-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JjporxG3DYWsGBTnqJ5SS7GhQ8zHVzGr3KWJuxFW0hlGqUHPwNexBBbaQLPdqkIF 3hRGKgrcywdulSnIXDl2mQ== 0000950131-99-000954.txt : 19990217 0000950131-99-000954.hdr.sgml : 19990217 ACCESSION NUMBER: 0000950131-99-000954 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL STEEL CORP CENTRAL INDEX KEY: 0000070578 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 250687210 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00983 FILM NUMBER: 99542088 BUSINESS ADDRESS: STREET 1: 4100 EDISON LAKES PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 46545-3440 BUSINESS PHONE: 2192737000 MAIL ADDRESS: STREET 1: 4100 EDISON LAKE PARKWAY CITY: MISHAWAKA STATE: IN ZIP: 46545-3440 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ---------------- (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 ---------------- 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:
Title of Each Class Name of each exchange on which registered ------------------- ----------------------------------------- Class B Common Stock New York Stock Exchange First Mortgage Bonds, 8 3/8% Series due 2006 New York Stock Exchange
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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NATIONAL STEEL CORPORATION TABLE OF CONTENTS
Page ---- 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
2 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 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 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 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 The following table sets forth the percentage of the Company's revenues from various markets for the past three years.
1998 1997 1996 ----- ----- ----- 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% ===== ===== =====
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 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.
Raw Steel Production Data --------------------------------------------- Effective Percentage Effective Actual Capacity Continuously Capacity Production Utilization Cast --------- ---------- ----------- ------------ (Thousands of net tons) 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
- -------- *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 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 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 10 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 11 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 12 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 13 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 14 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 15 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. 16 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 17 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 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 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 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.
Period High Low ------ ------- -------- 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
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 Item 6. Selected Financial Data
Years Ended December 31, -------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (Dollars in millions, except per share data) 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 -- -- -- -- December 31, -------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (Dollars in millions) 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 Years Ended December 31, -------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (Dollars in millions) 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
22 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:
1998 1997 1996 -------- -------- -------- Dollars and tons in millions (except earnings per share amounts) 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
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 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.
Years Ended December 31, ---------------------- 1998 1997 1996 ------ ------ ------ 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%
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:
Years Ended December 31, ---------------------- 1998 1997 1996 ------ ------ ------ 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%
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 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:
Years Ended December 31, --------------------- 1998 1997 1996 ------ ------ ----- Dollars in millions 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 ====== ====== =====
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 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 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 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 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 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:
Estimated Substantial Description Completion ----------- ---------------- 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
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 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 31 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 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:
Fair Value Market Risk -------- ----------- Dollars in thousands 1998: Long-term debt position, excluding capitalized lease obligations (Average interest rate of 8.6%)........ $302,085 $6,631
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 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
Page ---- 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
34 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 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 NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- (Dollars in Thousands, Except Per Share Amounts) 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 $ -- $ --
See notes to consolidated financial statements. 37 NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ---------------------- 1998 1997 ---------- ---------- (Dollars in Thousands, Except Per Share Amounts) 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 ========== ==========
See notes to consolidated financial statements. 38 NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in Thousands) 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
See notes to consolidated financial statements. 39 NATIONAL STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK--SERIES B
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) 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 $ -- -------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 40 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 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:
1998 1997 -------- -------- Dollars in thousands 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 ======== ========
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 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: Land improvements.............. 10 - 20 years Buildings...................... 15 - 40 years Machinery and equipment........ 3 - 15 years
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:
1998 1997 1996 ------- ------- ------- Shares in thousands 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 ======= ======= =======
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 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 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 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 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.
1998 1997 --------------------------------- -------------------------------- Steel All Other Total Steel All Other Total ---------- ---------- ---------- ---------- ---------- ---------- Dollars in thousands 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
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:
1998 1997 1996 ----- ----- ----- 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% ===== ===== =====
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 NATIONAL STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 5. Long-Term Obligations Long-term obligations were as follows:
December 31, ----------------- 1998 1997 -------- -------- Dollars in thousands 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 ======== ========
Future minimum payments for all long-term obligations and leases as of December 31, 1998 are as follows:
Other Long- Capitalized Operating Term Lease Leases Obligations ----------- --------- ----------- Dollars in thousands 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 ========
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 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 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:
Other Postretirement Pension Benefits Benefits ---------------------- ---------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Dollars in thousands 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) ========== ========== ========== ==========
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 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:
Other Postretirement Pension Benefits Benefits -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Dollars in thousands 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) ========= ========= ========= =========
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.
Other Postretirement Pension Benefits Benefits ------------------------------ ------------------------- 1998 1997 1996 1998 1997 1996 --------- --------- -------- ------- ------- ------- Dollars in thousands 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 ========= ========= ======== ======= ======= =======
The assumptions used in the measuring of the Company's benefit obligations and costs are shown in the following table:
1998 1997 1996 ----- ----- ----- 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%
51 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:
1% 1% Increase Decrease ---------- ---------- Dollars in thousands 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)
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:
1998 1997 -------- -------- Dollars in thousands 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 ======== ========
52 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:
1998 1997 --------- -------- Dollars in thousands 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 ========= ========
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:
1998 1997 1996 -------- -------- -------- Dollars in thousands 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) ======== ======== ========
53 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:
1998 1997 1996 -------- -------- -------- Dollars in thousands 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) ======== ======== ========
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 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 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 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 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 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 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:
1998 1997 1996 -------- -------- ------- Dollars in thousands, except per share amounts 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
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:
Number Of Exercise Price Options (Weighted Average) --------- ------------------ 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 ========= ======
60 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:
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 --------------- -------------- -------------- -------------- -------------- -------------- $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 ======= === ====== ======= ======
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.
1998 ------------------------------------------- March 31 June 30 September 30 December 31 Three Months Ended -------- -------- ------------ ----------- Dollars in thousands, except per share amounts 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 1997 ------------------------------------------- March 31 June 30 September 30 December 31 Three Months Ended -------- -------- ------------ ----------- Dollars in thousands, except per share amounts 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 ======== ======== ======== ========
61 NATIONAL STEEL CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
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) 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
- -------- 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 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 (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 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.
Name Title ---- ----- /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
65 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.
Exhibit Number Exhibit Description ------- ------------------- 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.
66
Exhibit Number Exhibit Description ------- ------------------- 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.
67
Exhibit Number Exhibit Description ------- ------------------- 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.
68
Exhibit Number Exhibit Description ------- ------------------- 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.
69 EX-10.R 2 AMD #3 TO AGREEMENT FOR THE TRANSFER OF EMPLOYEES 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:____________________________ EX-10.FF 3 1/28/99 AGREEMENT BETWEEN THE CO. & JOHN KALOSKI 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 EX-10.II 4 CONSTRUCTION CONTRACT 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 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. 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 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 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. 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. 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 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 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 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. 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. (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 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. 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 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. 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. 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. 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: 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. 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, 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 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) 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 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 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 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 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 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 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 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: 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 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. 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, 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 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 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: (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 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 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. 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 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 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:
DAYS AFTER SUBSTANTIAL LIQUIDATED DAMAGES COMPLETION DEADLINE MAXIMUM PER DAY 0-7 0 8-14 $20,000 15-21 $40,000 for each day after the 21st day $90,000
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: 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. (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, 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. 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 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 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. 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 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. 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: 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: (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 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 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: 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] 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:___________________ EX-21 5 LIST OF SUBSIDIARIES OF THE COMPANY EXHIBIT 21 NATIONAL STEEL CORPORATION SUBSIDIARIES
Jurisdiction Percentage of Outstanding Name Incorporation Stock Owned ---- ------------- ----------- 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%
EX-23 6 CONSENT OF INDEPENDENT AUDITORS 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 EX-27 7 FINANCIAL DATA SCHEDULES
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 137,895 0 262,739 16,899 472,834 879,875 3,475,565 2,205,025 2,483,975 546,783 285,767 0 0 433 849,868 2,483,975 2,848,044 2,848,044 2,496,786 2,496,786 253,061 (745) 10,885 88,057 4,299 83,758 0 0 0 83,758 1.94 1.94
-----END PRIVACY-ENHANCED MESSAGE-----