses
suffered or incurred by NATIONAL as a result of any violation of or non-
compliance with any RIGHT-TO-KNOW REQUIREMENTS to the extent caused or
contributed to by CONTRACTOR, its agents, materialmen or SUBCONTRACTORS, or the
employees of any of them.
28. TOXIC SUBSTANCES CONTROL:
CONTRACTOR agrees on behalf of itself, its agents, materialmen and
SUBCONTRACTORS, and the employees of any of them, to comply with, and to perform
the WORK in compliance with, GOVERNMENTAL REQUIREMENTS relating to the control
of toxic substances, including those contained in or authorized by the federal
Toxic Substances Control Act (herein collectively called "TOXIC SUBSTANCES
CONTROL REQUIREMENTS"). CONTRACTOR represents that all GOODS sold, used or
furnished in connection with the performance of the CONTRACT will comply with
all TOXIC SUBSTANCES CONTROL REQUIREMENTS, and CONTRACTOR agrees upon request to
furnish to NATIONAL any and all information regarding the ingredients of such
GOODS. CONTRACTOR further represents that each and every chemical substance
sold, used or furnished in connection with the performance of the CONTRACT, as
of the time of such sale, use or furnishing, is on the list of chemical
substances compiled and published by the Administrator of the Environmental
Protection Agency pursuant
<PAGE>
to the federal Toxic Substances Control Act. CONTRACTOR further agrees to
indemnify, defend and hold harmless NATIONAL from and against any claims,
losses, damages, fines, penalties, costs and expenses suffered or incurred by
NATIONAL as a result of any violation of or non-compliance with any TOXIC
SUBSTANCES CONTROL REQUIREMENTS to the extent caused or contributed to by
CONTRACTOR, its agents, materialmen or SUBCONTRACTORS, or the employees of any
of them, or the GOODS or other WORK of any of them.
29. ENVIRONMENTAL REQUIREMENTS:
CONTRACTOR agrees on behalf of itself, its employees, agents, materialmen and
SUBCONTRACTORS to comply with, and to perform the WORK in compliance with,
ENVIRONMENTAL REQUIREMENTS which arise out of performance of the CONTRACT.
CONTRACTOR warrants that all WORK covered by the CONTRACT will not violate any
ENVIRONMENTAL REQUIREMENTS. CONTRACTOR further agrees to indemnify, defend and
hold harmless NATIONAL from and against any claims, losses, damages, fines,
penalties, costs and expenses suffered or incurred by NATIONAL as a result of
any violation of or non-compliance with any ENVIRONMENTAL REQUIREMENTS to the
extent caused or contributed to by CONTRACTOR, its agents, materialmen or
SUBCONTRACTORS, or the employees of any of them or any release of hazardous
substances, pollutants or contaminants to the extent caused or exacerbated by
CONTRACTOR, its agents, materialmen or SUBCONTRACTORS.
30. INDEMNITY BY CONTRACTOR:
30.1. Indemnification by CONTRACTOR. Subject to the later provisions of
this Section 30.1, CONTRACTOR shall be solely responsible for and shall
indemnify NATIONAL from and against any and all claims, suits, damages, losses,
specifically, including loss of use of property, and all other liabilities
whatsoever, including related expenses and attorneys' fees ("LOSSES") , for or
on account of (i) injuries to or death of any PERSON, including but not limited
to employees of NATIONAL or CONTRACTOR, and/or loss of or damage to any
property, including, but not limited to, the property of NATIONAL or CONTRACTOR,
in any way sustained or alleged to have been sustained, directly or indirectly,
by reason of or in connection with the performance of the WORK by CONTRACTOR,
its employees, agents or SUBCONTRACTORS or their employees; (ii) subject to the
limitations set forth below, the presence of CONTRACTOR's employees or
SUBCONTRACTORS or their employees on the premises of NATIONAL; (iii) the
negligence, recklessness or willful misconduct of CONTRACTOR or any CONTRACTOR
AUTHORIZED PERSONNEL; (iv) any breach by CONTRACTOR of any representation,
warranty, covenant or agreement contained in the CONTRACT DOCUMENTS which
results in injuries or death to any third PERSON and/or loss or damage to any
property of a third PERSON, it being understood and agreed that CONTRACTOR's
indemnification obligation pursuant to this subsection (iv) shall be limited to
the amount of NATIONAL's liability to such third PERSON as a result of
CONTRACTOR's breach, together with costs, expenses and attorneys' fees, if any,
incurred by NATIONAL in the investigation or defense of any such claim; (v) any
violation of GOVERNMENTAL
<PAGE>
REQUIREMENTS by CONTRACTOR, its SUBCONTRACTORS or any CONTRACTOR AUTHORIZED
PERSONNEL; and (vi) the failure of the WORK to conform to GOVERNMENTAL
REQUIREMENTS. With respect to subsection (ii) above, in the event that it is
ultimately determined by a court of law that the LOSSES incurred were due to
NATIONAL'S FAULT (as defined below), NATIONAL shall refund to CONTRACTOR the
amount of out-of-pocket COSTS incurred by CONTRACTOR in connection with the
defense thereof. With respect to all of the indemnity events set forth in
subsections (i) through (vi) above, CONTRACTOR shall indemnify NATIONAL to the
full extent of NATIONAL's LOSSES; provided, however, that if NATIONAL's
liability is wholly or partially the result of NATIONAL's contributory
negligence, willful misconduct or other fault-based grounds (collectively,
"NATIONAL'S FAULT") then CONTRACTOR's indemnity obligations shall be offset by
an amount equal to (A) NATIONAL's LOSSES multiplied by (B) the percentage of
NATIONAL'S FAULT. Nothing in this Section 30.1 shall be construed to be an
agreement to indemnify NATIONAL against liability for damages caused by or
resulting from the sole negligence of NATIONAL, its agents or employees, under
circumstances whereby said agreement would be in violation of Michigan Public
Act 1966, No. 165, (S) 1 (M.C.L.A. (S) 691.991), if applicable, or of any other
applicable law, it being the intent of the foregoing provisions to absolve and
protect NATIONAL from, and to indemnify NATIONAL against, any and all liability
and loss by reason of the premises except to the limited extent prohibited by
Michigan Public Act 1966, No. 165, (S) 1, if applicable, or by any other
applicable law, and as limited herein.
30.2 Indemnity Obligation Exclusive of Insurance Requirements. The
obligation of CONTRACTOR to indemnify NATIONAL as provided above is not
superseded or modified by the provisions of Section 31 (INSURANCE) requiring
CONTRACTOR to procure and maintain insurance for the benefit of NATIONAL.
30.3 Indemnity Obligations Not Limited by Employee Benefit Acts. The
indemnity obligations of CONTRACTOR set forth in this CONTRACT shall not be
limited in any way by the limitation on the amounts and types of damages,
compensation or benefits payable by or for CONTRACTOR, SUBCONTRACTOR or any
CONTRACTOR AUTHORIZED PERSONNEL under any workers' compensation acts, disability
acts of other employment-related laws or regulations.
31. INSURANCE:
31.1 Provision of Insurance by CONTRACTOR and SUBCONTRACTORS.
CONTRACTOR and all SUBCONTRACTORS, at their own expense, shall procure and
maintain with respect to the WORK any policies of insurance (CONTRACTOR and any
such SUBCONTRACTORS being solely responsible for any deductible or retention, as
well as any liability based upon the fault of CONTRACTOR in excess of the
insurance coverage limits set forth herein), which may be required by NATIONAL
as set forth herein and which shall be in such form and issued by such company
or companies satisfactory to NATIONAL, and prior to commencement of WORK
hereunder, shall secure and deliver to NATIONAL Certificates of Insurance
evidencing the following insurance coverage:
<PAGE>
(i) Workers' Compensation according to applicable statutory requirements
and Employer's Liability Insurance with a limit of at least
$100,000.00 per occurrence.
(ii) Comprehensive General Liability Insurance written on an "occurrence"
basis covering operations and SUBCONTRACTORS (including the contractual
liability assumed under Section 30 (INDEMNITY BY CONTRACTOR) above as well
as the following: Products Liability/Completed Operations providing
coverage for one year beyond the acceptance of the PROJECT by NATIONAL;
Blanket Contractual Liability - All Written Contracts; Operations Premises
Liability; Explosion, Collapse, and Underground Property Damage; Personal
Injury; Independent Contractors Coverage; Broad Form Property Damage
Endorsement; Cross-Liability and Severability of Interest; Modified Notice
of Occurrence and Knowledge of Occurrence Endorsement, and with a minimum
limit applicable to Bodily Injury Liability and Property Damage Liability
of not less than:
$2,000,000.00 combined single limit which must be available at
all times under this CONTRACT.
(iii) Comprehensive Automobile Liability Insurance written on an
"occurrence" basis covering owned, non-owned and hired motor vehicles
(including, without limitation, land motor vehicles and trailers or
semi-trailers designed to travel on public roads (including all
machinery or apparatus attached thereto)) with a combined single limit
for bodily injury and property damage of not less than:
$2,000,000.00 combined single limit.
(iv) Excess Liability Insurance written on an "occurrence" basis with a
limit of at least $4,000,000 per occurrence and aggregate in excess of
the Comprehensive General Liability and Employers Liability coverages
required under subparagraphs (i) and (ii) above. The Excess Liability
Insurance shall include the "following form" endorsement and "drop
down" endorsement relating to exhaustion of primary limits. This
coverage shall be further endorsed to be excess of the Comprehensive
Automobile Liability coverage required under subparagraph (iii) above.
(v) Builders Risk Insurance written on an "occurrence" basis for an amount
not less than 100% of the insurable value on a Replacement Cost basis,
which will protect against all risks of physical loss including flood
and earth movement, to the PROJECT property during construction, such
property to include without limitation, all machinery, equipment,
materials and supplies which are destined to become a permanent part
of the PROJECT. Insurance shall be in force for the
<PAGE>
entire course of WORK under the CONTRACT, while property is in transit, on
or off-site awaiting installation, during the course of construction
and/or installation and terminating at final acceptance by NATIONAL.
CONTRACTOR SHALL MAKE NATIONAL AN ADDITIONAL INSURED ON A PRIMARY BASIS UNDER
CONTRACTOR'S INSURANCE POLICIES REFERRED TO IN SUBPARAGRAPHS (ii) THROUGH (iv)
ABOVE APPLICABLE TO THE WORK BY MEANS OF AN ENDORSEMENT TO THE POLICY IN THE
FORM ATTACHED TO THE CONTRACT AS EXHIBIT O SIGNED BY THE INSURER, A DUPLICATE OF
WHICH SHALL BE FURNISHED TO NATIONAL WITH THE REQUIRED CERTIFICATES OF
INSURANCE. ALL INSURANCE REQUIRED HEREUNDER SHALL BE ENDORSED TO BE PRIMARY
OVER ANY OTHER VALID AND COLLECTIBLE INSURANCE AVAILABLE TO NATIONAL.
31.2 Insurance Requirements in Addition to Indemnity Obligations. The
obligation of CONTRACTOR to provide insurance for the benefit of NATIONAL under
this Section 31 is in addition to and not in limitation or substitution of
CONTRACTOR's obligation to indemnify NATIONAL pursuant to Section 30 (INDEMNITY
BY CONTRACTOR) above.
31.3 Certificates of Insurance. All certificates of insurance from the
insuring companies required to be furnished to NATIONAL hereunder shall include
the following clause: "At least thirty (30) days advance notice shall be given
in writing by certified mail, return receipt requested, to:
Manager, Capital Construction/Services
National Steel Corporation
4100 Edison Lakes Parkway
Mishawaka, Indiana 46545
prior to cancellation, termination, or any alteration of the policy or policies
evidenced by this certificates".
32. FIRST AID AND MEDICAL FACILITIES:
32.1 Provision of Facilities by CONTRACTOR and SUBCONTRACTORS. It is
understood and agreed that CONTRACTOR, before proceeding with the WORK under the
CONTRACT, shall make and shall require all SUBCONTRACTORS to make such
arrangements as may be necessary to provide adequate first aid, medical,
surgical and hospital treatment for injuries sustained by any employees of
CONTRACTOR, by any employee of a SUBCONTRACTOR or by any other PERSON employed
or invited on the SITE by CONTRACTOR or a SUBCONTRACTOR arising out of or in
connection with the performance of the WORK. In the event that NATIONAL were to
supply any such first aid, medical, surgical or hospital treatment, then
CONTRACTOR and all SUBCONTRACTORS shall indemnify and defend NATIONAL from any
claims, suits, liabilities and damages arising out of or in connection
therewith, whether based in whole or in part on the active or passive negligence
of NATIONAL, its employees or agents; provided, however, that the foregoing
shall not be
<PAGE>
construed to be an agreement to indemnify NATIONAL against liability for damage
caused by or resulting from the sole negligence of NATIONAL, its agents or
employees, under circumstances whereby said agreement would be in violation of
Michigan Public Act 1966, No. 165, (S) 1 (M.C.L.A. (S) 691.991), if applicable,
or of any other applicable law, it being the intent of the foregoing provisions
to absolve and protect NATIONAL from, and to indemnify NATIONAL against, any and
all liability and loss by reason of the premises except to the limited extent
prohibited by Michigan Public Act 1966, No. 165, (S) 1, if applicable, or by any
other applicable law.
32.2 Accident Reports. CONTRACTOR must submit a written report to
NATIONAL's representative of all accidents, giving full details and statements
of witnesses, if reasonably available, within twenty-four (24) hours of the
accident. In addition, all accidents shall be reported immediately by telephone
or messenger to NATIONAL.
33. LABOR CONDITIONS:
33.1 Compliance with Labor Agreements. CONTRACTOR shall comply in full
with any labor agreements to which CONTRACTOR is a party or to which CONTRACTOR
is otherwise bound to the full extent that such labor agreements apply to the
WORK.
33.2 National Maintenance Agreement. All construction WORK on the SITE
shall be performed in accordance with the National Maintenance Agreement
attached hereto as Exhibit P, to the extent that it is agreed upon by NATIONAL
and all applicable unions.
33.3 Refusal of Entry. NATIONAL has the right to refuse entry onto its
property to any employee of CONTRACTOR or of a SUBCONTRACTOR in the event such
employee commits acts which, in NATIONAL's reasonable opinion, constitute proper
cause for refusal of entry. In addition, NATIONAL may require CONTRACTOR to
discharge any incompetent or unsatisfactory employees; provided, however, that
CONTRACTOR shall not be required to take any action which, in its reasonable
judgment, would result in a violation of any GOVERNMENTAL REQUIREMENTS or of any
labor agreement to which CONTRACTOR is a party.
33.4 GOVERNMENTAL REQUIREMENTS Relating to Labor Conditions. CONTRACTOR
will comply with GOVERNMENTAL REQUIREMENTS relating to: (i) equal employment
opportunity, including but not limited to all GOVERNMENTAL REQUIREMENTS
contained in or authorized by Federal Executive Order No. 11246 of September 24,
1965, and any amendments thereto; (ii) employment of veterans, including but not
limited to all GOVERNMENTAL REQUIREMENTS contained in or authorized by the
Vietnam Era Veterans' Readjustment Assistance Act of 1974, and any amendments
thereto; and (iii) employment of the handicapped, including but not limited to
all GOVERNMENTAL REQUIREMENTS contained in or authorized by the Rehabilitation
Act of 1973, and any amendments thereto.
<PAGE>
33.5 Incorporation of Regulations. The following clauses and
regulations are hereby incorporated herein by reference thereto: (i) the equal
employment opportunity clause contained in 41 C.F.R. (S) 60-1.4; (ii) the
affirmative action clause covering the employment of veterans and the
regulations contained in 41 C.F.R., Part 60-250, this incorporation by reference
being authorized by 41 C.F.R. (S) 60-250.22; and (iii) the affirmative action
clause covering the employment of handicapped workers and the regulations
contained in 41 C.F.R. Part 60-741, this incorporation by reference being
authorized by 41 C.F.R. (S) 60-741.22.
34. RESPONSIBILITY FOR AND GUARANTEE OF WORK:
34.1 Responsibility for WORK. CONTRACTOR shall be responsible for all
MATERIALS, EQUIPMENT and other items delivered (including materials furnished by
NATIONAL) to the SITE and the WORK performed until the HOT RUN COMMENCEMENT.
The WORK shall be delivered free from defects, complete, undamaged and in proper
operating condition capable of meeting all performance requirements. CONTRACTOR
warrants that upon delivery to the SITE, CONTRACTOR shall have good title to,
and the right to convey to NATIONAL, the WORK and all of its component parts.
34.2 Warranty Against Defective WORK. CONTRACTOR shall be responsible
to NATIONAL for promptly repairing or replacing any portion of the WORK which is
or becomes defective at any time (a) within one year after the date of issuance
(but not the deemed issuance) of the Certificate of Substantial Completion by
NATIONAL, or (b) subject to the next succeeding sentence, within seventeen and
one-half (17.5) months from the date of issuance of the No Load Test Completion
Certificate if there is a deemed issuance of the Certificate of Substantial
Completion hereunder (herein referred to as the "DEEMED WARRANTY PERIOD"), or
(c) within such longer warranty period applicable thereto, regardless of when
such defect is discovered; provided, however, that with respect to any
equipment, materials or services which are defective and which are corrected
(either by CONTRACTOR or by NATIONAL, if CONTRACTOR fails to make such
corrections), then the warranty with respect to such equipment, materials or
service shall extend for one (1) year from the date of correction. No such
DEEMED WARRANTY PERIOD shall apply under this Section 34.2, and the one-year
warranty period shall begin to run as of the date of issuance, or deemed
issuance, as the case may be, of the Certificate of Substantial Completion
unless (i) CONTRACTOR shall have given to NATIONAL timely notice(s) that a
FAILURE OF NATIONAL PERFORMANCE TEST CONDITIONS is preventing the issuance of
the Certificate of Substantial Completion, which notice shall set forth in
detail the specific basis for CONTRACTOR's belief that the delay is being caused
by a FAILURE OF NATIONAL PERFORMANCE TEST CONDITIONS, (ii) no act or omission of
CONTRACTOR or any SUBCONTRACTOR prevents the issuance of the Certificate of
Substantial Completion, and (iii) either the parties have agreed, or a court of
law has determined, that such delay was indeed caused by a FAILURE OF NATIONAL
PERFORMANCE TEST CONDITIONS. CONTRACTOR shall provide the aforementioned
notice(s) within thirty (30) days after the beginning of such delay by NATIONAL.
No such deemed commencement of the warranty period shall occur if there is a
dispute between NATIONAL and CONTRACTOR with regard to CONTRACTOR's assertion
that the delay is caused by a FAILURE OF NATIONAL PERFORMANCE TEST CONDITIONS or
with respect
<PAGE>
to the quality of the WORK or the conformity of the WORK to the CONTRACT
DOCUMENTS. In the event that there is a dispute as to whether the warranty
period has expired, and NATIONAL requests CONTRACTOR to perform services or work
which NATIONAL believes should be covered by CONTRACTOR's warranty, CONTRACTOR
shall be obligated to perform such services or WORK as if such warranty was in
effect, but CONTRACTOR shall keep COST and expense records with reference to its
performance of services and/or work and in the event that it is subsequently
determined by a court of law or agreed that the warranty period has expired,
NATIONAL shall pay CONTRACTOR for such services and work at CONTRACTOR's
customary rates. The one year warranty period set forth herein shall apply to
all portions of the WORK with respect to which warranty periods of longer
duration are not specified. In addition to its obligations hereunder, CONTRACTOR
shall make available to NATIONAL the benefits of any and all manufacturer and
supplier warranties applicable to any portions of the WORK for the complete
warranty period, which shall not be less than such one year warranty period
described above. Notwithstanding the foregoing, the CONTRACTOR shall not be
responsible for repair, replacement or making good of any defect or of any
damage to the WORK to the extent arising out of or resulting from the improper
operation or maintenance of the PLANT by NATIONAL, the operation of the PLANT by
NATIONAL outside the SPECIFICATIONS provided in the CONTRACT or normal wear and
tear.
34.3 Intent of CONTRACT DOCUMENTS. CONTRACTOR acknowledges that the
intent of the CONTRACT DOCUMENTS is to define the absolute minimum functional
requirements for a continuous galvanizing line. The WORK shall be designed,
engineered, manufactured and constructed in accordance with all applicable codes
and manufacturing standards, and shall incorporate the latest technology
available. Compliance with the minimum standards set forth in the CONTRACT
DOCUMENTS does not waive the CONTRACTOR's responsibility to provide a "turnkey"
fully operating automotive exposed continuous galvanizing line facility.
34.4 Performance Requirements as Express Warranties. All requirements
relating to the WORK set forth in the SPECIFICATIONS (including, without
limitation, all operating and performance standards), DRAWINGS and other
CONTRACT DOCUMENTS shall be deemed express warranties by the CONTRACTOR that the
WORK will conform in all respects thereto.
34.5 Design and Construction Warranties. CONTRACTOR warrants that the
WORK will be designed, manufactured and constructed according to the CONTRACT
DOCUMENTS and there shall be no defects in design, engineering, material and
workmanship of the PLANT supplied and of the WORK executed.
34.6 Spare Parts. The CONTRACT PRICE includes all of those spare parts
listed in the SPECIFICATIONS. CONTRACTOR represents that, to the best of its
knowledge, based upon its prior experience, such list constitutes a full
complement of those spare parts that would be required for use during the first
two (2) years of operation of the galvanizing facility.
34.7 Knowledge of Existing Conditions and Applicable Laws. CONTRACTOR
represents and warrants that it is technically, physically, financially and
legally ready, willing
<PAGE>
and able to perform the WORK hereunder and that it is familiar with and
knowledgeable about applicable GOVERNMENTAL REQUIREMENTS to the extent necessary
to carry out its duties in a professional, complete and competent manner.
34.8 NATIONAL's Reliance on CONTRACTOR's Experience and Expertise.
CONTRACTOR acknowledges and agrees that NATIONAL is relying upon CONTRACTOR's
special and unique abilities and the accuracy, competence and completeness of
CONTRACTOR's WORK. CONTRACTOR represents that it has performed WORK similar to
that required hereunder on other projects, and that CONTRACTOR's experience and
expertise are the principal reasons that NATIONAL is retaining CONTRACTOR to
perform the WORK hereunder.
34.9 Training and Qualifications. CONTRACTOR represents, covenants and
warrants that it has the requisite personnel, competence, skill and physical
resources to perform the WORK required hereunder and that it has and shall
maintain the capability, experience, registrations, licenses, permits and
government approvals required to perform the SCOPE OF WORK herein.
34.10 Review of CONTRACT DOCUMENTS. CONTRACTOR represents that it (i)
has thoroughly reviewed all of the documents comprising the CONTRACT; (ii) is in
agreement with the design, approach and concepts set forth in such documents
with respect to the WORK; and (iii) is of the belief that such design, approach
and concepts are reasonable under the circumstances and will accomplish
NATIONAL's purposes with respect to the WORK.
34.11 Additional Warranties. The warranties set forth herein are in
addition to any other warranties set forth elsewhere in the CONTRACT, as well as
any express warranties made by CONTRACTOR.
34.12 Liquidated Damages for Failure to Achieve Performance Warranties.
(i) In the event that the WORK fails to meet the operating performance
criteria set forth in the SPECIFICATIONS by the SUBSTANTIAL COMPLETION DEADLINE,
CONTRACTOR agrees to pay to NATIONAL an amount calculated in accordance with the
following formula, which sum is hereby, in view of the difficulty of calculating
the precise amount of damages which will be suffered by NATIONAL as a result of
such failure to meet such performance warranty standards, agreed upon by
NATIONAL and CONTRACTOR as a reasonable estimate of the damages NATIONAL will
suffer as a result thereof, and not as a penalty.
(ii) Liquidated damages hereunder shall be assessed based upon the failure
to satisfy any or all of the seven (7) performance warranty criteria set forth
in Section 8.3 of the AS SOLD SPECIFICATION by the SUBSTANTIAL COMPLETION
DEADLINE (as set forth in subsection (iii) below). Liquidated damages shall
accrue on a daily basis in accordance with the following schedule:
<PAGE>
<TABLE>
<CAPTION>
DAYS AFTER SUBSTANTIAL LIQUIDATED DAMAGES
COMPLETION DEADLINE MAXIMUM PER DAY
<S> <C>
0-7 0
8-14 $20,000
15-21 $40,000
for each day after
the 21st day $90,000
</TABLE>
The liquidated damages amounts set forth above represent the maximum liquidated
damages payable per day for failure to achieve the performance warranties.
(iii) The amount of liquidated damages payable on a daily basis shall be
determined based upon which of the seven (7) performance warranty criteria are
not satisfied as of that date.
(A) In the event that any one or more of the following four (4) criteria
are not satisfied, the entire maximum liquidated damages amount payable for that
day shall be assessed: (1) zinc coating weight; (2) strip temperature; (3)
galvannealing capability; and (4) process computer.
(B) In the event that any one or more of the following three (3) criteria
are not satisfied, one-third (1/3) of the maximum liquidated damages amount
payable for that day shall be assessed for each of the unsatisfied criteria: (1)
productivity; (2) finished strip flatness; and (3) finished strip surface.
(iv) By way of example, if on day 8, the performance warranty criteria for
zinc coating weight, strip temperature, productivity and finished strip flatness
are unsatisfied, the liquidated damages amount for that day is $20,000 ($20,000
being the daily "cap"). If on day 12, only the criteria for productivity and
finished strip flatness remain unsatisfied, the liquidated damages amount for
that day is $13,333.33 (1/3 of $20,000 assessable for each of the two
unsatisfied criteria).
(v) Liquidated damages under this Section 34.12 shall be payable on a
monthly lump-sum basis by CONTRACTOR and such payment of liquidated damages
shall be due no later than ten (10) days after the end of the calendar month for
which such damages are payable. The assessment of liquidated damages hereunder
does not discharge CONTRACTOR from its duty to complete the WORK, to satisfy the
performance warranties and to otherwise fulfill all of the requirements of this
CONTRACT.
(vi) CONTRACTOR's total maximum liability for liquidated damages pursuant
to this Section 34.12 shall be three percent (3%) of the CONTRACT PRICE.
35. COMPENSATION AND PAYMENTS:
<PAGE>
35.1 Full Compensation. CONTRACTOR agrees to accept payment specified
hereunder as full compensation for performing the WORK, for any and all loss or
damage arising out of or in connection with the WORK, whether from the action of
the elements or from any unforeseen or unknown difficulties or obstructions
which may arise or be encountered in the prosecution of the WORK at any time
until final acceptance of the WORK by NATIONAL, and for any and all risks of
every description connected with the WORK.
35.2 Down Payment. Within ten (10) days of the execution of this
CONTRACT, and subject to the provisions of Section 35.5 (RETAINAGE) hereof,
NATIONAL shall make a down payment in the amount of ten percent (10%) of the
CONTRACT PRICE - CONSTRUCTION COMPONENT and five percent (5%) of the CONTRACT
PRICE - EQUIPMENT COMPONENT to CONTRACTOR.
35.3 Payment Terms.
(i) Attached hereto as Exhibit Q is a Payment Milestone Schedule, which
correlates the engineering, design, EQUIPMENT supply and commissioning
components of the WORK with an appropriate percentage of the CONTRACT PRICE, and
also sets forth the dates on which each of the milestone events are to be
completed. Promptly following the end of each calendar month, CONTRACTOR shall
certify to NATIONAL, by executing and delivering a status report, in such form
and substance as is reasonably specified by NATIONAL, whether or not (A) the
milestone events on the Payment Milestone Schedule for that month were
accomplished; and (B) the progress of the WORK is in compliance with the
CONTRACT Schedule, and shall provide along with such certification appropriate
supporting documentation. Notwithstanding anything to the contrary set forth in
the Payment Milestone Schedule, CONTRACTOR shall not invoice NATIONAL, and
NATIONAL shall not be obligated to pay, for milestones achieved more than one
month ahead of the projected completion date therefor set forth in the Payment
Milestone Schedule.
(ii) Those aspects of the WORK for which payment is not governed pursuant
to either Section 35.2 or subsection (i) above (e.g., construction components of
the WORK) shall be paid for via progress payments in the manner set forth in
Section 35.4(ii) below. Attached hereto as Exhibit R is a Construction Estimate
which sets forth estimated total quantities to be used during the construction
components of the WORK and breaks the construction component into subcategories
for the WORK. CONTRACTOR shall update the information contained on Exhibit R
(THE CONSTRUCTION ESTIMATE) from time to time by providing written notice
thereof to NATIONAL. Promptly following the end of each calendar month in which
construction components of the WORK are being performed, CONTRACTOR shall
provide NATIONAL with a status report, in such form and substance as is
reasonably specified by NATIONAL and in accordance with the PROGRESS
EVALUATION/PROCEDURE, setting forth the progress of construction activities
detailed in the then-applicable version of Exhibit R (THE CONSTRUCTION
ESTIMATE).
35.4 Partial Payments.
<PAGE>
(i) For those aspects of the WORK covered by Section 35.3(i) hereof,
NATIONAL shall make partial payments of the CONTRACT PRICE as WORK progresses as
follows: in the event that NATIONAL agrees that CONTRACTOR has met all of the
milestone events shown on the Payment Milestone Schedule which are then required
to have been met and that the progress of this WORK is on schedule as of a date
when payment is due under the Payment Milestone Schedule, then NATIONAL shall on
or before the twenty-fifth (25th) day of the month following the month in which
NATIONAL receives the certification referred to in Section 35.3(i) hereof, make
the progress payment called for under the Payment Milestone Schedule (minus
retainage as set forth in Section 35.5 below). In the event that NATIONAL
reasonably determines that CONTRACTOR has failed to accomplish any required
milestone event and/or that the progress of the WORK with respect to a
particular milestone is not on schedule as of a date when payment is due under
the Payment Milestone Schedule, then NATIONAL shall be entitled to withhold
making such payment of that portion of the CONTRACT PRICE attributable to that
milestone until NATIONAL is reasonably satisfied that the required milestone
event has been accomplished and that the WORK scheduled to be completed with
respect to that milestone as of that payment date has in fact been
satisfactorily completed. Upon satisfaction of such requirements by CONTRACTOR,
the withheld payment shall be made.
(ii) For those aspects of the WORK covered by Section 35.3(ii) hereof,
NATIONAL shall make partial payments of the CONTRACT PRICE as WORK progresses as
follows: CONTRACTOR shall present to NATIONAL an itemized invoice for all
charges payable under Section 35.3(ii) (together with appropriate backup
documentation) at the end of each calendar month while WORK is being performed.
CONTRACTOR'S invoice shall include on its face such information as NATIONAL
shall reasonably require and shall be cross-referenced to the appropriate
portions of the then-applicable version of Exhibit R (THE CONSTRUCTION
ESTIMATE). In the event that NATIONAL reasonably determines that CONTRACTOR's
WORK is behind schedule (as compared to the then-applicable version of Exhibit
R - THE CONSTRUCTION ESTIMATE) as of a date when payment is due under this
subsection, then NATIONAL shall be entitled to withhold making such payment (but
only to the extent applicable to those portions of the WORK that are behind
schedule) until NATIONAL is reasonably satisfied that those portions of the WORK
are back on schedule Approved progress payment invoices shall be paid (minus
retainage as set forth in Section 35.5 below) on or before the twenty-fifth
(25th) day of the month following the month in which NATIONAL receives the
CONTRACTOR's invoice.
35.5 Retainage.
(i) All payments of the CONTRACT PRICE - CONSTRUCTION COMPONENT - CIVIL AND
BUILDING to be made by NATIONAL to CONTRACTOR hereunder shall be subject to
withholding of retainage of ten percent (10%) of the applicable payment. If
CONTRACTOR has fully performed those of its obligations hereunder due at such
time, retained amounts with respect to the CONTRACT PRICE - CONSTRUCTION
COMPONENT - CIVIL AND BUILDING shall be paid by NATIONAL to CONTRACTOR no later
than ten (10) days after NATIONAL reasonably determines that the completion of
the Civil and Building portions of the construction component of the WORK has
occurred, as described in Exhibit R; provided,
<PAGE>
however, that as a condition precedent to the payment of such retainage, (A)
CONTRACTOR shall have delivered to NATIONAL all required lien waivers as of the
date of the paydown, and (B) CONTRACTOR shall have provided to NATIONAL an
irrevocable letter of credit ("L/C") in an amount equal to ten percent (10%) of
the CONTRACT PRICE -CONSTRUCTION COMPONENT - CIVIL AND BUILDING in form and
substance reasonably satisfactory to NATIONAL and CONTRACTOR to secure
CONTRACTOR'S performance and, if applicable, payment obligations hereunder.
(ii) All payments of the CONTRACT PRICE - CONSTRUCTION COMPONENT -
EQUIPMENT INSTALLATION to be made by NATIONAL to CONTRACTOR hereunder shall be
subject to withholding of retainage of ten percent (10%) of the applicable
payment. If CONTRACTOR has fully performed those of its obligations hereunder
due at such time, retained amounts with respect to the CONTRACT PRICE -
CONSTRUCTION COMPONENT - EQUIPMENT INSTALLATION shall be paid by NATIONAL to
CONTRACTOR no later than ten (10) days after the issuance of the Installation
Completion Certificate; provided, however, that as a condition precedent to the
payment of such retainage, (A) CONTRACTOR shall have delivered to NATIONAL all
required lien waivers as of the date of the paydown, and (B) CONTRACTOR shall
have provided to NATIONAL an additional L/C in an amount equal to ten percent
(10%) of the CONTRACT PRICE - CONSTRUCTION COMPONENT - EQUIPMENT INSTALLATION in
form and substance reasonably satisfactory to NATIONAL and CONTRACTOR to secure
CONTRACTOR's performance and, if applicable, payment obligations hereunder.
(iii) Each of the L/Cs described in clauses (i) and (ii) above shall be
issued by a bank with offices in the United States with a rating of A or better
from Moody's or Standard & Poor's, or otherwise acceptable to NATIONAL, and such
L/C shall contain provisions consistent with this Section 35.5 (iii). Each of
the L/Cs shall remain in effect until the issuance (or deemed issuance) of the
Certificate of Substantial Completion by NATIONAL. Each of the L/Cs may be
drawn down by sight drafts, one or more times, upon presentation of a sworn
statement by an officer of NATIONAL stating that CONTRACTOR has failed to
perform its obligations or pay sums due hereunder; provided, however, that
NATIONAL shall not draw down on either of the L/Cs until after the giving of
such notices and the expiration of such cure periods as are required under
Section 41 (TERMINATION) hereof.
(iv) All payments of the CONTRACT PRICE - EQUIPMENT COMPONENT to be made by
NATIONAL to CONTRACTOR hereunder shall be subject to withholding of retainage of
five percent (5%) of the applicable payment. If CONTRACTOR has fully performed
those of its obligations hereunder due at such time, retained amounts with
respect to the CONTRACT PRICE - EQUIPMENT COMPONENT shall be paid by NATIONAL to
CONTRACTOR in accordance with the following schedule: (A) fifty percent (50%) of
the then retained amounts, no later than ten (10) days after the issuance (or
deemed issuance) of the Provisional Acceptance Certificate, and (B) the
remainder of the then retained amounts no later than ten (10) days after the
issuance (or deemed issuance) of the Certificate of Substantial Completion;
provided, however, that a condition precedent to the release of any retainage
hereunder shall be the delivery by CONTRACTOR to NATIONAL of all required lien
waivers as of the date of the paydown.
<PAGE>
CONTRACTOR understands and agrees that, notwithstanding the issuance or deemed
issuance of the Certificate of Substantial Completion, NATIONAL shall be
entitled to hold back such amounts of retainage under this Section 35.5(iv) as
NATIONAL, in its reasonable discretion, determines is necessary to ensure the
satisfactory completion of all "punch list" items and satisfaction of any other
obligations for which CONTRACTOR is responsible pursuant to Section 15.1(vi)
hereof; provided, however, that such hold back shall not exceed an amount equal
to twice the value of the "punch list" items and unfulfilled obligations.
(v) Payments of the CONTRACT PRICE - COMMISSIONING COMPONENT shall not be
subject to withholding for retainage.
35.6 Payment of Remaining Amounts Due. Payment of all remaining amounts
of the CONTRACT PRICE due CONTRACTOR (less the hold back for "punch list" items
and other items referred to in Section 35.5 above) shall be made by NATIONAL
within thirty (30) days of the issuance (or deemed issuance) by NATIONAL of the
Certificate of Substantial Completion referred to in Section 15 (ACCEPTANCE OF
THE WORK) hereof. Any remaining hold back portions of the CONTRACT PRICE shall
be paid upon issuance of the Certificate of Final Completion.
35.7 Payments Subject to Being Withheld. Payments otherwise due may be
withheld by NATIONAL in amounts reasonably related to the extent of defective
WORK not remedied, claims filed, or reasonable evidence indicating the
probability of filing of claims, overcharges or duplication of charges, failure
of CONTRACTOR to make proper payment to SUBCONTRACTORS or for materials or
labor, or the existence of a reasonable doubt that the CONTRACT can be completed
for the balance then unpaid. If the foregoing causes are removed, the withheld
payments shall promptly be made. If said causes are not removed after written
notice to CONTRACTOR, NATIONAL may rectify or discharge the same at CONTRACTOR's
expense. After final payment is made, CONTRACTOR shall, upon demand by
NATIONAL, pay, or reimburse NATIONAL for payments of, any amount that NATIONAL
may be obliged to pay in discharging any lien or claim relating to the WORK for
which CONTRACTOR is responsible pursuant to Section 20 (LIENS AND CLAIMS) hereof
and affecting title to the WORK or NATIONAL's other property.
35.8 Payment Not Acceptance. No payment by NATIONAL hereunder shall be
construed as acceptance or approval of WORK hereunder.
35.9 Method of Payment. All payments to be made by NATIONAL to
CONTRACTOR hereunder shall be made by wire transfer to a United States bank
account or accounts to be designated in writing by CONTRACTOR to NATIONAL. Each
party shall bear the charges and costs assessed by its own respective bank with
respect to such wire transfer.
35.10 Interest on Late Payments. Late payments of sums due either party
shall bear interest at the rate quoted for six-month London Interbank Offered
Rates under the caption "Money Rates" in the Wall Street Journal on the date
such payment is due plus one-half percent (0.5%) per annum; provided, however,
that interest shall not accrue on amounts not paid due to
<PAGE>
the existence of a good faith dispute between the parties until the date of
resolution of such dispute.
36. TITLE; RISK OF LOSS.
36.1 Title. Title to the EQUIPMENT and MATERIALS shall vest in NATIONAL
upon payment therefor by NATIONAL. Notwithstanding the foregoing, title to any
EQUIPMENT and MATERIALS, excluding spares, in excess of the requirements for the
WORK shall revert to CONTRACTOR upon the issuance or deemed issuance of the
Certificate of Substantial Completion by NATIONAL or at such other time as the
parties may mutually agree.
36.2 Risk of Loss. Risk of loss for the EQUIPMENT AND MATERIALS shall
pass from CONTRACTOR to NATIONAL upon HOT RUN COMMENCEMENT, notwithstanding the
fact that title to such EQUIPMENT and MATERIALS may have passed to NATIONAL at
an earlier date.
36.3 Construction Equipment. Risk of loss for the CONSTRUCTION EQUIPMENT
shall remain at all times with the CONTRACTOR or its SUBCONTRACTOR(S), as
applicable.
37. FORFEITURE OF COMPENSATION FOR FALSELY IDENTIFIED WORK:
37.1 Compensation Only for PROJECT WORK. CONTRACTOR understands and agrees
that it is essential for construction management and financial purposes of
NATIONAL that all WORK performed under this CONTRACT be only for the PROJECT and
within the SCOPE OF WORK. CONTRACTOR therefore certifies and agrees that all
WORK for which CONTRACTOR claims or receives compensation from NATIONAL under
this CONTRACT, including, without limitation, all EXTRA WORK, whether such WORK
is performed by CONTRACTOR or any SUBCONTRACTOR of any tier, will be performed
only on the PROJECT and within the SCOPE OF WORK.
37.2 Forfeiture of Compensation. If CONTRACTOR claims compensation under
this CONTRACT for WORK done by CONTRACTOR or any SUBCONTRACTOR of any tier:
(i) on another project which may be simultaneously ongoing on NATIONAL's
premises, or
(ii) which is not within the SCOPE OF WORK,
such WORK shall be deemed to be falsely identified by CONTRACTOR and CONTRACTOR
agrees to forfeit to NATIONAL any and all compensation and/or claims for
compensation for such falsely identified WORK, said forfeited amount being
agreed upon liquidated damages due to NATIONAL and not a penalty; provided,
however, that this forfeiture provision shall not apply to WORK performed under
an Extra Work Authorization issued pursuant to Section 11 (CHANGES) hereof which
covers WORK performed on the PROJECT but outside the initial
<PAGE>
SCOPE OF WORK if such Extra Work Authorization clearly indicates that the SCOPE
OF WORK is being modified by it.
38. WORKER'S COMPENSATION INSURANCE AND UNEMPLOYMENT INSURANCE:
Notwithstanding any provision herein to the contrary, CONTRACTOR shall be solely
liable for the payment of any and all taxes and contributions for worker's
compensation, occupational disease, unemployment insurance, old age retirement
benefits, pensions and annuities which may now or hereafter be imposed by the
United States of America or any state, whether measured by the wages, salaries
or other remuneration paid to PERSONS employed by CONTRACTOR or otherwise, for
or in connection with the WORK required to be performed hereunder. CONTRACTOR
shall comply with all GOVERNMENTAL REQUIREMENTS relating thereto, shall maintain
suitable forms, books and records, and agrees to furnish to NATIONAL, upon
reasonable advance notice, satisfactory evidence that CONTRACTOR and all
SUBCONTRACTORS have complied fully with all the provisions of said GOVERNMENTAL
REQUIREMENTS. CONTRACTOR agrees to and does hereby release NATIONAL of and from
any and all claims of the CONTRACTOR which may arise under or by virtue of any
of such GOVERNMENTAL REQUIREMENTS, and CONTRACTOR further agrees to indemnify,
save harmless and defend NATIONAL from and against any and all suits, actions,
legal proceedings, claims, demands, damages, costs, expenses and attorneys' fees
made or brought against, or incurred by, NATIONAL under or by virtue of said
GOVERNMENTAL REQUIREMENTS.
39. LIMITATION OF LIABILITY.
In no event shall either party hereto be liable to the other party by way of
indemnity or by reason of any breach of the CONTRACT or in tort or otherwise,
for any indirect, special or consequential damages or losses, including loss of
production, lost profits and loss of any contract of the party suffering
therefrom.
40. TAXES:
Unless otherwise agreed in writing, CONTRACTOR shall pay any and all taxes,
excises, assessments or other charges of any kind levied by any governmental
authority on or because of the WORK or any part thereof including, but not
limited to, any such governmental charges of any kind levied on the production,
transportation, sale or lease of any equipment, supplies, materials or other
property or services of any kind used or transferred in the performance of the
WORK. Notwithstanding the foregoing, each party shall be liable for its own
income taxes and for its liability for the Michigan Single Business Tax.
CONTRACTOR shall save NATIONAL harmless from the payment of any and all such
taxes, contributions, penalties, excises, assessments or other governmental
charges. CONTRACTOR shall provide NATIONAL with CONTRACTOR's state tax number
or registration number in connection with any applicable exemption from sales
and use tax or other similar tax for the purchase of machinery and equipment,
and CONTRACTOR shall obtain such a number if it does not already have one.
<PAGE>
41. TERMINATION:
41.1 Termination for Cause. Should CONTRACTOR at any time fail in any
respect to prosecute the WORK or any portion thereof with promptness and
diligence, or fail in the performance of any of the agreements on its part
contained herein, or become bankrupt, insolvent, or unable to pay its debts as
they mature, CONTRACTOR shall be in breach of the CONTRACT and, in addition to
its other legal remedies, NATIONAL may, after forty-eight (48) hours written
notice to CONTRACTOR, provide any such labor or materials and deduct the cost
thereof from any money due or thereafter to become due CONTRACTOR under the
CONTRACT; and, upon said notice, NATIONAL may also terminate CONTRACTOR's right
to proceed with the WORK or such part of the WORK as to which such defaults have
occurred or terminate the CONTRACT as a whole. In the event of any such
termination, (i) for the purpose of completing the WORK and using, maintaining
and repairing the WORK, NATIONAL may enter upon the premises and take
possession of all materials, equipment, tools, appliances, and other property
thereon belonging to or under the control of CONTRACTOR and may finish the WORK
by whatever method it may deem expedient, including the hiring of another
contractor or contractors under such form of contract as NATIONAL may deem
advisable, (ii) NATIONAL may use (but shall not disclose to third parties unless
reasonably necessary to complete the WORK) DRAWINGS, SPECIFICATIONS, trade
secrets, proprietary or confidential information and other documents and
information previously provided by CONTRACTOR to NATIONAL under the CONTRACT,
and (iii) CONTRACTOR agrees to provide to NATIONAL such DRAWINGS,
SPECIFICATIONS, trade secrets, proprietary or confidential information and other
documents and information then in its possession and not previously provided to
NATIONAL, as are reasonably necessary for NATIONAL to complete the WORK, free
from any and all patent infringement or other claims by CONTRACTOR or others;
provided, however, that for the purpose of clauses (ii) and (iii), NATIONAL
agrees to execute, and to cause such other contractors and subcontractors to
execute, NATIONAL's standard form of Secrecy Agreement covering any such trade
secrets or proprietary or confidential information provided by CONTRACTOR to
NATIONAL and CONTRACTOR shall be a third party beneficiary thereof. If the
unpaid balance under the CONTRACT is less than the expense to NATIONAL of
completing the WORK, compensation for additional managerial and administrative
services, and the total amount of such other costs, expenses, losses and damages
as NATIONAL may suffer, to the fullest extent allowed by applicable law,
CONTRACTOR and its sureties, if any, shall be liable for and shall pay the
difference to NATIONAL upon demand. The determination by NATIONAL's auditors of
all costs of completion, expenses, losses, damages and other matters described
herein shall be final and binding upon the parties. Failure of NATIONAL to
exercise any of its rights under this Section 41.1 shall not excuse CONTRACTOR
from compliance with the provisions of the CONTRACT or prejudice rights of
NATIONAL to recover damages for such default.
41.2 Termination Without Cause. Should conditions arise which, in the
sole discretion of NATIONAL, make it advisable to cease WORK under the CONTRACT,
NATIONAL may terminate the CONTRACT without cause by written notice to
CONTRACTOR. Such termination shall be effective in the manner specified in said
notice and shall be without
<PAGE>
prejudice to any claims or legal remedies which NATIONAL may have against
CONTRACTOR. On receipt of such notice, CONTRACTOR shall, unless the notice
directs otherwise, immediately discontinue the WORK and placing of orders for
materials, facilities and supplies in connection with the performance of the
CONTRACT and shall, if requested, make every reasonable effort to procure
cancellation or termination of all existing orders and SUBCONTRACTS upon terms
satisfactory to NATIONAL and shall thereafter do only such WORK as may be
necessary to preserve and protect WORK already in progress and buildings,
material, equipment, supplies and other property at the SITE or in transit
thereto.
Upon such termination by NATIONAL, it is agreed: (i) that all completed or
partially completed WORK on the SITE shall be and remain the property of
NATIONAL and that NATIONAL may elect, upon written notice to CONTRACTOR, to take
title to all other material, equipment and other property on the SITE or located
elsewhere and identified to the CONTRACT which CONTRACTOR owns or has the right
to acquire; (ii) that CONTRACTOR shall be entitled to pro rata compensation for
the portion of WORK already completed and to reimbursement for the net COST to
CONTRACTOR of all material, equipment and other property identified to the
CONTRACT for which CONTRACTOR has become legally obliged to pay in the course of
proper performance of the CONTRACT prior to termination by NATIONAL; and (iii)
that all obligations of the CONTRACTOR under the CONTRACT with respect to
completed WORK, including but not limited to all performance guarantees and
patent rights and indemnities, applicable as of such date shall apply to all
WORK completed or substantially completed by CONTRACTOR prior to termination by
NATIONAL.
42. GOVERNMENTAL REQUIREMENTS:
CONTRACTOR represents that CONTRACTOR, its employees and representatives, and
all WORK furnished by CONTRACTOR, its employees and representatives hereunder,
will comply with all GOVERNMENTAL REQUIREMENTS, including but not limited to the
GOVERNMENTAL REQUIREMENTS set forth in the following Sections: 26. OCCUPATIONAL
SAFETY AND HEALTH, 27. HAZARDOUS SUBSTANCES AND RIGHT-TO-KNOW, 28. TOXIC
SUBSTANCES CONTROL 29. ENVIRONMENTAL REQUIREMENTS, 33. LABOR CONDITIONS, and
38. WORKER'S COMPENSATION INSURANCE AND UNEMPLOYMENT INSURANCE, hereof, subject
to the provisions of Section 7.6 (CHANGE IN GOVERNMENTAL REQUIREMENTS) hereof.
Any provisions required to be included in a CONTRACT of this type by any
GOVERNMENTAL REQUIREMENTS are deemed to be incorporated herein. CONTRACTOR
agrees to cooperate with NATIONAL in connection with the application of any
GOVERNMENTAL REQUIREMENTS to NATIONAL, its employees or property and which are
related to the WORK.
CONTRACTOR represents and warrants that it and all of its SUBCONTRACTORS working
at the SITE are properly authorized and qualified under applicable GOVERNMENTAL
REQUIREMENTS to perform the WORK in the State of Michigan.
<PAGE>
43. PERMITS AND INSPECTIONS:
CONTRACTOR shall procure and pay for any and all permits, inspections and other
requirements of any governmental board or authority with respect to any part of
the WORK except permits or authorizations which NATIONAL elects to procure.
CONTRACTOR shall furnish any bonds, security or deposits required to permit
performance of the WORK or any part thereof.
44. NOTICES:
Any notices permitted or required hereunder, unless otherwise provided in the
CONTRACT, shall be in writing and shall be given by personal delivery, by
certified mail, return receipt requested, or by telefax, telecopy or similar
electronic medium to the addresses set forth below. Any such notice shall be
effective upon receipt. In the case of CONTRACTOR any such notice may be served
personally on the resident manager or superintendent of CONTRACTOR at the SITE.
If to NATIONAL: If to CONTRACTOR:
NATIONAL STEEL CORPORATION NKK STEEL ENGINEERING, INC.
Great Lakes Division 910 Sheraton Drive, Suite 400
No. 1 Quality Drive Mars, PA 16046-9414
Ecorse, MI 48229 ATTN: Mr. Yasuo Ise
ATTN: R. Gallagher ------------------------
--------------------- Telecopy: (724) 772-3836
Telecopy: (313) 297-2288 --------------------
-----------------
For any notices given pursuant to Article 16
hereof, a copy shall be sent to:
NATIONAL STEEL CORPORATION
4100 Edison Lakes Parkway
Mishawaka, IN 46545
ATTN: General Counsel
---------------------
Telecopy: (219) 273-7609
-----------------
45. NON-ASSIGNMENT:
Neither party shall assign the CONTRACT or any part thereof or assign any monies
to become due hereunder, without first obtaining written consent of the other
party. An assigning party shall not be relieved of any responsibility or
obligation under the CONTRACT by assigning any portion thereof.
46. COST AUDIT:
<PAGE>
46.1 Right to Audit Cost Charges. All RECORDS (as defined below in
Section 46.2) of CONTRACTOR shall be open to inspection, audit and copying
(hereinafter a "COST AUDIT") by NATIONAL at reasonable times and places to
permit evaluation and verification of any charge of CONTRACTOR or of any
SUBCONTRACTOR that is determined by or based upon COST, it being understood,
however, that such right to inspect, audit and copy shall not apply with respect
to elements of this CONTRACT for which CONTRACTOR is being paid or reimbursed
solely on a "lump sum" basis.
46.2 RECORDS Subject to Inspection and COST AUDIT by NATIONAL. For
purposes of this Section 46, the term "RECORDS" subject to COST AUDIT shall
include but not be limited to any and all writings, data and other sources of
information of every kind and character, including, without limitation, the
documents described in Section 46.4 below and all other documents, records,
books, papers, subscriptions, recordings, agreements, purchase orders, leases,
contracts, commitments, arrangements, notes, daily diaries, meeting minutes,
superintendent reports, drawings, receipts, cost files and data, written
policies and procedures, CONTRACT and SUBCONTRACT files (including proposals of
successful and unsuccessful bidders, bid recaps and all other bid documents),
original estimates, estimating work sheets, correspondence, Extra Work
Authorization and change order files, back charge logs and supporting
documentation, general ledger entries detailing cash and trade discounts earned,
insurance rebates and dividends, any other supporting evidence deemed necessary
by NATIONAL to substantiate charges related to the CONTRACT, and any and all
other evidence and sources of information in any form, tangible or intangible,
that are relevant to the COST AUDIT. For purposes of this Section 46.2,
"NATIONAL" shall include its officers, employees, auditors and designated
representatives (including independent auditors).
46.3 Access to RECORDS. NATIONAL shall give CONTRACTOR reasonable
advance notice of its intent to perform a COST AUDIT. NATIONAL shall have
access to all of CONTRACTOR's locations and facilities where such relevant
RECORDS are located and to all such RECORDS, and shall be provided adequate and
appropriate work space in order to perform a COST AUDIT in compliance with this
Section 46. In connection therewith, knowledgeable employees of CONTRACTOR
shall be available for interviews by NATIONAL. NATIONAL shall be afforded
access to all of the relevant CONTRACTOR's RECORDS pursuant to the provisions of
this Section 46 throughout the term of the CONTRACT and for a period of four (4)
years after final payment or longer if required by law or any GOVERNMENTAL
REQUIREMENTS, such RECORDS to be kept in a readily accessible and organized
manner during all such times.
46.4 CONTRACTOR's Obligation to Furnish Specific Documents. In addition
to and not in limitation of any other provision of this Section 46, in all cases
where any charge, or portion thereof, of CONTRACTOR or of any SUBCONTRACTOR is
subject to a COST AUDIT, CONTRACTOR shall furnish to NATIONAL with progress
billings and all documents related thereto, including but not limited to the
following:
<PAGE>
(i) Labor Related Documents - Daily force and time reports, weekly
payroll records of wages, records and reports of payroll taxes, insurances, and
fringe benefits (by individuals, and in summary);
(ii) Materials Related Documents - Vendor invoices and credits, purchase
requisitions, purchase orders and amendments, receiving reports (properly
acknowledged and authenticated) and SUBCONTRACTOR invoices, with supporting
documents; and
(iii) Equipment Related Documents - Agreements with lessors, lessor
invoices, CONTRACTOR's own rental rate schedule and daily equipment usage
reports for both rented or owned equipment.
46.5 Withholding of Payments by NATIONAL. CONTRACTOR must comply with
all the documentation requirements of Sections 46.3 and 46.4 above or NATIONAL
may withhold payment until said requirements are met.
46.6 Reimbursement of COST AUDIT Costs. If a COST AUDIT in accordance
with this Section 46 discloses overcharges of any nature by the CONTRACTOR to
NATIONAL in excess of two percent (2%) of the total CONTRACT billings reviewed,
the actual cost of NATIONAL's COST AUDIT relating to such overcharge or charges,
including the discovery thereof, shall be reimbursed to NATIONAL by the
CONTRACTOR. Any adjustments and/or payments which must be made as a result of
any such COST AUDIT of the CONTRACTOR's RECORDS shall be made within a
reasonable amount of time (not to exceed thirty (30) days) from presentation of
NATIONAL's findings to CONTRACTOR.
46.7 Inclusion of COST AUDIT Rights in SUBCONTRACTS. The provisions of
Section 46 shall be inserted in all SUBCONTRACTS in accordance with Section 4.2,
in order to ensure that NATIONAL shall have the right to conduct a COST AUDIT
with respect to any charge or portion thereof of a SUBCONTRACTOR that is
determined by or based upon COST.
47. WAIVER OR INVALIDITY:
It is mutually understood and agreed that any failure by NATIONAL at any time,
or from time to time, to enforce or require the strict keeping and performance
by CONTRACTOR of any of the provisions of the CONTRACT shall not constitute a
waiver by NATIONAL of such provisions, and shall not affect or impair such
provisions in any way, or the right of NATIONAL at any time to avail itself of
such remedies as it may have for any breach or breaches of such provisions. The
waiver, illegality, invalidity, breaches of such provision and/or
unenforceability of any provision appearing in the CONTRACT DOCUMENTS shall not
affect the validity of the CONTRACT as a whole or the validity of any other
provisions therein.
48. CONTRACT INCLUDES ENTIRE AGREEMENT:
The CONTRACT embodies the entire agreement between NATIONAL and CONTRACTOR.
CONTRACTOR represents that in entering into the CONTRACT it does not rely on any
<PAGE>
previous or contemporaneous written, oral, implied, or other representation,
inducement or understanding of any kind whatsoever. The CONTRACT may not be
amended except by a writing signed by both parties, or a written change order or
Extra Work Authorization signed by NATIONAL. Except to the extent expressly
provided herein, none of CONTRACTOR's proposals, bid documents, correspondence
or other written materials provided to NATIONAL by CONTRACTOR shall constitute
any part of the parties' agreement hereunder. In no event shall any preprinted
terms or conditions found in NATIONAL's or CONTRACTOR's or any SUBCONTRACTOR's
or material or equipment supplier's purchase order, acknowledgment or work order
be considered to be part of this CONTRACT or to otherwise be binding upon any
party hereto.
49. APPLICABLE LAWS:
Except as otherwise specifically provided for in the CONTRACT, the CONTRACT and
the rights of the parties under the CONTRACT shall be governed by and construed
and enforced in accordance with the laws of the State of Michigan without regard
to its conflicts of laws provisions. The parties hereby consent to the exclusive
jurisdiction of the county courts of Wayne County, Michigan, and federal
district court for the United States District Court for the Eastern District of
Michigan in connection with any dispute, claim or litigation arising out of the
WORK or this CONTRACT, and the parties hereby waive any objection to personal
jurisdiction in such courts. The parties agree that the mailing to the last
known address of the respective parties of any process by certified mail, return
receipt requested, shall constitute lawful and valid source of process.
50. COMMUNICATIONS WITH REGULATORY AUTHORITIES:
CONTRACTOR shall not communicate directly or indirectly with any governmental or
regulatory authorities except to the extent expressly authorized by NATIONAL in
writing. To the extent that CONTRACTOR deems any such communications necessary
or appropriate to the performance of the WORK, CONTRACTOR shall so notify
NATIONAL and NATIONAL shall make such arrangements as are appropriate.
51. CONFIDENTIALITY:
Each party shall retain as confidential and shall not disclose to third parties
the specific proprietary information (herein called "CONFIDENTIAL INFORMATION")
furnished to it by the other party identified on Exhibit U (CONFIDENTIAL
INFORMATION) attached hereto and made a part hereof. Notwithstanding the above,
CONTRACTOR may furnish to its SUBCONTRACTORS such CONFIDENTIAL INFORMATION that
CONTRACTOR receives from NATIONAL to the extent required for the SUBCONTRACTORS
to perform their respective portions of the WORK, so long as CONTRACTOR obtains
from such SUBCONTRACTORS an undertaking of confidentiality substantially similar
to that imposed on CONTRACTOR hereunder. In the event that either party becomes
legally compelled to disclose CONFIDENTIAL INFORMATION of the other party, it
will provide the other party with prompt written notice prior to disclosure in
sufficient time to allow such party to seek a
<PAGE>
protective order or other appropriate remedy to protect the confidentiality of
such information. The confidentiality obligations set forth herein shall not
apply to information which (i) enters the public domain through no fault of the
receiving party, or (ii) can be proven to have been in the possession of the
receiving party at the time of disclosure and which was not previously obtained,
directly or indirectly, from the other party hereto; or (iii) otherwise becomes
lawfully available to the receiving party from a third party under no obligation
of confidentiality.
52. DISPUTE RESOLUTION:
Except as provided herein, no civil action with respect to any dispute, claim or
controversy arising out of or relating to the CONTRACT may be commenced until
the matter has been submitted to JAMS/ENDISPUTE, or its successor, for non-
binding mediation. Either party may commence mediation by providing to
JAMS/ENDISPUTE and the other party a written request for mediation, setting
forth the subject of the dispute and the relief requested. The parties will
cooperate with JAMS/ENDISPUTE and with one another in selecting a mediator from
JAMS/ENDISPUTE's panel of neutrals, and in scheduling the mediation proceedings.
The parties covenant that they will participate in the mediation in good faith,
and that they will share equally in its costs. All offers, promises, conduct and
statements, whether oral or written, made in the course of the mediation by any
of the parties, their agents, employees, experts and attorneys, and by the
mediator and any JAMS/ENDISPUTE employees, are confidential, privileged and
inadmissible for any purpose, including impeachment, in any litigation or other
proceeding involving the parties; provided, however, that evidence that is
otherwise admissible or discoverable shall not be rendered inadmissible or non-
discoverable as a result of its use in the mediation. Either party may seek
equitable relief prior to the mediation to preserve the status quo pending the
completion of that process. Additionally, either party may seek equitable or
other relief in the event of an emergency situation which presents a danger to
human health, safety or the property of such party or third parties. Except for
such an action to obtain equitable or other relief, neither party may commence a
civil action with respect to matters submitted to mediation until after
completion of the initial mediation session, or 45 days after the date of filing
the written request for mediation, whichever occurs first. Mediation may
continue after the commencement of a civil action, if the parties so desire. The
provisions of this Section 52 may be enforced by any court of competent
jurisdiction, and the party seeking enforcement shall be entitled to an award of
all costs, fees and expenses including attorneys' fees, to be paid by the party
against whom enforcement is ordered.
53. RECORDS RETENTION:
CONTRACTOR shall retain, for a period of three (3) years after the issuance (or
deemed issuance) of the Certificate of Substantial Completion at no additional
cost to NATIONAL, and shall make available to NATIONAL and its designees upon
request, copies of all documents generated as a result of or in connection with
the performance of WORK hereunder.
54. SURVIVAL:
<PAGE>
Any provision setting forth an obligation or duty of CONTRACTOR which by its
very nature is not expected to or cannot or may not be performed during the
actual life of this CONTRACT (including, without limitation, CONTRACTOR's
obligations with respect to warranties, indemnity and insurance) shall be deemed
to survive suspension, expiration, termination, completion or cancellation of
the CONTRACT for a period of three (3) years, except for the provisions of
Section 20 (LIENS AND CLAIMS), Section 21 (PATENT RIGHTS AND INDEMNIFICATION;
OWNERSHIP OF DRAWINGS), Section 22 (RIGHT TO USE COMPUTER SOFTWARE AND
INDEMNIFICATION), Section 25.3 (HEALTH AND SAFETY PLAN), Section 26
(OCCUPATIONAL SAFETY AND HEALTH), Section 27 (HAZARDOUS SUBSTANCES AND RIGHT-TO-
KNOW), Section 28 (TOXIC SUBSTANCES CONTROL), Section 29 (ENVIRONMENTAL
REQUIREMENTS), Section 30 (INDEMNITY BY CONTRACTOR), Section 32 (FIRST AID AND
MEDICAL FACILITIES), Section 37 (FORFEITURE OF COMPENSATION FOR FALSELY
IDENTIFIED WORK), Section 40 (TAXES), Section 42 (GOVERNMENTAL REQUIREMENTS) and
Section 51 (CONFIDENTIALITY), which shall survive indefinitely.
55. CUMULATIVE REMEDIES:
The rights and remedies of NATIONAL under this CONTRACT are cumulative and not
exclusive of any rights or remedies which NATIONAL might otherwise have.
56. CAPTIONS:
The captions at the beginning of each of the sections and subsections herein are
for reference purposes only and are of no legal force and effect.
57. NKK CORPORATION GUARANTEE:
Simultaneously with the execution of this CONTRACT, CONTRACTOR shall cause NKK
Corporation, the parent corporation of CONTRACTOR's parent corporation, to
execute and deliver the form of guarantee attached hereto as Exhibit V (THE
GUARANTEE).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
The parties hereto, intending to be legally bound, have executed this
CONTRACT by their duly authorized representatives.
NATIONAL STEEL CORPORATION, CONTRACTOR:
GREAT LAKES DIVISION:
By: /s/Joseph R. Dudak By: /s/ Masayuki Ueta
------------------ -----------------
Title: V.P. Strategic Sourcing Title: Chairman & CEO
----------------------- --------------
Date: October 23, 1998 Date: October 23, 1998
---------------- ----------------
CONTRACTOR's State Tax or
Registration No.is:___________________
<PAGE>
EXHIBIT 21
NATIONAL STEEL CORPORATION SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction Percentage
of Outstanding
Name Incorporation Stock Owned
---- ------------- -----------
<S> <C> <C>
American Steel Corporation Michigan 100%
Delray Connecting Railroad Company Michigan 100%
D.W. Pipeline Company Michigan 100%
Granite City Steel Company Illinois 100%
Granite Intake Corporation Delaware 100%
Great Lakes Steel Corporation Delaware 100%
The Hanna Furnace Corporation New York 100%
Hanna Ore Mining Company Minnesota 100%
Ingleside Point Corporation Texas 100%
Ingleside Channel & Dock Co. Texas 100%
Liberty Pipe and Tube, Inc. Texas 100%
Mathies Coal Company Pennsylvania 86.67%
Mid-Coast Minerals Corporation Delaware 100%
Midwest Steel Corporation Pennsylvania 100%
Natcoal, Inc. Delaware 100%
National Acquisition Corporation Delaware 100%
National Caster Acquisition Corporation Delaware 100%
National Caster Operating Corporation Delaware 100%
National Casting Corporation Delaware 100%
National Coal Mining Company Delaware 100%
National Coating Limited Corporation Delaware 100%
National Coating Line Corporation Delaware 100%
National Galvanizing Corporation Delaware 100%
National Materials Procurement Corporation Illinois 100%
National Mines Corporation Pennsylvania 100%
National Ontario Corporation Delaware 100%
National Ontario II, Limited Delaware 100%
National Pickle Line Corporation Delaware 100%
National Steel Corporation (New York) New York 100%
National Steel Funding Corporation Delaware 100%
National Steel Pellet Company Delaware 100%
Natland Corporation Delaware 100%
National Steel Foreign Sales Corporation Barbados 100%
NS Holdings Corporation Delaware 100%
NS Land Company New Jersey 100%
NSC Realty Corporation Delaware 100%
NSL, Inc. Delaware 100%
Peter White Coal Mining Corporation West Virginia 100%
ProCoil Corporation Delaware 56%
Puritan Mining Company Michigan 100%
Rostraver Corporation Delaware 100%
Skar-Ore Steamship Corporation Delaware 100%
The Teal Lake Iron Mining Company Michigan 100%
</TABLE>
<PAGE>
Exhibit 23
Consent Of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements:
. Form S-8 No. 33-51991 pertaining to the 1994 and 1995 Stock Grants to Union
Employees,
. Form S-8 No. 33-51081 pertaining to the 1993 National Steel Corporation Long
Term Incentive Plan,
. Form S-8 No. 33-51083 pertaining to the 1993 National Steel Corporation Non-
Employee Director's Stock Option Plan, and
. Form S-8 No. 33-6087 pertaining to the National Steel Retirement Savings Plan
and National Steel Represented Employee Retirement Savings Plan;
of our report dated January 28, 1999, with respect to the consolidated financial
statements and schedule of the National Steel Corporation and Subsidiaries
included in this Annual Report on Form 10-K for the year ended December 31,
1998.
Ernst & Young LLP
Indianapolis, Indiana
January 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 137,895
<SECURITIES> 0
<RECEIVABLES> 262,739
<ALLOWANCES> 16,899
<INVENTORY> 472,834
<CURRENT-ASSETS> 879,875
<PP&E> 3,475,565
<DEPRECIATION> 2,205,025
<TOTAL-ASSETS> 2,483,975
<CURRENT-LIABILITIES> 546,783
<BONDS> 285,767
0
0
<COMMON> 433
<OTHER-SE> 849,868
<TOTAL-LIABILITY-AND-EQUITY> 2,483,975
<SALES> 2,848,044
<TOTAL-REVENUES> 2,848,044
<CGS> 2,496,786
<TOTAL-COSTS> 2,496,786
<OTHER-EXPENSES> 253,061
<LOSS-PROVISION> (745)
<INTEREST-EXPENSE> 10,885
<INCOME-PRETAX> 88,057
<INCOME-TAX> 4,299
<INCOME-CONTINUING> 83,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,758
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.94
</TABLE>
